Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
|
For the
quarterly period ended September 30, 2010
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from to
Commission File Number 0-23125
OSI SYSTEMS, INC.
(Exact name of registrant as
specified in its charter)
Delaware
|
|
33-0238801
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification Number)
|
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal
executive offices)
(310) 978-0516
(Registrants telephone
number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
£
|
|
Smaller reporting company
£
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As
of October 25, 2010, there were 18,660,973 shares of the registrants
common stock outstanding.
Table of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Condensed Consolidated Financial Statements
OSI SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands, except share amounts)
(Unaudited)
|
|
June 30,
|
|
September 30,
|
|
|
|
2010
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,989
|
|
$
|
55,569
|
|
Accounts receivable, net
|
|
132,728
|
|
99,949
|
|
Other receivables
|
|
2,859
|
|
2,930
|
|
Inventories
|
|
125,930
|
|
146,968
|
|
Deferred income taxes
|
|
17,262
|
|
17,132
|
|
Prepaid expenses and other
current assets
|
|
18,433
|
|
18,799
|
|
|
|
|
|
|
|
Total current assets
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|
349,201
|
|
341,347
|
|
Property and equipment,
net
|
|
51,515
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|
51,641
|
|
Goodwill
|
|
63,941
|
|
69,994
|
|
Intangible assets, net
|
|
31,975
|
|
31,946
|
|
Other assets
|
|
16,482
|
|
18,448
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
513,114
|
|
$
|
513,376
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Current portion of
long-term debt
|
|
$
|
12,743
|
|
$
|
8,632
|
|
Accounts payable
|
|
49,673
|
|
49,785
|
|
Accrued payroll and
related expenses
|
|
23,953
|
|
15,883
|
|
Advances from customers
|
|
25,325
|
|
22,833
|
|
Accrued warranties
|
|
10,930
|
|
11,395
|
|
Deferred revenue
|
|
7,698
|
|
7,750
|
|
Other accrued expenses and
current liabilities
|
|
14,272
|
|
12,849
|
|
Total current liabilities
|
|
144,594
|
|
129,127
|
|
Long-term debt
|
|
23,366
|
|
20,841
|
|
Other long-term
liabilities
|
|
31,444
|
|
34,683
|
|
|
|
|
|
|
|
Total liabilities
|
|
199,404
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|
184,651
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|
Commitment and
contingencies (Note 7)
|
|
|
|
|
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Shareholders Equity:
|
|
|
|
|
|
Preferred stock, no par
valueauthorized, 10,000,000 shares; no shares issued or outstanding
|
|
|
|
|
|
Common stock, no par valueauthorized, 100,000,000
shares; issued and outstanding, 18,326,133 at June 30, 2010 and
18,653,913 shares at September 30, 2010
|
|
244,026
|
|
250,579
|
|
Retained earnings
|
|
76,681
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|
80,073
|
|
Accumulated other comprehensive loss
|
|
(6,997
|
)
|
(1,927
|
)
|
Total shareholders equity
|
|
313,710
|
|
328,725
|
|
Total liabilities and
equity
|
|
$
|
513,114
|
|
$
|
513,376
|
|
See accompanying notes to Consolidated Financial
Statements
3
Table of Contents
OSI SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share
amount data)
(Unaudited)
|
|
For the Three Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Revenues
|
|
$
|
133,761
|
|
$
|
128,453
|
|
Cost of goods sold
|
|
89,294
|
|
81,555
|
|
Gross profit
|
|
44,467
|
|
46,898
|
|
Operating expenses:
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
32,280
|
|
31,976
|
|
Research and development
|
|
7,989
|
|
9,231
|
|
Restructuring, and other
charges
|
|
|
|
256
|
|
Total operating expenses
|
|
40,269
|
|
41,463
|
|
Income from operations
|
|
4,198
|
|
5,435
|
|
Interest expense net
|
|
(605
|
)
|
(590
|
)
|
Income before income taxes
|
|
3,593
|
|
4,845
|
|
Provision for income taxes
|
|
1,083
|
|
1,453
|
|
Net income
|
|
$
|
2,510
|
|
$
|
3,392
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.18
|
|
Shares used in per share
calculation:
|
|
|
|
|
|
Basic
|
|
17,503
|
|
18,433
|
|
Diluted
|
|
17,818
|
|
19,078
|
|
See accompanying notes to condensed consolidated financial
statements.
4
Table of Contents
OSI SYSTEMS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
|
|
For the Three Months Ended
September 30
|
|
|
|
2009
|
|
2010
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net income
|
|
$
|
2,510
|
|
$
|
3,392
|
|
Adjustments to reconcile
net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
4,181
|
|
4,468
|
|
Stock based compensation
expense
|
|
1,128
|
|
1,298
|
|
Recoveries of losses on
accounts receivable
|
|
(56
|
)
|
(272
|
)
|
Equity in gains of
unconsolidated affiliates
|
|
(33
|
)
|
(211
|
)
|
Deferred income taxes
|
|
(909
|
)
|
272
|
|
Other
|
|
(6
|
)
|
45
|
|
Changes in operating
assets and liabilitiesnet of business acquisitions:
|
|
|
|
|
|
Accounts receivable
|
|
(1,360
|
)
|
34,275
|
|
Other receivables
|
|
(45
|
)
|
91
|
|
Inventories
|
|
9,087
|
|
(19,055
|
)
|
Prepaid expenses and other
current assets
|
|
(1,502
|
)
|
78
|
|
Accounts payable
|
|
(1,515
|
)
|
(982
|
)
|
Accrued payroll and
related expenses
|
|
(2,841
|
)
|
(8,302
|
)
|
Advances from customers
|
|
5,234
|
|
(3,049
|
)
|
Accrued warranties
|
|
(522
|
)
|
265
|
|
Deferred revenue
|
|
(772
|
)
|
(526
|
)
|
Other accrued expenses and
current liabilities
|
|
(2,069
|
)
|
(2,191
|
)
|
Net cash provided by operating activities
|
|
10,510
|
|
9,596
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchases of property and
equipment
|
|
(1,513
|
)
|
(2,012
|
)
|
Acquisition of businesses
|
|
(3,241
|
)
|
(2,048
|
)
|
Purchases of intangible
and other assets
|
|
(495
|
)
|
(671
|
)
|
Net cash used in investing
activities
|
|
(5,249
|
)
|
(4,731
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
Net repayments of bank
lines of credit
|
|
(1,836
|
)
|
|
|
Payments on long-term debt
|
|
(5,917
|
)
|
(6,656
|
)
|
Payments of capital lease
obligations
|
|
(168
|
)
|
(127
|
)
|
Proceeds from exercise of
stock options and employee stock purchase plan
|
|
1,585
|
|
4,801
|
|
Net cash used in financing
activities
|
|
(6,336
|
)
|
(1,982
|
)
|
Effect of exchange rate
changes on cash
|
|
533
|
|
697
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
(542
|
)
|
3,580
|
|
Cash and cash
equivalents-beginning of period
|
|
25,172
|
|
51,989
|
|
Cash and cash
equivalents-end of period
|
|
$
|
24,630
|
|
$
|
55,569
|
|
Supplemental disclosure of
cash flow information:
|
|
|
|
|
|
Cash paid during the year
for:
|
|
|
|
|
|
Interest
|
|
$
|
639
|
|
$
|
472
|
|
Income taxes
|
|
$
|
1,805
|
|
$
|
2,413
|
|
See accompanying notes to condensed consolidated
financial statements.
