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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

Graphic

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

OSIS

The NASDAQ Global Select Market

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  No 

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 No 

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 

   

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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.

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

As of October 22, 2019, there were 18,357,463 shares of the registrant’s common stock outstanding.

Table of Contents

OSI SYSTEMS, INC.

INDEX

PAGE

PART I — FINANCIAL INFORMATION

3

Item 1 —

Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets at June 30, 2019 and September 30, 2019

3

Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and 2019

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2018 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2018 and 2019

6

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2018 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Item 2 —

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

26

Item 3 —

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4 —

Controls and Procedures

32

PART II — OTHER INFORMATION

32

Item 1 —

Legal Proceedings

32

Item 1A —

Risk Factors

32

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3 —

Defaults Upon Senior Securities

32

Item 4 —

Mine Safety Disclosures

32

Item 5 —

Other Information

32

Item 6 —

Exhibits

33

Signatures

34

2

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, 

September 30, 

    

2019

    

2019

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

96,316

$

85,142

Accounts receivable, net

 

238,440

 

245,093

Inventories

 

273,711

 

268,761

Prepaid expenses and other current assets

 

32,432

 

38,140

Total current assets

 

640,899

 

637,136

Property and equipment, net

 

127,385

 

128,293

Goodwill

 

307,108

 

306,713

Intangible assets, net

 

132,954

 

129,633

Other assets

 

56,518

 

88,327

Total assets

$

1,264,864

$

1,290,102

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Bank lines of credit

$

88,000

$

95,000

Current portion of long-term debt

 

804

 

801

Accounts payable

 

93,500

 

100,942

Accrued payroll and related expenses

 

43,521

 

31,794

Advances from customers

 

43,227

 

49,845

Other accrued expenses and current liabilities

 

112,956

 

116,320

Total current liabilities

 

382,008

 

394,702

Long-term debt

 

257,752

 

260,007

Deferred income taxes

 

7,979

 

7,832

Other long-term liabilities

 

65,398

 

85,997

Total liabilities

 

713,137

 

748,538

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, 18,167,020 shares at June 30, 2019 and 18,357,464 shares at September 30, 2019

 

168,913

 

141,049

Retained earnings

 

399,541

 

420,284

Accumulated other comprehensive loss

 

(16,727)

 

(19,769)

Total stockholders’ equity

 

551,727

 

541,564

Total liabilities and stockholders’ equity

$

1,264,864

$

1,290,102

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 September 30, 

    

2018

    

2019

Net revenues:

Products

$

182,480

$

209,761

Services

 

83,769

 

81,091

Total net revenues

 

266,249

 

290,852

Cost of goods sold:

Products

 

125,371

 

146,342

Services

 

44,965

 

45,299

Total cost of goods sold

 

170,336

 

191,641

Gross profit

 

95,913

 

99,211

Operating expenses:

Selling, general and administrative

 

61,707

 

62,177

Research and development

 

13,753

 

14,246

Restructuring and other charges (benefit), net

 

4,196

 

(2,099)

Total operating expenses

 

79,656

 

74,324

Income from operations

 

16,257

 

24,887

Interest expense and other expense, net

 

(5,332)

 

(4,736)

Income before income taxes

 

10,925

 

20,151

(Provision) benefit for income taxes

 

(1,523)

 

592

Net income

$

9,402

$

20,743

Earnings per share:

Basic

$

0.52

$

1.14

Diluted

$

0.50

$

1.10

Shares used in per share calculation:

Basic

 

18,090

 

18,259

Diluted

 

18,736

 

18,903

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 September 30, 

    

2018

    

2019

Net income

$

9,402

$

20,743

Other comprehensive income (loss):

Foreign currency translation adjustment

 

1,173

 

(3,052)

Other

 

6

 

10

Other comprehensive income (loss)

1,179

(3,042)

Comprehensive income

$

10,581

$

17,701

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 September 30, 2018

Accumulated

Common

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—June 30, 2018

 

18,032,374

$

169,475

$

334,745

$

(14,784)

$

489,436

Exercise of stock options

 

9,034

 

269

 

 

 

269

Vesting of RSUs

 

