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 March 31, 2019

 

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
incorporation or organization)

 

(I.R.S. Employer
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 April 26, 2019, there were 18,104,754 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

 

OSI SYSTEMS, INC.

 

INDEX

 

 

 

PAGE

 

 

 

PART I — FINANCIAL INFORMATION (Unaudited)

3

 

 

 

Item 1 —

Financial Statements

3

 

Condensed Consolidated Balance Sheets at June 30, 2018 and March 31, 2019

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2018 and 2019

4

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2018 and 2019

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended March 31, 2018 and 2019

6

 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and 2019

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2 —

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

26

Item 3 —

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4 —

Controls and Procedures

32

 

 

 

PART II — OTHER INFORMATION

34

Item 1 —

Legal Proceedings

34

Item 1A —

Risk Factors

34

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3 —

Defaults Upon Senior Securities

34

Item 4 —

Mine Safety Disclosures

34

Item 5 —

Other Information

34

Item 6 —

Exhibits

34

Signatures

 

35

 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share amounts and par value)

 

 

 

June 30,

 

March 31,

 

 

 

2018

 

2019

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

84,814

 

$

107,649

 

Accounts receivable, net

 

210,744

 

218,433

 

Inventories

 

313,552

 

297,704

 

Prepaid expenses and other current assets

 

41,587

 

35,050

 

Total current assets

 

650,697

 

658,836

 

Property and equipment, net

 

115,524

 

124,916

 

Goodwill

 

292,213

 

307,461

 

Intangible assets, net

 

142,001

 

136,432

 

Other assets

 

55,256

 

56,470

 

Total assets

 

$

1,255,691

 

$

1,284,115

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Bank lines of credit

 

$

113,000

 

$

124,000

 

Current portion of long-term debt

 

2,262

 

1,702

 

Accounts payable

 

106,892

 

89,891

 

Accrued payroll and related expenses

 

40,171

 

36,053

 

Advances from customers

 

55,761

 

60,016

 

Other accrued expenses and current liabilities

 

125,236

 

113,838

 

Total current liabilities

 

443,322

 

425,500

 

Long-term debt

 

248,980

 

255,411

 

Deferred income taxes

 

15,002

 

15,015

 

Other long-term liabilities

 

58,951

 

62,381

 

Total liabilities

 

766,255

 

758,307

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.001 par value —100,000,000 shares authorized; issued and outstanding, 18,032,374 shares at June 30, 2018 and 18,100,841 shares at March 31, 2019

 

169,475

 

160,384

 

Retained earnings

 

334,745

 

382,880

 

Accumulated other comprehensive loss

 

(14,784

)

(17,456

)

Total stockholders’ equity

 

489,436

 

525,808

 

Total liabilities and stockholders’ equity

 

$

1,255,691

 

$

1,284,115

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

2018

 

2019

 

Net revenues:

 

 

 

 

 

 

 

 

 

Products

 

$

182,484

 

$

224,778

 

$

529,530

 

$

632,660

 

Services

 

84,815

 

79,506

 

272,430

 

241,078

 

Total net revenues

 

267,299

 

304,284

 

801,960

 

873,738

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

Products

 

126,419

 

147,939

 

363,063

 

423,441

 

Services

 

43,295

 

45,029

 

148,411

 

132,724

 

Total cost of goods sold

 

169,714

 

192,968

 

511,474

 

556,165

 

Gross profit

 

97,585

 

111,316

 

290,486

 

317,573

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

59,846

 

67,278

 

175,591

 

196,082

 

Research and development

 

15,934

 

13,695

 

46,122

 

40,253

 

Impairment, restructuring and other charges

 

14,062

 

(1,777

)

23,489

 

1,154

 

Total operating expenses

 

89,842

 

79,196

 

245,202

 

237,489

 

Income from operations

 

7,743

 

32,120

 

45,284

 

80,084

 

Interest expense and other expense, net

 

(4,625

)

(5,595

)

(14,156

)

(16,546

)

Income before income taxes

 

3,118

 

26,525

 

31,128

 

63,538

 

Provision for income taxes

 

(565

)

(6,899

)

(65,369

)

(15,403

)

Net income (loss)

 

$

2,553

 

$

19,626

 

$

(34,241

)

$

48,135

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

1.09

 

$

(1.82

)

$

2.66

 

Diluted

 

$

0.13

 

$

1.05

 

$

(1.82

)

$

2.58

 

Shares used in per share calculation:

 

 

 

 

 

 

 

 

 

Basic

 

18,569

 

18,079

 

18,773

 

18,085

 

Diluted

 

19,146

 

18,671

 

18,773

 

18,678

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

2018

 

2019

 

Net income (loss)

 

$

2,553

 

$

19,626

 

$

(34,241

)

$

48,135

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

1,366

 

1,521

 

3,272

 

(2,694

)

Other

 

103

 

7

 

38

 

22

 

Other comprehensive income (loss)

 

1,469

 

1,528

 

3,310

 

(2,672

)

Comprehensive income (loss)

 

$

4,022

 

$

21,154

 

$

(30,931

)

$

45,463

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)

 

 

 

Three Months Ended March 31, 2018

 

 

 

Common

 

 

 

Accumulated
Other

 

 

 

 

 

Number of
Shares

 

Amount

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Total

 

Balance—December 31, 2017

 

18,978,031

 

$

218,343

 

$

327,078

 

$

(15,347

)

$

530,074

 

Exercise of stock options

 

31,500

 

708

 

 

 

708

 

Vesting of RSUs

 

1,435

 

 

 

 

 

Shares issued under employee stock purchase program

 

40,822

 

2,072

 

 

 

2,072

 

Stock-based compensation

 

 

6,014

 

 

 

6,014

 

Repurchase of common stock

 

(972,481

)

(59,684

)

 

 

(59,684

)

Taxes paid related to net share settlement of equity awards

 

(13,877

)

(820

)

 

 

(820

)

Net income

 

 

 

2,553

 

 

2,553

 

Other comprehensive income

 

 

 

 

1,469

 

1,469

 

Balance—March 31, 2018

 

18,065,430

 

$

166,633

 

$

329,631

 

$

(13,878

)

$

482,386

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Common

 

 

 

Accumulated
Other

 

 

 

 

 

Number of
Shares

 

Amount

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Total

 

Balance—December 31, 2018

 

18,020,907

 

$

151,926

 

$

363,254

 

$

(18,984

)

$

496,196

 

Exercise of stock options

 