5
Table of Contents
OSI SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Description of Business
OSI
Systems, Inc., together with its subsidiaries (the Company), is a
vertically integrated designer and manufacturer of specialized electronic
systems and components for critical applications. The Company sells its
products in diversified markets, including homeland security, healthcare,
defense and aerospace.
The
Company has three operating divisions: (i) Security, providing security
inspection systems and related services; (ii) Healthcare, providing
patient monitoring, diagnostic cardiology and anesthesia systems and related
services; and (iii) Optoelectronics and Manufacturing, providing
specialized electronic components for the Security and Healthcare divisions as
well as for applications in the defense and aerospace markets, among others.
Through
its Security division, the Company designs, manufactures and markets security
and inspection systems worldwide primarily under the Rapiscan Systems trade
name. Rapiscan Systems products are used to inspect baggage, cargo, vehicles
and other objects for weapons, explosives, drugs and other contraband and to
screen people. These products and services are also used for the safe, accurate
and efficient verification of cargo manifests for the purpose of assessing
duties and monitoring the export and import of controlled materials. The
Security division also offers turnkey security screening services under the S2
Global trade name.
Through
its Healthcare division, the Company designs, manufactures and markets patient
monitoring, diagnostic cardiology and anesthesia delivery and ventilation
systems worldwide primarily under the Spacelabs trade name. These products
are used by care providers in critical care, emergency and perioperative areas
within hospitals as well as physicians offices, medical clinics and ambulatory surgery
centers.
Through
its Optoelectronics and Manufacturing division, the Company designs,
manufactures and markets optoelectronic devices and provides electronics
manufacturing services worldwide for use in a broad range of applications,
including aerospace and defense electronics, security and inspection systems,
medical imaging and diagnostics, computed tomography (CT), telecommunications,
office automation, computer peripherals and industrial automation. This
division provides products and services to original equipment manufacturers as
well as to the Companys own Security and Healthcare divisions.
Basis of Presentation
The
condensed consolidated financial statements include the accounts of OSI Systems, Inc.
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. The condensed consolidated financial
statements have been prepared by the Company, without audit, pursuant to
interim financial reporting guidelines and the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Companys management, all adjustments,
consisting of only normal and recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for the
periods presented have been included. These condensed consolidated financial
statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements and accompanying notes included in
the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2010, filed with the Securities and Exchange Commission on August 27,
2010. The results of operations for the three months ended September 30,
2010, are not necessarily indicative of the operating results to be expected
for the full fiscal year or any future periods.
6
Table of Contents
Per Share Computations
The
Company computes basic earnings per share by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during the period. The Company computes diluted earnings per share by dividing
net income available to common shareholders by the sum of the weighted average
number of common and dilutive potential common shares outstanding during the
period. Potential common shares consist of restricted shares and shares
issuable upon the exercise of stock options and warrants under the treasury
stock method. Stock options and warrants to purchase a total of 1.3 million
shares of common stock for the three months ended September 30, 2009, were
not included in diluted earnings per share calculations because to do so would
have been antidilutive. The following table sets forth the computation of basic
and diluted earnings per share (in thousands, except per share amounts):
|
|
Three months Ended
September 30
|
|
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
Net income for diluted earnings per share
calculation
|
|
$
|
2,510
|
|
$
|
3,392
|
|
|
|
|
|
|
|
Weighted average shares for basic earnings per share
calculation
|
|
17,503
|
|
18,433
|
|
Dilutive effect of stock awards and warrants
|
|
315
|
|
645
|
|
Weighted average shares for diluted earnings per
share calculation
|
|
17,818
|
|
19,078
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.14
|
|
$
|
0.18
|
|
Diluted net income per share
|
|
$
|
0.14
|
|
$
|
0.18
|
|
Comprehensive Income
Comprehensive
income is computed as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Net income
|
|
$
|
2,510
|
|
$
|
3,392
|
|
Foreign currency translation adjustments
|
|
(1,577
|
)
|
4,912
|
|
Other
|
|
(35
|
)
|
160
|
|
Comprehensive income
|
|
$
|
898
|
|
$
|
8,464
|
|
Fair Value of Financial Instruments
The
Companys financial instruments consist primarily of cash, marketable
securities, accounts receivable, accounts payable and debt instruments. The
carrying values of financial instruments, other than debt instruments, are
representative of their fair values due to their short-term maturities. The
carrying values of the Companys long-term debt instruments are considered to
approximate their fair values because the interest rates of these instruments
are variable or comparable to current rates offered to the Company.
Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company
has determined that all of its marketable securities fall into the Level 1
category, which values assets at the quoted prices in active markets for
identical assets; while the Companys derivative instruments fall into the Level
2 category, which values assets and liabilities from observable inputs other
than quoted market prices. There were no assets or liabilities where Level 3
valuation techniques were used and there were no assets and liabilities
measured at fair value on a non-recurring basis.