340,082

 

 

 

 

Shares issued under employee stock purchase program

 

39,293

 

2,022

 

 

 

2,022

Stock-based compensation

 

 

5,463

 

 

 

5,463

Repurchase of common stock

(104,146)

(7,844)

(7,844)

Taxes paid related to net share settlement of equity awards

 

(163,514)

 

(12,625)

 

 

 

(12,625)

Net income

 

 

 

9,402

 

 

9,402

Other comprehensive income

 

 

 

 

1,179

 

1,179

Balance—September 30, 2018

18,153,123

$

156,760

$

344,147

$

(13,605)

$

487,302

Three Months Ended September 30, 2019

Accumulated

Common

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—June 30, 2019

 

18,167,020

$

168,913

$

399,541

$

(16,727)

$

551,727

Exercise of stock options

 

167,306

 

2,832

 

 

 

2,832

Vesting of RSUs

 

360,866

 

 

 

 

Shares issued under employee stock purchase program

 

34,837

 

2,065

 

 

 

2,065

Stock-based compensation

 

 

6,416

 

 

 

6,416

Repurchase of common stock

(126,051)

(13,262)

(13,262)

Taxes paid related to net share settlement of equity awards

 

(246,514)

 

(25,915)

 

 

 

(25,915)

Net income

 

 

 

20,743

 

 

20,743

Other comprehensive loss

 

 

 

 

(3,042)

 

(3,042)

Balance—September 30, 2019

18,357,464

$

141,049

$

420,284

$

(19,769)

$

541,564

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

Three Months Ended September 30, 

    

2018

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

9,402

$

20,743

Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of effects from acquisitions:

Depreciation and amortization

 

14,147

 

13,539

Stock-based compensation expense

 

5,463

 

6,416

Deferred income taxes

(3,386)

(3)

Amortization of debt discount and issuance costs

2,220

2,308

Other

 

49

 

(61)

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

Accounts receivable

 

(8,701)

 

(6,940)

Inventories

 

(28,690)

 

4,167

Prepaid expenses and other assets

 

(9,913)

 

(13,272)

Accounts payable

9,177

7,594

Accrued payroll and related expenses

(9,585)

(11,675)

Advances from customers

 

18,409

 

6,673

Other

 

(1,413)

 

(4,651)

Net cash (used in) provided by operating activities

 

(2,821)

 

24,838

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

 

(7,875)

 

(6,026)

Acquisition of businesses, net of cash acquired

 

(18,259)

 

Acquisition of intangible and other assets

 

(4,176)

 

(2,088)

Net cash used in investing activities

 

(30,310)

 

(8,114)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings on bank lines of credit

 

53,000

 

7,000

Proceeds from long-term debt

 

468

 

198

Payments on long-term debt

 

(649)

 

(253)

Proceeds from exercise of stock options and employee stock purchase plan

 

2,289

 

4,897

Payments of contingent consideration

(217)

(144)

Repurchases of common stock

 

(7,844)

 

(13,262)

Taxes paid related to net share settlement of equity awards

 

(12,625)

 

(25,915)

Net cash provided by (used in) financing activities

 

34,422

 

(27,479)

Effect of exchange rate changes on cash

 

306

 

(419)

Net change in cash and cash equivalents

 

1,597

 

(11,174)

Cash and cash equivalents—beginning of period

 

84,814

 

96,316

Cash and cash equivalents—end of period

$

86,411

$

85,142

Supplemental disclosure of cash flow information:

Cash paid, net during the period for:

Interest

$

3,702

$

2,986

Income taxes

$

13,998

$

4,098

See accompanying notes to condensed consolidated financial statements.

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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 and diagnostic cardiology products 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 internationally. 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 internationally. 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 internationally 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, 2019 filed with the SEC. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the operating results to be expected for the full 2020 fiscal year or any future periods.

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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. Due to the inherent uncertainty involved in making estimates, our actual amounts reported in future periods could differ materially from these estimates.

Earnings 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. 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 a net impact on diluted earnings per share when 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 dilutive effect of the Notes is included in the calculation below for the three months ended September 30, 2019. There was no dilutive effect of the Notes for the three months ended September 30, 2018.