58,613

 

1,196

 

 

 

1,196

 

Vesting of RSUs

 

1,219

 

 

 

 

 

Shares issued under employee stock purchase program

 

36,020

 

2,160

 

 

 

2,160

 

Stock-based compensation

 

 

5,888

 

 

 

5,888

 

Taxes paid related to net share settlement of equity awards

 

(15,918

)

(786

)

 

 

(786

)

Net income

 

 

 

19,626

 

 

19,626

 

Other comprehensive income

 

 

 

 

1,528

 

1,528

 

Balance—March 31, 2019

 

18,100,841

 

$

160,384

 

$

382,880

 

$

(17,456

)

$

525,808

 

 

6


Table of Contents

 

 

 

Nine Months Ended March 31, 2018

 

 

 

Common

 

 

 

Accumulated
Other

 

 

 

 

 

Number of
Shares

 

Amount

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Total

 

Balance—June 30, 2017

 

18,689,568

 

$

222,529

 

$

363,872

 

$

(17,188

)

$

569,213

 

Exercise of stock options

 

113,255

 

2,575

 

 

 

2,575

 

Vesting of RSUs

 

401,773

 

 

 

 

 

Shares issued under employee stock purchase program

 

78,310

 

4,033

 

 

 

4,033

 

Stock-based compensation

 

 

17,754

 

 

 

17,754

 

Repurchase of common stock

 

(972,481

)

(59,684

)

 

 

(59,684

)

Taxes paid for net share settlement of equity awards

 

(244,995

)

(20,574

)

 

 

(20,574

)

Net loss

 

 

 

(34,241

)

 

(34,241

)

Other comprehensive income

 

 

 

 

3,310

 

3,310

 

Balance—March 31, 2018

 

18,065,430

 

$

166,633

 

$

329,631

 

$

(13,878

)

$

482,386

 

 

 

 

Nine Months Ended March 31, 2019

 

 

 

Common

 

 

 

Accumulated
Other

 

 

 

 

 

Number of
Shares

 

Amount

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Total

 

Balance—June 30, 2018

 

18,032,374

 

$

169,475

 

$

334,745

 

$

(14,784

)

$

489,436

 

Exercise of stock options

 

108,008

 

1,985

 

 

 

1,985

 

Vesting of RSUs

 

357,924

 

 

 

 

 

Shares issued under employee stock purchase program

 

75,313

 

4,180

 

 

 

4,180

 

Stock-based compensation

 

 

19,514

 

 

 

19,514

 

Repurchase of common stock

 

(288,316

)

(21,029

)

 

 

(21,029

)

Taxes paid for net share settlement of equity awards

 

(184,462

)

(13,741

)

 

 

(13,741

)

Net income

 

 

 

48,135

 

 

48,135

 

Other comprehensive loss

 

 

 

 

(2,672

)

(2,672

)

Balance—March 31, 2019

 

18,100,841

 

$

160,384

 

$

382,880

 

$

(17,456

)

$

525,808

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

 

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(34,241

)

$

48,135

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

55,368

 

42,401

 

Stock-based compensation expense

 

17,754

 

19,514

 

Deferred income taxes

 

50,775

 

(3,220

)

Amortization of debt discount and issuance costs

 

6,426

 

6,733

 

Impairment charges

 

7,181

 

 

Other

 

2,125

 

1,617

 

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

 

 

 

 

 

Accounts receivable

 

7,131

 

(5,967

)

Inventories

 

(48,703

)

16,232

 

Prepaid expenses and other assets

 

(22,121

)

(6,620

)

Accounts payable

 

19,522

 

(20,265

)

Accrued payroll and related expenses

 

(1,689

)

(4,008

)

Advances from customers

 

32,152

 

4,258

 

Other

 

24,084

 

(11,066

)

Net cash provided by operating activities

 

115,764

 

87,744

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property and equipment

 

(36,432

)

(20,905

)

Acquisition of businesses, net of cash acquired

 

(100,567

)

(18,271

)

Acquisition of intangible and other assets

 

(2,250

)

(1,657

)

Net cash used in investing activities

 

(139,249

)

(40,833

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net borrowings on bank lines of credit

 

125,000

 

11,000

 

Proceeds from long-term debt

 

626

 

1,019

 

Payments on long-term debt

 

(1,933

)

(1,880

)

Proceeds from exercise of stock options and employee stock purchase plan

 

6,608

 

6,165

 

Payment of contingent consideration

 

(2,617

)

(4,797

)

Repurchase of common stock

 

(59,684

)

(21,029

)

Taxes paid related to net share settlement of equity awards

 

(20,574

)

(13,741

)

Net cash provided by (used in) financing activities

 

47,426

 

(23,263

)

Effect of exchange rate changes on cash

 

410

 

(813

)

Net increase in cash and cash equivalents

 

24,351

 

22,835

 

Cash and cash equivalents—beginning of period

 

169,650

 

84,814

 

Cash and cash equivalents—end of period

 

$

194,001

 

$

107,649

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid, net during the period for:

 

 

 

 

 

Interest

 

$

6,508

 

$

9,394

 

Income taxes

 

$

21,728

 

$

28,233

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


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 our subsidiaries, is a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. We sell our products in diversified markets, including homeland security, healthcare, defense and aerospace.

 

We have three reporting segments: (i) Security, providing security inspection systems and related services, and turnkey security screening solutions; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and related services and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and electronic manufacturing services for our Security and Healthcare divisions as well as to external original equipment manufacturer (“OEM”) customers and end users for applications in the defense, aerospace, medical and industrial markets, among others.

 

Through our Security segment, we provide security screening products and related services globally. These products fall into the following categories: baggage and parcel inspection; cargo and vehicle inspection; hold (checked) baggage screening; people screening; radiation detection; and explosive and narcotics trace detection. In addition to these products, we also provide site design, installation, training and technical support services to our customers. We also provide turnkey security screening solutions, which can include the construction, staffing and long-term operation of security screening checkpoints for our customers.

 

Through our Healthcare segment, we design, manufacture, market and service patient monitoring and diagnostic cardiology systems and related supplies and accessories 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, among others.

 

Through our Optoelectronics and Manufacturing segment, we design, manufacture and market optoelectronic devices and flex circuits and provide electronics manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, X-ray security and inspection systems and medical imaging, chemistry analysis and diagnostics instruments, telecommunications, scanners and industrial automations, automotive diagnostic systems, internet of things (IoT) and consumer wearable products. This division provides products and services to OEM customers and end users as well as to our Security and Healthcare divisions.