The fair values of such assets were:
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Level 1
|
|
$
|
5,750
|
|
$
|
7,464
|
|
Level 2
|
|
(244
|
)
|
(744
|
)
|
Total
|
|
$
|
5,506
|
|
$
|
6,720
|
|
7
Table of
Contents
Derivative Instruments and Hedging Activity
The Companys use of derivatives
consists primarily of foreign exchange contracts and interest rate swap
agreements. As of September 30, 2010, the Company had outstanding foreign
currency forward contracts totaling $8.0 million to sell foreign currencies in
anticipation of the settlement in fiscal 2011 of sales denominated in that
currency. In addition, to reduce the
unpredictability of cash flows from interest payments related to variable,
LIBOR-based debt, the Company has outstanding a three-year interest rate swap
agreement, under which the Company incurs interest expense based upon a fixed
1.69% rate index for a portion of its term loan. The interest rate swap matures
in March 2012. Each of these derivative contracts is considered an
effective cash flow hedge in its entirety. As a result, the net gains or losses
on such derivative contracts have been reported as a component of other
comprehensive income in the Condensed Consolidated Financial Statements and are
reclassified as net earnings when the hedged transactions settle.
Business Combinations
During
the normal course of business the Company makes acquisitions. In the event that an individual acquisition
(or an aggregate of acquisitions) is material, appropriate disclosure of such
acquisition activity is disclosed.
Recent Accounting Updates Not Yet Adopted
In January 2010,
the Financial Accounting Standards Board issued an accounting standards update
(ASU) improving disclosures surrounding fair market value measurements. This update requires
disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements
.
Certain
financial assets are measured at fair value on a nonrecurring basis. These
assets include equity method investments that are recognized at fair value at
the end of the period to the extent that they are deemed to be
other-than-temporarily impaired. Non-financial assets such as property plant
and equipment, land, goodwill and intangible assets are also subject to
nonrecurring fair value measurements if they are deemed to be impaired. The
impairment models used for nonfinancial assets depend on the type of asset. This portion of the ASU is effective for
fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. Early application is permitted. The Company has not yet adopted this update
and is currently evaluating the impact it may have on its financial condition
and results of operations.
2. Balance Sheet Details
The
following tables provide details of selected balance sheet accounts (in
thousands):
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Accounts receivable
|
|
|
|
|
|
Trade receivables
|
|
$
|
138,734
|
|
$
|
105,746
|
|
Less: allowance for doubtful accounts
|
|
(6,006
|
)
|
(5,797
|
)
|
Accounts receivable, net
|
|
$
|
132,728
|
|
$
|
99,949
|
|
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Inventories, net
|
|
|
|
|
|
Raw
materials
|
|
$
|
69,421
|
|
$
|
81,460
|
|
Work-in-process
|
|
20,847
|
|
26,226
|
|
Finished
goods
|
|
35,662
|
|
39,282
|
|
Total
|
|
$
|
125,930
|
|
$
|
146,968
|
|
8
Table of Contents
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Property and equipment, net
|
|
|
|
|
|
Land
|
|
$
|
5,078
|
|
$
|
5,256
|
|
Buildings
|
|
8,618
|
|
8,801
|
|
Leasehold
improvements
|
|
12,549
|
|
12,837
|
|
Equipment
and tooling
|
|
62,861
|
|
64,644
|
|
Furniture
and fixtures
|
|
4,753
|
|
4,869
|
|
Computer
equipment
|
|
17,738
|
|
18,353
|
|
Computer
software
|
|
13,859
|
|
14,276
|
|
Total
|
|
125,456
|
|
129,036
|
|
Less:
accumulated depreciation and amortization
|
|
(73,941
|
)
|
(77,395
|
)
|
Property
and equipment, net
|
|
$
|
51,515
|
|
$
|
51,641
|
|
3. Goodwill and Intangible Assets
The
goodwill acquired during the period within the Security division related to an
acquisition of a business that was considered immaterial to the Company. The changes in the carrying value of goodwill
for the three month period ended September 30, 2010, are as follows (in
thousands):
|
|
Security
Division
|
|
Healthcare
Division
|
|
Optoelectronics
and
Manufacturing
Division
|
|
Consolidated
|
|
Balance
as of June 30, 2010
|
|
$
|
16,566
|
|
$
|
35,403
|
|
$
|
11,972
|
|
$
|
63,941
|
|
Goodwill
acquired during the period
|
|
5,518
|
|
|
|
|
|
5,518
|
|
Foreign
currency translation adjustment
|
|
365
|
|
170
|
|
|
|
535
|
|
Balance
as of September 30, 2010
|
|
$
|
22,449
|
|
$
|
35,573
|
|
$
|
11,972
|
|
$
|
69,994
|
|
Intangible
assets consisted of the following (in thousands):
|
|
|
|
June 30, 2010
|
|
September 30, 2010
|
|
|
|
Weighted
Average
Lives
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangibles
Net
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangibles
Net
|
|
Amortizable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
|
5 years
|
|
$
|
11,877
|
|
$
|
3,954
|
|
$
|
7,923
|
|
$
|
12,952
|
|
$
|
4,589
|
|
$
|
8,363
|
|
Patents
|
|
9 years
|
|
1,630
|
|
388
|
|
1,242
|
|
1,870
|
|
405
|
|
1,465
|
|
Core technology
|
|
10 years
|
|
2,029
|
|
1,094
|
|
935
|
|
2,129
|
|
1,202
|
|
927
|
|
Developed technology
|
|
13 years
|
|
17,246
|
|
8,942
|
|
8,304
|
|
17,304
|
|
9,413
|
|
7,891
|
|
Customer relationships/ backlog
|
|
7 years
|
|
10,437
|
|
6,132
|
|
4,305
|
|
10,022
|
|
6,036
|
|
3,986
|
|
Total amortizable assets
|
|
|
|
43,219
|
|
20,510
|
|
22,709
|
|
44,277
|
|
21,645
|
|
22,632
|
|
Non-amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
9,266
|
|
|
|
9,266
|
|
9,314
|
|
|
|
9,314
|
|
Total intangible assets
|
|
|
|
$
|
52,485
|
|
$
|
20,510
|
|
$
|
31,975
|
|
$
|
53,591
|
|
$
|
21,645
|
|
$
|
31,946
|
|
9
Table of
Contents
Amortization
expense related to intangibles assets was $1.0 million for each of the three
months ended September 30, 2009 and 2010. At September 30, 2010, the
estimated future amortization expense was as follows (in thousands):
2011 (remaining 9 months)
|
|
$
|
3,082
|
|
2012
|
|
4,076
|
|
2013
|
|
3,783
|
|
2014
|
|
2,599
|
|
2015
|
|
1,224
|
|
2016
|
|
1,045
|
|
2017 and
thereafter
|
|
6,823
|
|
Total
|
|
$
|
22,632
|
|
4. Borrowings
On October 15,
2010, the Company entered into a credit agreement with a syndicate of banks for
a $250 million revolving credit facility.