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, 

    

2018

    

2019

Net income available to common stockholders

$

9,402

$

20,743

Weighted average shares outstanding—basic

 

18,090

 

18,259

Dilutive effect of equity awards

 

646

 

628

Dilutive effect of the Notes

16

Weighted average shares outstanding—diluted

 

18,736

 

18,903

Basic earnings per share

$

0.52

$

1.14

Diluted earnings per share

$

0.50

$

1.10

Shares excluded from diluted earnings per share due to their anti-dilutive effect

42

84

Cash and 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 $85.1 million at September 30, 2019. Of this amount, approximately 71% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by our subsidiaries in Singapore, the United Kingdom, Malaysia, Canada and to a lesser extent in Mexico, Germany, and Albania 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.

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Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, insurance company contracts, 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, as 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.The "Level 1" category includes assets and liabilities measured at quoted prices in active markets for identical assets and liabilities. The"Level 2" category includes assets and liabilities measured from observable inputs other than quoted market prices.The "Level 3" category includes assets and liabilities for which valuation inputs are unobservable and significant to the fair value measurement. As of June 30, 2019 and September 30, 2019, there were no assets in the "Level 3" category. 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.

The fair values of our financial assets and liabilities are categorized as follows (in thousands):

June 30, 2019

September 30, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

Insurance company contracts

 

$

 

$

35,899

 

$

 

$

35,889

 

$

$

36,486

 

$

 

$

36,486

Liabilities:

Contingent consideration

$

$

$

16,577

$

16,577

$

$

$

16,578

$

16,578

Revenue Recognition

We recognize revenue under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“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.

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.

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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.

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 amount of consideration is attributed to that obligation. When a contract contains multiple performance obligations the standalone selling price is first estimated using the observable price, which is generally a list price net of applicable discount or the price used to sell the good or service 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 performance obligations. 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.

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.

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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 our contract assets and liabilities as of June 30, 2019 and September 30, 2019, including the change between the periods (in thousands):

    

June 30, 

    

September 30, 

    

    

 

Contract Assets:

2019

2019

Change

% Change

 

Unbilled revenue

$

19,287

$

38,257

$

18,970

 

98

%

Contract Liabilities:

    

    

    

    

 

Advances from customers

$

43,227

$

49,845

$

6,618

15

%

Deferred revenue—current

 

33,641

 

29,900

 

(3,741)

(11)

%

Deferred revenue—long-term

 

9,506

 

8,656

 

(850)

(9)

%

Contract assets increased during the three months ended September 30, 2019 primarily due to satisfaction of performance obligations for explosive detection systems and cargo and vehicle inspection systems in our Security division which have not yet been billed to customers. The net increase in contract liabilities were primarily due to deposits received on cargo and vehicle system contracts in our Security division.

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 September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $150.1 million. We expect to recognize revenue on approximately 49% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the three months ended September 30, 2019, we recognized revenue of $34.3 million from contract liabilities existing at the beginning of the period.

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.

Lease Accounting

Right of use (“ROU”) assets represent our right to use an underlying asset during the reasonably certain lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. We recognize ROU lease assets and lease liabilities at lease commencement on our consolidated balance sheet based on the present value of lease payments over the lease term using a discount rate determined based on our incremental borrowing rate since the rate implicit in each lease is not readily determinable. We elected the package of practical expedients, which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification of any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component. We also elected the hindsight practical expedient, which allows us to use hindsight in determining the lease term. We do not record an ROU asset and corresponding lease liability for leases with an initial term of 12 months or less (“short-term leases”). The terms in our leases may include options to extend or terminate the lease. We recognize ROU assets and liabilities when it is reasonably certain that we will exercise those options. Judgment is required in our assessment as to whether renewal or termination options are reasonably certain to be exercised and factors such as contractual terms compared to current market rates, the importance of the facility and location to our operations, among others, are considered. Lease payments are made in accordance with the lease terms and lease expense, including short-term lease expense, is recognized on a straight-line basis over the lease term.