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The results of operations for the nine months ended March 31, 2019 are not necessarily indicative of the operating results to be expected for the full 2019 fiscal year or any future periods.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, profit and loss recognition, fair values of assets acquired and liabilities assumed in business combinations, values for inventories reported at lower of cost or net realizable value, stock-based compensation expense, income taxes, accrued warranty costs, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially.

 

9


Table of Contents

 

Per Share Computations

 

We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income available to common stockholders by the sum of the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method. In periods where a net loss is reported, basic and diluted net loss per share are the same since the effect of potential common shares is antidilutive and therefore excluded. The underlying equity component of the 1.25% convertible senior notes due 2022 (the “Notes”) discussed in Note 6 to the condensed consolidated financial statements will have no impact on diluted earnings per share until the average price of our common stock exceeds the conversion price because the principal amount of the Notes is intended to be settled in cash upon conversion.

 

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

2018

 

2019

 

Net income (loss) available to common stockholders

 

$

2,553

 

$

19,626

 

$

(34,241

)

$

48,135

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding—basic

 

18,569

 

18,079

 

18,773

 

18,085

 

Dilutive effect of equity awards

 

577

 

592

 

 

593

 

Weighted average shares outstanding—diluted

 

19,146

 

18,671

 

18,773

 

18,678

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.14

 

$

1.09

 

$

(1.82

)

$

2.66

 

Diluted earnings (loss) per share

 

$

0.13

 

$

1.05

 

$

(1.82

)

$

2.58

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares excluded from diluted earnings (loss) per share due to their anti-dilutive effect (in thousands)

 

288

 

44

 

753

 

46

 

 

Cash Equivalents

 

We consider all highly liquid investments with maturities of three months or less as of the acquisition date to be cash equivalents.

 

Our cash and cash equivalents totaled $107.6 million at March 31, 2019. These funds were held primarily by us and our subsidiaries in the United States, United Kingdom, Singapore, Malaysia, and Mexico, and to a lesser extent in India, Canada and Germany among others. We have cash holdings that exceed insured limits for financial institutions; however, we mitigate this risk by utilizing high credit quality financial institutions throughout the world.

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, derivative instruments, accounts receivable, accounts payable and debt instruments. The carrying values of financial instruments, other than long term debt instruments, are representative of their fair values due to their short term maturities. The carrying values of our 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 available to us.

 

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. “Level 1” category includes assets and liabilities at quoted prices in active markets for identical assets and liabilities. “Level 2” category includes assets and liabilities from observable inputs other than quoted market prices. “Level 3” category includes assets and liabilities for which valuation techniques are unobservable and significant to the fair value measurement. As of June 30, 2018 and March 31, 2019, there were no assets where “Level 3” valuation techniques were used. Our contingent payment obligations related to acquisitions, which are further discussed in Note 9 to the condensed consolidated financial statements, are in the “Level 3” category for valuation purposes.

 

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The fair values of our financial assets and liabilities as of June 30, 2018 and March 31, 2019 are categorized as follows (in thousands):

 

 

 

June 30, 2018

 

March 31, 2019

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance company contracts

 

$

 

$

31,897

 

$

 

$

31,897

 

$

 

$

34,647

 

$

 

$

34,647

 

Interest rate contract

 

 

18

 

 

18

 

 

4

 

 

4

 

Total assets

 

$

 

$

31,915

 

$

 

$

31,915

 

$

 

$

34,651

 

$

 

$

34,651

 

Liabilities—contingent consideration

 

$

 

$

 

$

15,713

 

$

15,713

 

$

 

$

 

$

16,869

 

$

16,869

 

 

Derivative Instruments and Hedging Activity

 

Our use of derivatives consists of an interest rate swap agreement. 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 described in Note 6. 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 (loss) in the consolidated financial statements and are reclassified as net income when the hedge transaction settles.

 

Revenue Recognition

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 and related amendments (“ASC 606”), which superseded all prior revenue recognition methods and industry-specific guidance. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (i.e., either over time or at a point in time). ASC 606 further requires that companies disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On July 1, 2018, we adopted ASC 606 using the modified retrospective method, whereby the adoption does not impact any prior periods. We identified contracts not yet completed as of July 1, 2018 and applied the new guidance on a prospective basis.

 

Product Sales. We recognize revenue from sales of products upon shipment or delivery when control of the product transfers to the customer, depending on the terms of each sale, and when collection is probable. In the circumstance where terms of a product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the acceptance criteria unless the customer acceptance criteria are perfunctory or inconsequential. We generally offer customers payment terms of less than one year. In cases when payment terms extend beyond one year, we consider whether the contract has a significant financing component.

 

Service Revenue. Revenue from services includes installation and implementation of products and turnkey security screening services and after-market services. Generally, revenue from services is recognized over time as the services are performed. Revenues from out of warranty service maintenance contracts are recognized ratably over the respective terms of such contracts. Deferred revenue for such services arises from payments received from customers for services not yet performed.

 

Contract Revenue. Sales agreements with customers can be project specific, cover a period of time, and can be renewable periodically. The contracts may contain terms and conditions with respect to payment, delivery, installation, services, warranty and other rights. In certain instances, we consider an accepted customer order, governed by a master sales agreement, to be the contract with the customer when legal rights and obligations exist. Contracts with customers may include the sale of products and services, as discussed in the paragraphs above. In certain instances, contracts can contain multiple performance obligations as discussed in the paragraph below. According to the terms of a sale contract, we may receive consideration from a customer prior to transferring goods to the customer, and we record these prepayments as a contract liability. We also record deferred revenue, typically related to service contacts, when consideration is received before the services have been performed. We recognize customer deposits and deferred revenue as net sales after all revenue recognition criteria are met.

 

When determining revenue recognition for contracts, we use judgment based on our understanding of the obligations within each contract. We determine 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 recognition. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.

 

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Multiple Performance Obligations.  Certain agreements with customers include the sale of capital equipment involving multiple elements that may include civil works to prepare a site for the installation of equipment, manufacture and delivery of equipment, installation and integration of equipment, training of customer personnel to operate the equipment and after-market service of the equipment. We generally separate multiple elements in a contract into separate performance obligations if those elements are distinct, both individually and in the context of the contract. If multiple promises comprise a series of distinct services which are substantially the same and have the same pattern of transfer, they are combined and accounted for as a single performance obligation.