This credit agreement replaced the existing agreement described below,
which was repaid and terminated simultaneously with the close of the new
agreement. The new facility consists of
a $250 million, five-year revolving credit facility, including a $155 million
sub-limit for letters of credit.
Borrowings under this facility bear interest, based on the Companys option,
at either (i) London Interbank Offered Rate (LIBOR) plus margins that
range from 2.00% to 2.50% or (ii) the sum of margins that range from 1.00%
to 1.50% and the higher of (a) the banks prime rate, (b) the Fed
Funds rate plus 0.5% or (c) LIBOR plus 1.0%. The margins are determined by the Companys
consolidated leverage ratio. The Companys
borrowings under the credit agreement are guaranteed by the Companys domestic
subsidiaries and are secured by substantially all of the Companys and certain
subsidiaries assets. The agreement contains various representations,
warranties, affirmative, negative and financial covenants, and conditions of
default customary for financing agreements of this type, including restrictions
on the Companys ability to pay cash dividends.
Prior to the closing of the
aforementioned revolving credit facility, the Company maintained a credit
agreement with certain lenders allowing for a $74.5 million revolving credit
facility (including a $64.5 million sub-limit for letters-of-credit) and an
amortizing five-year term loan, which would have matured in July 2012. Borrowings under the agreement bore interest
at either (i) LIBOR plus margins that range from 2.00% to 2.50% or (ii) the
sum of margins that range from 1.00% to 1.50% and the higher of (a) the
banks prime rate or (b) Fed Funds rate plus 0.5%. The rates were
determined based on the Companys consolidated leverage ratio. As of September 30, 2010, the
weighted-average interest rate under the credit agreement was 2.3%. The Companys
borrowings under the credit agreement were guaranteed by the Companys domestic
subsidiaries and secured by substantially all of the Companys and certain
subsidiaries assets. The agreement contained various representations,
warranties, affirmative, negative and financial covenants, and conditions of
default customary for financing agreements of this type, including restrictions
on the Companys ability to pay cash dividends. As of September 30, 2010,
$25.7 million was outstanding under the term loan, while no debt was
outstanding under the revolving credit facility, and $38.0 million was
outstanding under the letter-of-credit facility.
Several of the Companys foreign
subsidiaries maintain bank lines-of-credit, denominated in local currencies, to
meet short-term working capital requirements and for the issuance of
letters-of-credit. As of September 30, 2010, $18.6 million was outstanding
under these letter-of-credit facilities, while no debt was outstanding. As of
September 30, 2010, the total amount available under these credit
facilities was $13.9 million, with a total cash borrowing sub-limit of $4.2
million.
In fiscal 2005, the Company entered
into a bank loan of $5.3 million to fund the acquisition of land and buildings
in the U.K. The loan is payable over a 20-year period. The loan bears interest
at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of
September 30, 2010, $3.1 million remained outstanding under this loan at
an interest rate of 1.9% per annum.
Long-term
debt consisted of the following (in thousands):
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Five-year
term loan due in 2013
|
|
$
|
32,281
|
|
$
|
25,681
|
|
Twenty-year
term loan due in 2024
|
|
3,015
|
|
3,109
|
|
Capital
leases
|
|
711
|
|
584
|
|
Other
|
|
102
|
|
99
|
|
|
|
36,109
|
|
29,473
|
|
Less
current portion of long-term debt
|
|
12,743
|
|
8,632
|
|
Long-term
portion of debt
|
|
$
|
23,366
|
|
$
|
20,841
|
|
10
Table of Contents
5. Stock-based Compensation
As
of September 30, 2010, the Company maintained an equity participation plan
and an employee stock purchase plan.
The
Company recorded stock-based-compensation expense in the condensed consolidated
statement of operations as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Cost of goods sold
|
|
$
|
72
|
|
$
|
88
|
|
Selling, general and administrative
|
|
1,002
|
|
1,156
|
|
Research and development
|
|
54
|
|
54
|
|
|
|
$
|
1,128
|
|
$
|
1,298
|
|
As
of September 30, 2010, total unrecognized compensation cost related to
non-vested, share-based compensation arrangements granted was approximately
$11.1 million. The Company expects to recognize these costs over a
weighted-average period of 2.9 years.
6. Retirement Benefit Plans
The
Company sponsors a number of qualified and nonqualified defined benefit pension
plans for its employees. The benefits under these plans are based on years of
service and an employees highest twelve months compensation during the last
five years of employment. The components of net periodic pension expense are as
follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Service cost
|
|
$
|
82
|
|
$
|
125
|
|
Interest cost
|
|
10
|
|
9
|
|
Amortization of net loss
|
|
27
|
|
25
|
|
Net periodic pension expense
|
|
$
|
119
|
|
$
|
159
|
|
For
each of the three months ended September 30, 2009 and 2010, the Company
made contributions of $0.1 million to these defined benefit plans.
In
addition, the Company sponsors several defined contribution benefit plans. For
the three months ended September 30, 2009 and 2010, the Company made
contributions of $0.8 million and $1.4 million, respectively, to these defined
contribution plans.