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Table of Contents

We lease facilities and certain equipment under various operating lease agreements. The majority of our lease arrangements are comprised of fixed payments while certain of our leases provide for periodic rent increases. Our leases may contain escalation clauses and renewal options. Most of the leases require us to pay for certain other costs such as common area maintenance and property taxes. Rent expense for leases with periodic rent increases or escalation clauses is recognized on a straight-line basis over the minimum lease term. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. We also have finance leases for fleet vehicles that are not material to the condensed consolidated financial statements.

The components of operating lease expense were as follows (in thousands):

Three Months Ended

    

September 30, 2019

Operating lease cost

$

2,649

Variable lease cost

 

138

Short-term lease cost

 

209

$

2,996

Supplemental balance sheet assets and liabilities related to operating leases were as follows (in thousands):

    

Balance Sheet Category

    

September 30, 2019

Operating lease ROU assets, net

 

Other assets

$

28,849

Operating lease liabilities, current portion

 

Other accrued expenses and current liabilities

$

8,355

Operating lease liabilities, long-term

 

Other long-term liabilities

 

20,750

Total operating lease liabilities

 

  

$

29,105

Weighted average remaining lease term

 

  

 

4.6 years

Weighted average discount rate

 

  

 

4.3%

Supplemental cash flow information related to operating leases was as follows (in thousands):

Three Months Ended

    

September 30, 2019

Cash paid for operating lease liabilities

$

2,572

ROU assets obtained in exchange for new lease obligations

 

1,313

Maturities of operating lease liabilities under ASC 842 (defined below) at September 30, 2019 were as follows (in thousands):

    

September 30, 2019

Less than one year

$

9,361

1 – 2 years

 

7,527

2 – 3 years

 

5,050

3 – 4 years

 

3,338

4 – 5 years

 

2,775

Thereafter

 

4,095

 

32,146

Less: Imputed interest

 

(3,041)

Total lease liabilities

$

29,105

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Maturities of minimum operating lease liabilities under non-cancelable leases under ASC 840 (defined below) at June 30, 2019 were as follows (in thousands):

    

June 30, 2019

Less than one year

$

9,802

1 – 2 years

 

8,082

2 – 3 years

 

5,473

3 – 4 years

 

3,397

4 – 5 years

 

2,954

Thereafter

 

4,583

Total lease liabilities

$

34,291

Recently Adopted Accounting Pronouncement

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”), which requires lessees to recognize ROU assets and lease liabilities, initially measured at present value of the lease payments, on its balance sheet for leases and classified as either financing or operating leases. We adopted ASC 842 on July 1, 2019, using the modified retrospective method, and we elected the package of practical expedients provided in ASC 842. In accordance with ASC 842, we did not restate comparative periods and instead reported comparative prior year periods under ASC 840, “Leases.”

The cumulative effect of the changes made to our July 1, 2019 consolidated condensed balance sheet for the adoption of the new lease standard was as follows (in thousands):

Balance at

Effect of Adoption

Balance at

Balance Sheet

    

June 30, 2019

    

of ASC 842

    

July 1, 2019

Assets

 

  

 

  

 

  

Other assets

$

56,518

$

30,066

$

86,584

Liabilities

 

  

 

  

 

  

Other accrued expenses and current liabilities

$

112,956

$

8,324

$

121,280

Other long-term liabilities

 

65,398

 

21,742

 

87,140

The adoption of the new lease accounting guidance did not have a material impact to the condensed consolidated statement of operations or the condensed consolidated statement of cash flows for the three months ended September 30, 2019.

Recently Issued Accounting Pronouncements Not Yet Adopted

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.

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Table of Contents

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.

2. Business Combinations

Under ASC 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 consideration 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.

Fiscal Year 2020 Business Acquisition

There were no acquisitions during the three months ended September 30,2019.

Fiscal Year 2019 Business Acquisitions

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.

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 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 after the completion of 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.

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.