 

In cases where obligations in a contract are distinct and thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle of promises has been met.

 

The standalone selling price for each performance obligation is an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the good or service. When there is only one performance obligation associated with a contract, the entire sale value is attributed to that obligation. When a contract contains multiple performance obligations the transaction value is first allocated using the observable price, which is generally a list price net of applicable discount or the price used to sell in similar circumstances. In circumstances when a selling price is not directly observable, we will estimate the standalone selling price using information available to us including our market assessment and expected cost plus margin.

 

The timetable for fulfilment of each of the distinct performance obligations can range from completion in a short amount of time and entirely within a single reporting period to completion over several reporting periods. The timing of revenue recognition for each performance obligation may be dependent upon several milestones, including physical delivery of equipment, completion of factory acceptance test, completion of site acceptance test, installation and connectivity of equipment, certification of training of personnel and, in the case of after-market service deliverables, the passage of time (typically evenly over the post-warranty period of the service deliverable).

 

We often provide a guarantee to support our performance under multiple-deliverable arrangements. In the event that customers are permitted to terminate such arrangements, the underlying contract typically requires payment for deliverables and reimbursement of costs incurred through the date of termination.

 

Effect of Adopting ASC 606. Adopting ASC 606 did not require any cumulative effect adjustment to retained earnings as of July 1, 2018 because the impact on retained earnings was immaterial. The impact to our condensed consolidated statements of operations is shown below for the three and nine month periods ended March 31, 2019 and for the balance sheet as of March 31, 2019.

 

Statement of Operations (in thousands)

 

 

 

Three Months Ended March 31, 2019

 

Nine Months Ended March 31, 2019

 

 

 

Results
as Reported

 

Results
without
Adoption of
ASC 606

 

Effect of
Change

 

Results
as Reported

 

Results
without
Adoption of
ASC 606

 

Effect of
Change

 

Revenue

 

$

304,284

 

$

293,254

 

$

11,030

 

$

873,738

 

$

843,815

 

$

29,923

 

Cost of goods sold

 

192,968

 

187,111

 

5,857

 

556,165

 

541,402

 

14,763

 

Operating expenses

 

79,196

 

75,508

 

3,688

 

237,489

 

227,144

 

10,345

 

Income from operations

 

32,120

 

30, 635

 

1,485

 

80,084

 

75,269

 

4,815

 

Interest and other expense, net

 

(5,595

)

(5,595

)

 

(16,546

)

(16,546

)

 

Income tax provision

 

(6,899

)

(6,625

)

(274

)

(15,403

)

(14,593

)

(810

)

Net income

 

$

19,626

 

$

18,415

 

$

1,211

 

$

48,135

 

$

44,130

 

$

4,005

 

 

Balance Sheet (in thousands)

 

 

 

March 31, 2019

 

 

 

Balances
as Reported

 

Balances
without
Adoption of
ASC 606

 

Effect of
Change

 

Assets

 

 

 

 

 

 

 

Accounts receivable, net

 

$

218,433

 

$

202,266

 

$

16,167

 

Inventories

 

297,704

 

312,494

 

(14,790

)

Other assets

 

767,978

 

768,789

 

(811

)

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

425,500

 

428,939

 

(3,439

)

Other liabilities

 

332,807

 

332,807

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Retained earnings

 

382,880

 

378,875

 

4,005

 

 

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Table of Contents

 

We disaggregate revenue by reporting segment (Security, Optoelectronics and Manufacturing, and Healthcare) to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. Refer to Note 11 to our condensed consolidated financial statements for additional details of revenues by reporting segment.

 

During the three and nine months ended March 31, 2019, we recognized additional revenue as a result of adopting ASC 606. This is primarily due to sales within our Security division where we met certain contractual performance obligations. As a result, this increased net income and accounts receivable and reduced inventories.

 

Contract Assets and Liabilities. We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer. We may also receive consideration, per the terms of a contract, from customers prior to transferring goods to the customer. We record customer deposits as a contract liability. Additionally, we may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, we record a deferred revenue liability. We recognize these contract liabilities as sales after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of June 30, 2018 and March 31, 2019, including the change between the periods.

 

Contract Assets (in thousands)

 

 

 

June 30,
2018

 

March 31,
2019

 

Change

 

% Change

 

Unbilled revenue

 

$

13,087

 

$

25,590

 

$

12,503

 

96

%

 

Contract Liabilities (in thousands)

 

 

 

June 30,
2018

 

March 31,
2019

 

Change

 

% Change

 

Advances from customers

 

$

55,761

 

$

60,016

 

$

4,225

 

8

%

Deferred revenue—current

 

28,899

 

34,710

 

5,811

 

20

%

Deferred revenue—long-term

 

9,562

 

8,864

 

(698

)

(7

)%

 

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $178.4 million. We expect to recognize revenue on approximately 44% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

 

Practical Expedients. In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat the shipping activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only give consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year.

 

Recently Adopted Accounting Pronouncements

 

Revenue Recognition

 

As discussed above, we adopted ASC 606 on July 1, 2018 using the modified retrospective method, whereby the adoption does not impact any prior periods.

 

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Table of Contents

 

Statement of Cash Flows

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. We adopted this ASU effective July 1, 2018 using the retrospective approach and the initial adoption had no material effect on our condensed consolidated statement of cash flows.

 

Income Taxes

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory. The new guidance eliminates the exception for intra-entity transfers other than inventory and requires the recognition of current and deferred income taxes resulting from such a transfer when the transfer occurs. We adopted this ASU effective July 1, 2018 using the modified retrospective transition method resulting in a reclassification in the balance sheet of $3 million to decrease prepaid expenses and other assets and increase deferred tax assets.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with terms of more than 12 months. The ASU also will require qualitative and quantitative disclosures designed to give financial statement readers information on the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for us in the first quarter of fiscal 2020 with early adoption permitted. We plan to adopt the new lease standard effective July 1, 2019, and apply it using the new transition method, under which an entity initially applies the new standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We continue to assess and have not yet made a determination on whether to elect the package of transition practical expedients. In preparation for implementation, we plan to use a software solution to assist with the new reporting requirements and continue to assess the effect of the guidance on existing accounting policies and the consolidated financial statements. We expect the valuation of our right-of-use assets and lease liabilities, previously described as operating leases, to approximate the present value of our forecasted future lease commitments. We are currently implementing processes to comply with the measurement and disclosure requirements.