7. Commitments and Contingencies
Legal Proceedings
The Company is involved in various
claims and legal proceedings arising out of the ordinary course of business. In
the Companys opinion after consultation with legal counsel, the ultimate
disposition of such proceedings is not likely to have a material adverse effect
on its financial position, future results of operations, or cash flows. The
Company has not accrued for loss contingencies relating to such matters because
the Company believes that, although unfavorable outcomes in the proceedings may
be possible, they are not considered by management to be probable or reasonably
estimable. If one or more of these matters are resolved in a manner adverse to
the Company, the impact on the Companys results of operations, financial
position and/or liquidity could be material.
11
Table of
Contents
Contingent Acquisition Obligations
Under the terms and conditions of
the purchase agreements associated with certain acquisitions, the Company may
be obligated to make additional payments based on the achievement by the
acquired operations of certain sales and profitability milestones. Some of the purchase agreements the Company
has entered into do not put a cap on the total payments that may be earned, or
a deadline for such payments. For acquisitions that occurred prior to fiscal
year 2010, which were accounted for under Statement of Financial Accounting
Standards 141, Business Combinations, the Company accounts for such
contingent payments as an addition to the purchase price of the acquired
company. For acquisitions accounted for under Accounting Standards Codification
805, Purchase Price Allocations, (ASC 805), the estimated fair value of
these obligations is recorded as a liability in the consolidated balance sheet
with subsequent revisions reflected in the consolidated statements of
operations. As of September 30, 2010, pursuant to ASC 805, $9.3 million of
contingent payment obligations are included in other long-term liabilities in
the accompanying condensed consolidated balance sheet.
Environmental Contingencies
The Company is subject to various
environmental laws. The Companys practice is to ensure that Phase I
environmental site assessments are conducted for each of its properties in the
United States at which the Company manufactures products in order to identify,
as of the date of such report, potential areas of environmental concern related
to past and present activities or from nearby operations. In certain cases, the
Company has conducted further environmental assessments consisting of soil and
groundwater testing and other investigations deemed appropriate by independent
environmental consultants.
During one investigation, the
Company discovered soil and groundwater contamination at its Hawthorne,
California facility. The Company filed the requisite reports concerning this
problem with the appropriate environmental authorities in fiscal 2001. The
Company has not yet received any response to such reports, and no agency action
or litigation is presently pending or threatened. The Companys site was
previously used by other companies for semiconductor manufacturing similar to
that presently conducted on the site by us, and it is not presently known who
is responsible for the contamination or, if required, the remediation. The
groundwater contamination is a known regional problem, not limited to the
Companys premises or its immediate surroundings.
The Company has also been informed
of soil and groundwater evaluation efforts at a facility that its Ferson
Technologies subsidiary previously leased in Ocean Springs, Mississippi. Ferson
Technologies occupied the facility until October 2003. The Company
believes that the owner and previous occupants of the facility have primary
responsibility for any remediation that may be required and have an agreement
with the facilitys owner under which the owner is responsible for remediation
of pre-existing conditions. However, as site evaluation efforts are still in
progress, and may be for some time, the Company is unable at this time to
ascertain whether Ferson Technologies bears any exposure for remediation costs
under applicable environmental regulations.
The Company has not accrued for loss
contingencies relating to the above environmental matters because it believes
that, although unfavorable outcomes may be possible, they are not considered by
the Companys management to be probable and reasonably estimable.
If one or more of these matters are
resolved in a manner adverse to the Company, the impact on the Companys
results of operations, financial position and/or liquidity could be material.
Product Warranties
The Company offers its customers
warranties on many of the products that it sells. These warranties typically
provide for repairs and maintenance of the products if problems arise during a
specified time period after original shipment. Concurrent with the sale of
products, the Company records a provision for estimated warranty expenses with
a corresponding increase in cost of goods sold. The Company periodically
adjusts this provision based on historical and anticipated experience. The
Company charges actual expenses of repairs under warranty, including parts and
labor, to this provision when incurred.
The
following table presents changes in warranty provisions (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
10,106
|
|
$
|
10,930
|
|
Additions
|
|
271
|
|
1,137
|
|
Reductions for warranty repair costs and adjustments
|
|
(870
|
)
|
(672
|
)
|
Balance at end of period
|
|
$
|
9,507
|
|
$
|
11,395
|
|
12
Table of Contents
8. Income Taxes
The
provision for income taxes is determined using an effective tax rate that is
subject to fluctuations during the year as new information is obtained, which
may affect the assumptions used to estimate the annual effective tax rate,
including factors such as the mix of pre-tax earnings in the various tax
jurisdictions in which the Company operates, valuation allowances against
deferred tax assets, the recognition or derecognition of tax benefits related
to uncertain tax positions, utilization of R&D tax credits and changes in
or the interpretation of tax laws in jurisdictions where the Company conducts
business. The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis
of its assets and liabilities along with net operating loss and tax credit carryovers.
The Company records a valuation allowance against its deferred tax assets to
reduce the net carrying value to an amount that it believes is more likely than
not to be realized. When the Company establishes or reduces the valuation
allowance against its deferred tax assets, the provision for income taxes will
be adjusted in the period such determination is made.
9. Segment and Enterprise-Wide Information
The
Company operates in three identifiable industry segments: (i) Security,
providing security and inspection systems and related services; (ii) Healthcare,
providing patient monitoring, diagnostic cardiology and anesthesia systems and
related services; and (iii) Optoelectronics and Manufacturing, providing
specialized electronic components for affiliated end-products divisions, as
well as for applications in the defense and aerospace markets, among others.
The Company also has a Corporate segment that includes executive compensation
and certain other general and administrative expenses. Interest expense, and
certain expenses related to legal, audit and other professional service fees,
are not allocated to industry segments. Both the Security and Healthcare
divisions comprise primarily end-product businesses whereas the Optoelectronics
and Manufacturing division comprises businesses that primarily supply
components and subsystems to original equipment manufacturers, including to the
businesses of the Security and Healthcare divisions. All intersegment sales are
eliminated in consolidation.