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Table of Contents

3. Balance Sheet Details

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

June 30, 

September 30, 

Accounts receivable, net

    

2019

    

2019

Accounts receivable

$

253,504

$

259,383

Less allowance for doubtful accounts

 

(15,064)

 

(14,290)

Total

$

238,440

$

245,093

June 30, 

September 30, 

Inventories

2019

2019

Raw materials

$

143,697

$

145,087

Work-in-process

 

67,897

 

75,499

Finished goods

 

62,117

 

48,175

Total

$

273,711

$

268,761

June 30, 

September 30, 

Property and equipment, net

    

2019

    

2019

Land

$

16,564

$

16,558

Buildings, civil works and improvements

55,391

55,461

Leasehold improvements

 

8,311

 

8,459

Equipment and tooling

 

128,428

 

129,055

Furniture and fixtures

 

3,190

 

2,986

Computer equipment

 

18,733

 

18,814

Computer software

 

20,146

 

20,289

Computer software implementation in process

8,563

9,314

Construction in process

 

5,760

 

7,473

Total

 

265,086

 

268,409

Less accumulated depreciation and amortization

 

(137,701)

 

(140,116)

Property and equipment, net

$

127,385

$

128,293

Depreciation and amortization expense for property and equipment was $5.1 million for each of the three months ended September 30, 2018 and 2019.

4. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the three month period ended September 30, 2019 were as follows (in thousands):

Optoelectronics

and

    

Security

    

Healthcare

    

Manufacturing

    

Division

Division

Division

Consolidated

Balance as of June 30, 2019

$

200,079

$

40,064

$

66,965

$

307,108

Goodwill adjusted during the period

 

483

483

Foreign currency translation adjustment

 

(254)

 

(78)

 

(546)

 

(878)

Balance as of September 30, 2019

$

200,308

$

39,986

$

66,419

$

306,713

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Intangible assets consisted of the following (in thousands):

June 30, 2019

September 30,  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

$

29,393

$

(12,747)

$

16,646

$

30,740

$

(13,992)

$

16,748

Patents

19 years

 

8,688

 

(1,927)

 

6,761

 

9,104

(2,033)

7,071

Developed technology

10 years

 

53,460

 

(14,050)

 

39,410

 

53,443

(15,412)

38,031

Customer relationships/backlog

7 years

 

63,101

 

(22,132)

 

40,969

 

62,484

(23,862)

38,622

Total amortizable assets

 

154,642

 

(50,856)

 

103,786

 

155,771

(55,299)

100,472

Non-amortizable assets:

IPR&D

2,290

2,290

2,290

2,290

Trademarks

 

26,878

 

 

26,878

 

26,871

26,871

Total intangible assets

$

183,810

$

(50,856)

$

132,954

$

184,932

$

(55,299)

$

129,633

Amortization expense related to intangible assets was $5.3 million and $4.9 million for the three months ended September 30, 2018 and 2019, respectively.

At September 30, 2019, the estimated future amortization expense for intangible assets was as follows (in thousands):

2020 (remaining 9 months)

    

$

15,523

2021

 

19,009

2022

 

15,142

2023

 

14,001

2024

 

12,947

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

 

23,850

Total

$

100,472

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 September 30, 2018 and 2019, we capitalized software development costs in the amount of $0.4 million and $1.3 million, respectively.

5. Restructuring and Other Charges

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

During the quarter ended September 30, 2018, we incurred $3.6 million in legal fees in our Corporate division related to class action litigation and government investigations. Additionally, we incurred costs related to acquisitions completed during the quarter and as a result of employee terminations.

During the quarter ended September 30, 2019, we recognized a net benefit of $2.1 million primarily related to reimbursements from our insurance carriers for covered legal charges, partially offset by additional legal fees related to class action litigation and government investigations.

17

Table of Contents

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

Three Months Ended September 30, 2018

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Acquisition-related costs

$

$

    

$

267

$

$

267

Employee termination costs

 

35

 

191

 

107

 

 

333

Facility closures/consolidation

 

10

 

 

 

 

10

Legal costs

 

 

 

 

3,586

 

3,586

Total expensed

$

45

$

191

$

374

$

3,586

$

4,196

Three Months Ended September 30, 2019

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Employee termination costs (benefit)

$

$

$

(13)

$

71

$

58

Legal costs (benefit), net

 

 

 

 

(2,157)

 

(2,157)

Total benefit

$

$

$

(13)