 

Retirement Benefit Plans

 

In August 2018, the FASB issued authoritative guidance under ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of the adoption of this guidance on our consolidated financial statements.

 

Intangibles

 

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

 

2Business Combinations

 

Under ASU 805, Business Combinations the acquisition method of accounting requires us to record assets acquired less liabilities assumed in an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase price over the estimated fair value of the assets acquired less liabilities assumed should be recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. We may record adjustments to the assets acquired and liabilities assumed, with corresponding adjustments to goodwill, during the one-year post-acquisition measurement period as additional information becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are reflected in reported earnings.

 

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Table of Contents

 

Fiscal Year 2019 Business Acquisitions

 

In July 2018, we (through our Optoelectronics and Manufacturing division) acquired an optoelectronics solutions business for $17.5 million, plus up to $1 million in potential contingent consideration, which may be earned over an 18-month period. The acquisition was financed with cash on hand and borrowings under our existing revolving bank line of credit. The goodwill recognized for this business is expected to be deductible for income tax purposes.

 

In August 2018, we (through our Security division) completed an acquisition of a privately held services company for approximately $0.8 million, plus up to approximately $5 million in contingent consideration, which may be earned over a five-year period. The acquisition was financed with cash on hand. The goodwill recognized for this business is not expected to be deductible for income tax purposes.

 

In January 2019, we (through our Security division) completed an acquisition of a privately held sales and services company. The acquisition was financed with cash on hand and was in an amount determined to be insignificant by management.

 

These business acquisitions, individually and in the aggregate, were not material to our consolidated financial statements. Accordingly, pro-forma historical results of operations related to these businesses have not been presented.

 

Fiscal Year 2018 Business Acquisitions

 

Acquisition of Explosive Trace Detection Business

 

On July 7, 2017, we acquired the global explosive trace detection business (“ETD”) from Smiths Group plc. This acquisition was a carve out from a larger entity. We financed the total purchase price of $80.5 million with a combination of cash on hand and borrowings under our revolving bank line of credit. Pro-forma results were not presented because, based on the date of the acquisition, there was not a material difference between pro-forma and actual results in the condensed consolidated financial statements of operations for the nine months ended March 31, 2018 and 2019.

 

The valuation of certain assets and liabilities of ETD were performed by a third party valuation specialist. The final allocation was as follows:

 

Cash and cash equivalents

 

$

4

 

Accounts receivable

 

15,517

 

Inventories

 

11,678

 

Property and equipment

 

1,599

 

Intangible assets

 

30,370

 

Deferred tax asset

 

2,738

 

Other long-term assets

 

297

 

Accounts payable

 

(4,784

)

Accrued payroll and related expenses

 

(2,116

)

Deferred revenues—current

 

(924

)

Accrued warranties

 

(2,068

)

Advances from customers

 

(670

)

Other accrued expenses and current liabilities

 

(1,074

)

Deferred revenues—long term

 

(232

)

Net assets acquired

 

50,335

 

Goodwill

 

30,132

 

Total consideration

 

$

80,467

 

 

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Table of Contents

 

The goodwill is largely attributable to expected growth, intellectual capital and the assembled workforce of the ETD business. Intangible assets were recorded at fair value, as determined by management based on available information, with assistance from a third party. The fair value attributed to the intangible assets acquired was based on estimates, assumptions and other information compiled by management, and valuations resulting from established valuation techniques. The value attributed to goodwill and intangible assets is partially non-deductible for income tax purposes. The following table summarizes the fair value of acquired identifiable intangible assets as of the acquisition date (amounts in thousands):

 

 

 

Weighted

 

 

 

 

 

Average Estimated

 

Fair

 

 

 

Lives

 

Value

 

 

 

 

 

 

 

Developed technology

 

10 years

 

$

14,210

 

Customer relationships/backlog

 

7 years

 

16,070

 

In-process research and development (“IPR&D”)

 

 

 

90

 

Total intangible assets

 

 

 

$

30,370

 

 

Other Fiscal Year 2018 Business Acquisitions

 

In July 2017, we (through our Security division) completed an acquisition of a privately held technology company. The acquisition was financed with cash on hand and was in an amount including potential earnout consideration determined to be insignificant by management.

 

In January 2018, we (through our Optoelectronics and Manufacturing division) acquired an electronics component designer and manufacturer for approximately $22 million, plus up to $6 million in contingent consideration, which may be earned over a three-year period. The goodwill recognized for this business is not expected to be deductible for income tax purposes. The acquisition was financed with cash on hand and borrowings under our revolving bank line of credit.

 

3. Balance Sheet Details

 

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

 

 

 

June 30,
2018

 

March 31,
2019

 

 

 

 

 

 

 

Accounts receivable

 

$

225,336

 

$

234,411

 

Less allowance for doubtful accounts

 

(14,592

)

(15,978

)

Total

 

$

210,744

 

$

218,433

 

 

 

 

June 30,
2018

 

March 31,
2019

 

 

 

 

 

 

 

Raw materials

 

$

156,612

 

$

151,383

 

Work-in-process

 

89,468

 

79,188

 

Finished goods

 

67,472

 

67,133

 

Total

 

$

313,552

 

$

297,704

 

 

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Table of Contents

 

 

 

June 30,

 

March 31,

 

 

 

2018

 

2019

 

Land

 

$

16,569

 

$

16,561

 

Buildings, civil works and improvements

 

56,585

 

55,322

 

Leasehold improvements

 

9,681

 

7,903

 

Equipment and tooling

 

117,294

 

127,579

 

Furniture and fixtures

 

3,331

 

3,202

 

Computer equipment

 

18,759

 

18,199

 

Computer software

 

19,509

 

19,647

 

Computer software implementation in process

 

4,318

 

7,747

 

Construction in process

 

790

 

4,682

 

Total

 

246,836

 

260,842

 

Less accumulated depreciation and amortization

 

(131,312

)

(135,926

)

Property and equipment, net

 

$

115,524

 

$

124,916

 

 

Depreciation expense was $5.4 million and $5.1 million for the three months ended March 31, 2018 and 2019, respectively, and approximately $38.4 million and $15.4 million for the nine months ended March 31, 2018 and 2019, respectively. The year-over-year decrease in depreciation for the nine months ended March 31, 2019 is due to certain assets becoming fully depreciated in fiscal year 2018, as well as the transfer of certain assets as discussed below.