The
following table presents segment and enterprise-wide information (in
thousands):
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Revenues by Segment:
|
|
|
|
|
|
Security division
|
|
$
|
47,335
|
|
$
|
51,097
|
|
Healthcare division
|
|
46,962
|
|
45,924
|
|
Optoelectronics and Manufacturing division,
including intersegment revenues
|
|
45,791
|
|
41,911
|
|
Intersegment revenues elimination
|
|
(6,327
|
)
|
(10,479
|
)
|
Total
|
|
$
|
133,761
|
|
$
|
128,453
|
|
Revenues by Geography:
|
|
|
|
|
|
North America
|
|
$
|
96,075
|
|
$
|
97,002
|
|
Europe
|
|
30,535
|
|
21,064
|
|
Asia
|
|
13,478
|
|
20,866
|
|
Intersegment revenues elimination
|
|
(6,327
|
)
|
(10,479
|
)
|
Total
|
|
$
|
133,761
|
|
$
|
128,453
|
|
|
|
Three months ended
September 30,
|
|
|
|
2009
|
|
2010
|
|
Operating income (loss)
by Segment:
|
|
|
|
|
|
Security division
|
|
$
|
1,969
|
|
$
|
2,111
|
|
Healthcare division
|
|
1,495
|
|
2,598
|
|
Optoelectronics and Manufacturing division
|
|
3,461
|
|
3,421
|
|
Corporate
|
|
(3,280
|
)
|
(2,176
|
)
|
Eliminations (1)
|
|
553
|
|
(519
|
)
|
Total
|
|
$
|
4,198
|
|
$
|
5,435
|
|
13
Table of Contents
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Assets by Segment:
|
|
|
|
|
|
Security division
|
|
$
|
221,019
|
|
$
|
210,421
|
|
Healthcare division
|
|
138,739
|
|
135,990
|
|
Optoelectronics and Manufacturing division
|
|
85,170
|
|
89,136
|
|
Corporate
|
|
72,731
|
|
82,892
|
|
Eliminations (1)
|
|
(4,545
|
)
|
(5,063
|
)
|
Total
|
|
$
|
513,114
|
|
$
|
513,376
|
|
(1)
Eliminations
within operating income primarily reflect the change in the elimination of
intercompany profit in inventory not-yet-realized; while the eliminations in
assets reflect the amount of intercompany profits in inventory as of the
balance sheet date. Such intercompany profit will be realized when inventory is
shipped to the external customers of the Security and Healthcare divisions.
Item 2. Managements Discussion and Analysis of Financial
Condition and Results
of Operations
Cautionary Statement
Certain statements contained in this quarterly report on Form 10-Q
that are not
related to historical results, including, without limitation,
statements
regarding our business
strategy, objectives and future financial position, are
forward-looking statements within the meaning of Section 27A
of the Securities
Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and involve risks and
uncertainties. These forward-looking
statements may be identified by the use of forward-looking terms such
as
anticipate, believe, expect,
may, could, likely to, should, or
will, or by discussions of strategy that involve predictions which
are based
upon a number of future
conditions that ultimately may prove to be inaccurate.
Statements in this quarterly report on Form 10-Q
that are forward-looking are
based
on current expectations and actual results may differ materially.
Forward-looking statements involve numerous risks and
uncertainties described
in this
quarterly report on Form 10-Q, our Annual Report on Form 10-K and
other
documents previously filed
or hereafter filed by us from time to time with the
Securities and Exchange Commission. Such factors, of
course, do not include all
factors
that might affect our business and financial condition. Although we
believe that the assumptions upon which our forward-looking
statements are
based are
reasonable, such assumptions could prove to be inaccurate and actual
results could differ materially from those
expressed in or implied by the
forward-looking
statements. All forward-looking statements contained in this
quarterly report on Form 10-Q are qualified in
their entirety by this
statement.
We undertake no obligation other than as may be required under
securities laws to publicly update or revise any
forward-looking statements,
whether
as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions and select accounting policies that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Our critical accounting policies are detailed in our
Annual Report on Form 10-K for the year ended June 30, 2010.
Recent Accounting Pronouncements
We
describe recent accounting pronouncements in Item 1 Condensed Consolidated
Financial Statements Notes to Condensed Consolidated Financial Statements.
Executive Summary
We
are a vertically integrated designer and manufacturer of specialized electronic
systems and components for critical applications. We sell our products and
provide related services in diversified markets, including homeland security,
healthcare, defense and aerospace. We have three operating divisions: (i) Security;
(ii) Healthcare; and (iii) Optoelectronics and Manufacturing.
Security Division.
Through
our Security division, we design, manufacture and market security and
inspection systems worldwide to end
14
Table of Contents
users
under the Rapiscan Systems trade name. Rapiscan Systems products are used to
inspect baggage, cargo, people, vehicles and other objects for weapons,
explosives, drugs and other contraband. These systems are also used for the safe,
accurate and efficient verification of cargo manifests for the purpose of
assessing duties and monitoring the export and import of controlled materials.
Rapiscan Systems products fall into four categories: baggage and parcel
inspection, cargo and vehicle inspection, hold (checked) baggage screening and
people screening. We also offer turnkey security screening services under the S2
Global trade name. Revenues from our
Security division accounted for 40% and 35% of our total consolidated revenues
for the three months ended September 30, 2010 and 2009, respectively.
As a
result of the terrorist attacks of September 11, 2001, and subsequent
attacks in other locations worldwide, security and inspection products have
increasingly been used at a wide range of facilities other than airports, such
as border crossings, railway stations, seaports, cruise line terminals, freight
forwarding operations, government and military installations and nuclear
facilities.
Healthcare Division.
Through
our Healthcare division, we design, manufacture, market and service patient
monitoring, diagnostic cardiology and anesthesia delivery and ventilation
systems for sale primarily to hospitals and medical centers. Our products
monitor patients in critical, emergency and perioperative care areas of the
hospital and provide such information, through wired and wireless networks, to
physicians and nurses who may be at the patients bedside, in another area of
the hospital or even outside the hospital. Revenues from our Healthcare division
accounted for 36% and 35% of our total consolidated revenues for the three
months ended September 30, 2010 and 2009, respectively.
The
healthcare markets in which we operate are highly competitive. We believe that
our customers choose among competing products on the basis of product
performance, functionality, value and service. We also believe that the
worldwide economic slowdown has caused some hospitals and healthcare to delay
purchases of our products and services.