 

In January 2018, we entered into a two-year agreement with the Mexican government to continue providing security screening services. Upon inception of the contract, we transferred certain fixed assets with a net book value of $29.5 million to the customer, and this remaining cost to obtain the contract is amortized on a straightline basis over the term of the contract as corresponding revenues are recognized. During the three and nine months ended March 31, 2019, we recognized $3.6 million and $10.7 million, respectively, of amortization expense related to such assets. For the three and nine months ended March 31, 2018, we recognized $3.2 million of amortization expense related to such assets. As of March 31, 2019, $11.1 million was recorded within Prepaid expenses and other current assets.

 

4. Goodwill and Intangible Assets

 

The changes in the carrying value of goodwill for the nine month period ended March 31, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

Optoelectronics

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

Security

 

Healthcare

 

Manufacturing

 

 

 

 

 

Division

 

Division

 

Division

 

Consolidated

 

Balance as of June 30, 2018

 

$

191,810

 

$

40,157

 

$

60,246

 

$

292,213

 

Goodwill acquired or adjusted during the period

 

7,992

 

 

7,472

 

15,464

 

Foreign currency translation adjustment

 

(135

)

6

 

(87

)

(216

)

Balance as of March 31, 2019

 

$

199,667

 

$

40,163

 

$

67,631

 

$

307,461

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

June 30, 2018

 

March 31, 2019

 

 

 

Weighted

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Average

 

Carrying

 

Accumulated

 

Intangibles

 

Carrying

 

Accumulated

 

Intangibles

 

 

 

Lives

 

Value

 

Amortization

 

Net

 

Value

 

Amortization

 

Net

 

Amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software development costs

 

8 years

 

$

28,174

 

$

(9,423

)

$

18,751

 

$

28,706

 

$

(11,730

)

$

16,976

 

Patents

 

19 years

 

8,401

 

(1,618

)

6,783

 

8,456

 

(1,785

)

6,671

 

Developed technology

 

10 years

 

52,780

 

(9,706

)

43,074

 

54,604

 

(13,861

)

40,743

 

Customer relationships/ backlog

 

7 years

 

63,398

 

(17,891

)

45,507

 

66,085

 

(22,842

)

43,243

 

Total amortizable assets

 

 

 

152,753

 

(38,638

)

114,115

 

157,851

 

(50,218

)

107,633

 

Non-amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

25,596

 

 

25,596

 

26,509

 

 

26,509

 

IPR&D

 

 

 

2,290

 

 

2,290

 

2,290

 

 

2,290

 

Total intangible assets

 

 

 

$

180,639

 

$

(38,638

)

$

142,001

 

$

186,650

 

$

(50,218

)

$

136,432

 

 

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Amortization expense related to intangible assets was $5.1 million and $5.4 million for the three months ended March 31, 2018 and 2019, respectively. For the nine months ended March 31, 2018 and 2019, amortization expense was $13.8 million and $16.3 million, respectively. At March 31, 2019, the estimated future amortization expense of intangible assets was as follows (in thousands):

 

2019 (remaining 3 months)

 

$

5,329

 

2020

 

20,022

 

2021

 

18,732

 

2022

 

14,832

 

2023

 

13,750

 

Thereafter, including assets that have not yet begun to be amortized

 

34,968

 

Total

 

$

107,633

 

 

Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product-by-product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended March 31, 2018 and 2019, we capitalized software development costs in the amounts of $1.0 million and $0.8 million, respectively. For the nine months ended March 31, 2018 and 2019, we capitalized software development costs in the amounts of $1.3 million and $1.8 million, respectively.

 

5. Impairment, restructuring and other charges

 

Impairment

 

During the three and nine months ended March 31, 2019, there were no impairment charges. During the nine months ended March 31, 2018, we (i) abandoned a product line in our Security division that became redundant as a result of the ETD acquisition, (ii) abandoned a non-core product line in our Healthcare division, and (iii) abandoned certain trademarks in our Optoelectronics and Manufacturing division that were no longer used. As a result, $7.1 million of assets, including intangible and fixed assets, were written off as we determined that these assets had no value and were permanently impaired.

 

Restructuring and Other Charges

 

We endeavor to align our global capacity and infrastructure with demand by our customers and also to fully integrate acquisitions, and thereby improve operational efficiency.

 

The following table summarizes impairment, restructuring and other charges for the periods set forth below (in thousands):

 

 

 

Three Months Ended March 31, 2018

 

 

 

Security Division

 

Healthcare
Division

 

Optoelectronics and
Manufacturing
Division

 

Corporate

 

Total

 

Impairment charges

 

$

91

 

$

3,946

 

$

 

$

 

$

4,037

 

Acquisition-related costs

 

 

 

 

77

 

77

 

Employee termination costs

 

18

 

3

 

269

 

 

290

 

Facility closures/consolidation

 

117

 

(8

)

 

 

109

 

Legal and accrued settlement costs, net

 

 

5,766

 

 

3,783

 

9,549

 

Total expensed

 

$

226

 

$

9,707

 

$

269

 

$

3,860

 

$

14,062

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Security Division

 

Healthcare
 Division

 

Optoelectronics and
Manufacturing 
Division

 

Corporate

 

Total

 

Acquisition-related costs

 

$

 

$

 

$

 

$

 

$

 

Employee termination costs

 

 

 

 

 

 

Facility closures/consolidation

 

 

 

 

 

 

Legal and accrued settlement costs, net

 

 

 

 

(1,777

)

(1,777

)

Total expensed

 

$

 

$

 

$

 

$

(1,777

)

$

(1,777

)

 

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Table of Contents

 

 

 

Nine Months Ended March 31, 2018

 

 

 

Security Division

 

Healthcare
Division

 

Optoelectronics and
Manufacturing
Division

 

Corporate

 

Total

 

Impairment charges

 

$

1,581

 

$

4,525

 

$

1,075

 

$

 

$

7,181

 

Acquisition-related costs

 

 

 

 

1,258

 

1,258

 

Employee termination costs

 

348

 

3

 

415

 

 

766

 

Facility closures/consolidation

 

198

 

235

 

 

 

433

 

Legal and accrued settlement costs, net

 

 

9,966

 

 

3,885

 

13,851

 

Total expensed

 

$

2,127

 

$

14,729

 

$

1,490

 

$

5,143

 

$

23,489

 

 

 

 

Nine Months Ended March 31, 2019

 

 

 

Security Division

 

Healthcare
Division

 

Optoelectronics and
Manufacturing
Division

 

Corporate

 

Total

 

Acquisition-related costs

 

$

 

$

 

$

287

 

$

 

$

287

 

Employee termination costs

 

 

1,442

 

133

 

 

1,575

 

Facility closures/consolidation

 

 

2,084

 

 

 

2,084

 

Legal and accrued settlement costs, net

 

 

 

 

(2,792

)

(2,792

)

Total expensed

 

$

 

$

3,526

 

$

420

 

$

(2,792

)

$

1,154

 

 

The changes in the accrued liability for restructuring and other charges for the nine month period ended March 31, 2019 were as follows (in thousands):

 

 

 

Acquisition-
related Costs

 

Employee
Termination
Costs

 

Facility
Closure/
Consolidation
Cost

 

Legal and 
Settlement
Charges

 

Total

 

Balance as of June 30, 2018

 

$

 

$

837

 

$

399

 

$

14,065

 

$

15,301

 

Restructuring and other charges, net

 

287

 

1,575

 

2,084

 

(2,792

)

1,154

 

Payments and other adjustments

 

(287

)

(2,147

)

(2,163

)

(1,195

)

(5,792

)

Balance as of March 31, 2019

 

$

 

$

265

 

$

320

 

$

10,078

 

$

10,663

 

 

6. Borrowings

 

Revolving Credit Facility

 

In December 2016, we entered into an amendment to our revolving credit facility, which, among other things, increased the aggregate committed amount available to us from $450 million to $525 million and extended the maturity date to December 2021. The credit facility includes a $300 million sub limit for letters of credit. Under certain circumstances, we have the ability to increase the facility by the greater of $250 million or such amount as would not cause our secured leverage ratio to exceed a specified level. Borrowings under this facility bear interest at LIBOR, or a comparable rate in accordance with the terms of the credit agreement, plus a margin of 1.50% as of March 31, 2019 (which margin can range from 1.25% to 2.0% based on our consolidated net leverage ratio as defined in the credit facility). Letters of credit reduce the amount available to borrow by their face value. The unused portion of the facility bears a commitment fee of 0.20% as of March 31, 2019, but this fee can range from 0.20% to 0.30% based on our consolidated net leverage ratio as defined in the credit facility. Our borrowings under the credit agreement are guaranteed by certain of our U.S. based subsidiaries and are secured by substantially all of our assets and the assets of certain of our subsidiaries. The credit agreement contains various representations and warranties, affirmative, negative and financial covenants and conditions of default. As of March 31, 2019, there was $124.0 million of borrowings outstanding under the revolving credit facility and $59.1 million outstanding under the letters of credit sub-facility. The amount available to borrow under the credit facility as of March 31, 2019 was $341.9 million. Loan amounts under the revolving credit facility may be borrowed, repaid and re-borrowed during the term. Although the principal amount of each revolving loan is due and payable in full on the maturity date, we have the right to repay each revolving loan in whole or in part from time to time without penalty. It is our practice to routinely borrow and repay several times per year under this revolving credit facility. Therefore, borrowings under the credit facility are included in current liabilities. As of March 31, 2019, we are in compliance with all covenants under this credit facility.

 

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On April 23, 2019, we entered into an amendment to our revolving credit facility, which, among other things (i) increases the size of the credit facility to $535 million, (ii) extends the maturity date to April 2024, (iii) reduces the margin rate by 0.25% for each pricing tier and (iv) reduces the unused commitment fee.

 

1.25% Convertible Senior Notes Due 2022

 

In February 2017, we issued $287.5 million of the Notes in a private offering. The Notes are governed by an indenture dated February 22, 2017. The maturity for the payment of principal is September 1, 2022. The Notes bear interest at the rate of 1.25% payable in cash semiannually in arrears on each March 1 and September 1. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries, as well as any of our existing and future indebtedness that may be guaranteed by our subsidiaries to the extent of such guarantees (including the guarantees of certain of our subsidiaries under our existing revolving credit facility).

 

The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and are, thereafter convertible, at any time, in each case at an initial conversion rate of 9.3056 per $1,000 principal amount of the Notes, which is equal to an initial conversion price of approximately $107.46 per share or a 38.5% premium to our stock price at the time of the issuance. The conversion rate is subject to adjustment upon certain events. Upon conversion, the Notes may be settled, at our election, in shares of our common stock, cash or a combination of cash and shares of common stock. We have initially elected a combination settlement method to satisfy the conversion obligation, which allows us to settle the principal amount of the Notes in cash and to settle the excess conversion value, if any, in shares of common stock, and cash in lieu of fractional shares.

 

We may not redeem the Notes prior to March 6, 2020. Thereafter, we may redeem the Notes if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days. If we undergo a fundamental change, as defined in the indenture for the Notes, subject to certain conditions, holders of the Notes may require us to repurchase all or part of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The occurrence of a fundamental change will also result in the Notes becoming immediately convertible.

 

Pursuant to ASC 470-20, we allocated the $287.5 million gross proceeds of the Notes between liability and equity components. The initial $242.4 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature for similar terms and priced on the same day the Notes were issued. The initial $45.1 million equity component represents the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes. Issuance costs of $7.7 million were allocated between debt ($6.5 million) and equity ($1.2 million) components with the portion allocated to the debt presented as an offset against long term debt in the consolidated balance sheet and amortized as interest expense over the life of the Notes using the effective interest method. The total interest expense related to the Notes for the three and nine months ended March 31, 2019 was $3.2 million and $9.4 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $2.0 million and $5.8 million of debt discount amortization, and $0.3 million and $0.9 million of amortization of debt issuance costs. The total interest expense related to the Notes for the three and nine months ended March 31, 2018 was $3.1 million and $9.2 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $1.9 million and $5.6 million of debt discount amortization, and $0.3 million and $0.9 million of amortization of debt issuance costs. As of March 31, 2019, the unamortized debt discount was $29.3 million which is being amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.50%. The unamortized debt issuance cost of $4.0 million as of March 31, 2019 is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes. Based on our March 31, 2019 stock price of $87.60 per share, the “if-converted” value of the Notes did not exceed the principal amount.

 

Other Borrowings

 

Several of our foreign subsidiaries maintain bank lines of credit, denominated in local currencies and U.S. dollars, primarily for the issuance of letters of credit. As of March 31, 2019, $53.3 million of letters of credit were outstanding under these credit facilities. As of March 31, 2019, the total amount available under these credit facilities was $15.1 million.