During this period of uncertainty, we may experience lower sales of
patient monitoring, diagnostic cardiology and anesthesia systems products than
we have historically experienced, resulting in a negative impact on our
business. We cannot predict when the markets will recover and therefore when
this period of delayed and diminished purchasing will end. A prolonged delay
could have a material adverse effect on our business, financial condition and
results of operations.
Optoelectronics and Manufacturing Division.
Through our Optoelectronics and Manufacturing division, we design,
manufacture and market optoelectronic devices and value-added manufacturing
services worldwide for use in a broad range of applications, including
aerospace and defense electronics, security and inspection systems, medical
imaging and diagnostics, computed tomography (CT), fiber optics,
telecommunications, gaming, office automation, computer peripherals and
industrial automation. We also provide our optoelectronic devices and
value-added manufacturing services to our own Security and Healthcare
divisions. Revenues from our Optoelectronics and Manufacturing division
accounted for 24% and 30% of our total consolidated revenues for the three
months ended September 30, 2010 and 2009, respectively.
For
the three months ended September 30, 2010, we reported an operating profit
of $5.4 million, as compared to $4.2 million for the comparable prior year
period. We realized this $1.2 million year over year increase in operating
profit despite a 4% decrease in total revenue.
This improved profitability was driven primarily by a $2.4 million
improvement in gross profit as a result of product mix and operational
efficiencies. The gross profit
improvement was partially offset by a $1.2 million increase in research and
development (R&D) expenses in support of new product introductions.
Results of Operations for the Three Months
Ended September 30, 2010 Compared to
Three Months Ended September 30,
2009 (amounts in millions)
Net Revenues
The
table below and the discussion that follows are based upon the way in which we
analyze our business. See Note 9 to the condensed consolidated financial
statements for additional information about our business segments.
(in millions)
|
|
Q1
2010
|
|
% of
Net Sales
|
|
Q1
2011
|
|
% of
Net Sales
|
|
$ Change
|
|
% Change
|
|
Security division
|
|
$
|
47.3
|
|
35
|
%
|
$
|
51.1
|
|
40
|
%
|
$
|
3.8
|
|
8
|
%
|
Healthcare division
|
|
47.0
|
|
35
|
%
|
45.9
|
|
36
|
%
|
(1.1
|
)
|
(2
|
)%
|
Optoelectronics and Manufacturing division
|
|
45.8
|
|
34
|
%
|
41.9
|
|
32
|
%
|
(3.9
|
)
|
(9
|
)%
|
Intersegment revenues
|
|
(6.3
|
)
|
(4
|
)%
|
(10.4
|
)
|
(8
|
)%
|
(4.1
|
)
|
(65
|
)%
|
Total revenues
|
|
$
|
133.8
|
|
|
|
$
|
128.5
|
|
|
|
$
|
(5.3
|
)
|
(4
|
)%
|
15
Table of Contents
Net
revenues for the three months ended September 30, 2010, decreased $5.3
million, or 4%, to $128.5 million from $133.8 million for the comparable prior
year period.
Revenues
for the Security division for the three months ended September 30, 2010,
increased $3.8 million, or 8%, to $51.1 million, from $47.3 million for the
comparable prior year period. The increase was attributable to: (i) a $2.8
million or 8% increase in equipment sales mainly driven by a $8.1 million
increase in people screening equipment as a result of wider adoption of body
scanners partially offset by a $4.6 million decrease in sales of cargo and
vehicle inspection systems; and (ii) a $1.0 million or 8% increase in
service revenue. .
Revenues
for the Healthcare division for the three months ended September 30, 2010,
decreased $1.1 million, or 2%, to $45.9 million, from $47.0 million for the
comparable prior year period. The decrease was primarily attributable to a
$1.5 million decrease in patient monitoring revenues mainly in North America
partially offset by a $0.7 million increase in our anesthesia equipment
revenues.
Revenues
for the Optoelectronics and Manufacturing division for the three months ended September 30,
2010, decreased $3.9 million, or 9%, to $41.9 million, from $45.8 million for
the comparable prior year period. This change was primarily the result of an
expected decrease in contract manufacturing sales of $9.1 million primarily due
to the winding down of a defense-industry related contract partially offset by
increases in commercial optoelectronics sales of $5.2 million.
Gross Profit
(in millions)
|
|
Q1
2010
|
|
% of Net
Sales
|
|
Q1
2011
|
|
% of Net
Sales
|
|
Gross profit
|
|
$
|
44.5
|
|
33.3
|
%
|
$
|
46.9
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit increased $2.4 million, or 5%, to $46.9 million for the three months
ended September 30, 2010, from $44.5 million for the comparable prior year
period. The gross margin increased to
36.5% in the three months ended September 30, 2010, from 33.3% for the
comparable prior year period. The
increase was primarily attributable to ongoing manufacturing efficiencies
gained through facility consolidation and operational improvement initiatives
as well as due to favorable product mix within our Security and Optoelectronics
and Manufacturing divisions.
Operating Expenses
(in millions)
|
|
Q1
2010
|
|
% of Net
Sales
|
|
Q1
2011
|
|
% of Net
Sales
|
|
$ Change
|
|
%
Change
|
|
Selling, general and administrative
|
|
$
|
32.3
|
|
24.1
|
%
|
$
|
32.0
|
|
24.9
|
%
|
$
|
0.3
|
|
1
|
%
|
Research and development
|
|
8.0
|
|
6.0
|
%
|
9.2
|
|
7.2
|
%
|
(1.2
|
)
|
(15
|
)%
|
Restructuring and other charges
|
|
|
|
|
|
0.3
|
|
0.2
|
%
|
(0.3
|
)
|
NA
|
|
Total operating expenses
|
|
$
|
40.3
|
|
30.1
|
%
|
$
|
41.5
|
|
32.3
|
%
|
$
|
(1.2
|
)
|
(3
|
)%
|
Selling, general and administrative expenses
. Selling, general and administrative (SG&A) expenses consist primarily
of compensation paid to sales, marketing and administrative personnel,
professional service fees and marketing expenses. For the three months ended September 30,
2010, SG&A expenses decreased by $0.3 million, or 1%, to $32.0 million,
from $32.3 million for the comparable prior year period. As a percentage of
revenue, SG&A expenses were 24.9% for the three months ended September 30,
2010, compared to 24.1% for the comparable prior year period. This reduction was primarily a result of
reduced costs in our Corporate segment mainly driven by reductions in outside
support related expenses.