 

In September 2012, we entered into a seven year term loan agreement for $11.1 million to fund the acquisition of land and a building in the state of Washington. The principal on the loan, together with interest at LIBOR plus 1.25%, is payable on a monthly basis over seven years. The outstanding balance on this loan as of March 31, 2019 was $0.9 million compared to a balance of $2.1 million as of June 30, 2018. Concurrent with entering into the floating rate loan, we entered into an interest rate swap agreement that effectively locks the interest rate of the loan at 2.2% per annum for the term of the loan.

 

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Table of Contents

 

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

 

 

 

June 30,
2018

 

March 31,
2019

 

1.25% convertible notes due 2022:

 

 

 

 

 

Principal amount

 

$

287,500

 

$

287,500

 

Unamortized discount

 

(35,133

)

(29,281

)

Unamortized debt issuance costs

 

(4,897

)

(4,016

)

1.25% convertible notes due 2022, net of unamortized discount and debt issuance costs

 

247,470

 

254,203

 

Term loans

 

2,114

 

925

 

Other long-term debt

 

1,658

 

1,985

 

 

 

251,242

 

257,113

 

Less current portion of long-term debt

 

(2,262

)

(1,702

)

Long-term portion of debt

 

$

248,980

 

$

255,411

 

 

7. Stockholders’ Equity

 

Stock-based Compensation

 

As of March 31, 2019, we maintained the Amended and Restated 2012 Incentive Award Plan (the “2012 Plan”) and the Amended and Restated 2006 Equity Participation Plan (“2006 Plan”) as stock-based employee compensation plans. No further grants may be made under the 2006 Plan. In addition, pursuant to the acquisition of American Science and Engineering, Inc. (“AS&E”), we assumed two stock-based employee compensation plans: the AS&E 2005 Equity and Incentive Plan and the AS&E 2014 Equity and Incentive Plan (collectively the “AS&E Plans”). No new equity grants will be made under the AS&E Plans. The 2012 Plan, the 2006 Plan, and the AS&E Plans are collectively referred to as the “OSI Plans”.

 

We recorded stock-based compensation expense in the condensed consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

2018

 

2019

 

Cost of goods sold

 

$

251

 

$

182

 

$

739

 

$

539

 

Selling, general and administrative

 

5,614

 

5,543

 

16,574

 

18,487

 

Research and development

 

149

 

163

 

441

 

488

 

Stock-based compensation expense

 

$

6,014

 

$

5,888

 

$

17,754

 

$

19,514

 

 

As of March 31, 2019, total unrecognized compensation cost related to stock-based compensation grants under the OSI Plans were estimated at $0.6 million for stock options and $19.4 million for RSUs. We expect to recognize these costs over a weighted average period of 2.0 years with respect to the stock options and 1.9 years for grants of RSUs.

 

The following summarizes stock option activity during the nine months ended March 31, 2019:

 

 

 

Number of
Options

 

Weighted Average
Exercise Price

 

Weighted- Average
Remaining Contractual
Term

 

Aggregate
Intrinsic Value
(in thousands)

 

Outstanding at June 30, 2018

 

677,525

 

$

32.80

 

 

 

 

 

Granted

 

18,135

 

$

72.39

 

 

 

 

 

Exercised

 

(108,008

)

$

22.82

 

 

 

 

 

Expired or forfeited

 

(9,618

)

$

70.28

 

 

 

 

 

Outstanding at March 31, 2019

 

578,034

 

$

35.29

 

2.6 years

 

$

30,247

 

Exercisable at March 31, 2019

 

540,646

 

$

32.37

 

2.1 years

 

$

29,865

 

 

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Table of Contents

 

The following summarizes RSU award activity during the nine months ended March 31, 2019:

 

 

 

Shares

 

Weighted-
Average
Fair Value

 

Nonvested at June 30, 2018

 

526,377

 

$

71.56

 

Granted

 

362,025

 

73.80

 

Vested

 

(357,924

)

71.01

 

Forfeited

 

(13,669

)

73.74

 

Nonvested at March 31, 2019

 

516,809

 

$

73.45

 

 

As of March 31, 2019, there were approximately 1.6 million shares available for grant under the 2012 Plan. Under the terms of the 2012 Plan, RSUs granted from the pool of shares available for grant reduce the pool by 1.87 shares for each award granted. RSUs forfeited and returned to the pool of shares available for grant increase the pool by 1.87 shares for each award forfeited.

 

We granted 117,346 and 97,514 performance-based RSUs during the nine months ended March 31, 2018 and 2019, respectively. These performance based RSU awards are contingent on the achievement of certain performance metrics. The payout related to these awards can range from zero to 280% of the original number of shares or units awarded.

 

Share Repurchase Program

 

In March 2018, our Board of Directors authorized a share repurchase program of up to 1,000,000 shares. This program does not expire unless our Board of Directors acts to terminate the program. The timing and actual number of shares purchased depend on a variety of factors, including stock price, general business and market conditions and other investment opportunities and may be purchased through the open market. 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.

 

We did not repurchase any shares during the three months ended March 31, 2019. During the nine months ended March 31, 2019, we repurchased 288,316 shares of our common stock, and as of March 31, 2019, there were 562,707 shares available to repurchase under the program.

 

8. Retirement Benefit Plans

 

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

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2018

 

2019

 

2018

 

2019

 

Service cost

 

$

216

 

$

98

 

$

648

 

$

295

 

Interest cost

 

9

 

8

 

25

 

25

 

Amortization of prior service cost

 

70

 

14

 

210

 

42

 

Net periodic pension expense

 

$

295

 

$

120

 

$

883

 

$

362

 

 

For each of the three months ended March 31, 2018 and 2019, we made no contributions to these defined benefit plans. For each of the nine months ended March 31, 2018 and 2019, we made contributions of $1.0 million to these defined benefit plans.

 

We also maintain various defined contribution plans. For each of the three months ended March 31, 2018 and 2019, we made contributions of $1.6 million to these defined contribution plans. For the nine months ended March 31, 2018 and 2019, we made contributions of $4.6 million and $4.7 million, respectively, to these defined contribution plans.

 

9. Commitments and Contingencies

 

Contingent Acquisition Obligations

 

Under the terms and conditions of the purchase agreements associated with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain sales or profitability milestones through the acquired operations. For agreements that contain contingent consideration caps, the maximum amount of such potential future payments is $28.7 million as of March 31, 2019. In addition, we are required to make royalty payments through 2022 based on the license of, or sales of products containing, the technology of CXR Limited, a company acquired in 2004.