Research and development
.
Research and development (R&D) expenses include research related to new
product development and product enhancement expenditures. For the three months
ended September 30, 2010, such expenses increased $1.2 million, or 15%, to
$9.2 million, from $8.0 million for the comparable prior year period. As a
percentage of revenues, research and development expenses were 7.2% for the
three months ended September 30, 2010, compared to 6.0% for the comparable
prior year period. The increase in research and development expenses for the
three month period ended September 30, 2010, was primarily attributable to
an increase in spending in our Security division in support of new product
introductions.
16
Table of Contents
Other Income and Expenses
(in millions)
|
|
Q1
2010
|
|
% of Net
Sales
|
|
Q1
2011
|
|
% of Net
Sales
|
|
$ Change
|
|
%
Change
|
|
Interest expense, net
|
|
$
|
0.6
|
|
0.5
|
%
|
$
|
0.6
|
|
0.5
|
%
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other income, net
. Our net interest expense of $0.6
million was unchanged between periods.
Income taxes
. For the three months ended September 30,
2010, our income tax provision was $1.4 million, compared to $1.1 million for
the comparable prior year period. Our effective tax rate for the three months
ended September 30, 2010, was 30.0%, compared to 30.2% in the comparable
prior year period. Our provision for income taxes is dependent on the mix of
income from U.S. and foreign locations due to tax rate differences among
countries as well as due to the impact of permanent taxable differences.
Liquidity and Capital Resources
We
have financed our operations primarily through cash flow from operations,
proceeds from equity issuances and our credit facilities. Cash and cash
equivalents totaled $55.6 million at September 30, 2010, an increase of
$3.6 million from $52.0 million at June 30, 2010. The changes in our
working capital and cash and cash equivalent balances during the three months
ended September 30, 2010 are described below.
|
|
June 30, 2010
|
|
September 30, 2010
|
|
% Change
|
|
Working capital
|
|
$
|
204.6
|
|
$
|
212.2
|
|
4
|
%
|
Cash and cash equivalents
|
|
52.0
|
|
55.6
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
Working Capital
.
The increase in working capital is primarily due to: (i) increases in
inventory of $21.0 million, primarily in our Security division, to support
anticipated growth in shipments, (ii) decreases in accrued payroll and
employee benefits of $8.1 million, (iii) a decrease in current portion of
long term debt of $4.1 million, (iv) a $3.6 million increase in cash and
cash equivalents and (v) decreases in advances from customers of $2.5
million, primarily in our Security division.
These decreases were partially offset by a $32.8 million reduction in
accounts receivables, reflecting strong collections and the seasonality of
sales.
|
|
Three Months Ended
September 30, 2009
|
|
Three Months Ended
September 30, 2010
|
|
% Change
|
|
Cash provided by operating activities
|
|
$
|
10.5
|
|
$
|
9.6
|
|
(9
|
)%
|
Cash used in investing activities
|
|
(5.2
|
)
|
(4.7
|
)
|
10
|
%
|
Cash used by financing activities
|
|
(6.3
|
)
|
(2.0
|
)
|
68
|
%
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Operating Activities.
Cash flows from operating activities can fluctuate significantly from
period to period, as net income, tax timing differences, and other items can
significantly impact cash flows. Net cash provided by operations for the three
months ended September 30, 2010, was $9.6 million, a $0.9 million
reduction as compared to the $10.5 million generated in the comparable prior
year period. The reduction was primarily due to the changes in working capital
management in the current-year period versus the prior year period resulting
in: (i) a $28.1 million increase in the change in inventory, reflecting
the building of inventory primarily in our Security division to support growth as well as due to improvements
realized in the prior fiscal year due to inventory reduction initiatives, (ii) a
$8.3 million decrease in cash received as advances from customers and (iii) a
$5.5 million decrease in the change in accrued payroll and related
expenses. These unfavorable changes in
cash flow were partially offset by the following favorable changes in working
capital management: (i) $35.6 million increase in cash from accounts
receivables reflecting the high level of sales in the forth quarter of fiscal
2010 and strong receivables collections and (ii) a $1.6 million reduction
in the change in prepaid expenses and other current assets. In addition, the unfavorable changes in cash
flow provided by operating activities was partially offset by an increase in
our net income of $2.2 million, after giving consideration to various adjustments
to net income for non-operating cash items, including depreciation and
amortization, stock-based compensation, deferred taxes and provision for losses
on accounts receivable, among others, for both periods.
Cash Used in Investing Activities.
Net cash used in investing activities was $4.7 million for the three months
ended September 30, 2010, a decrease of $0.5 million as compared to $5.2
million used for the three months ended September 30, 2009. In the three months ended September 30,
2010, we used cash of $2.0 million for acquisitions of businesses, net of cash
acquired, as compared to $3.2 million
17
Table of Contents
expended
in the comparable prior year period.
During the three months ended September 30, 2010, we also invested
$2.0 million in capital expenditures compared to $1.5 million during the
comparable prior year period.
Cash Provided by Financing Activities.
Net cash used in financing activities was $2.0 million for the three months
ended September 30, 2010, compared to net cash used in financing
activities of $6.3 million for the three months ended September 30, 2009.
During the three months ended September 30, 2010, we paid down our debt
and capital leases by $6.8 million. In the prior year period, we paid down our
revolving lines of credit by $1.8 million and our term debt by $6.1
million. In addition, we received
proceeds of $4.8 million from the exercise of stock options and our employee
stock purchase plan in the three months ended September 30, 2010 and $1.6
million for the comparable prior year period.
Borrowings
Outstanding
lines of credit and current and long-term debt totaled $29.5 million at September 30,
2010, a decrease of $6.6 million from $36.1 million at June 30, 2010.
On October 15,
2010, we entered into a credit agreement with a syndicate of banks for a $250.0
million revolving credit facility. This
credit agreement replaced the existing agreement discussed below, which was
repaid and terminated simultaneously with the close of the new agreement. The facility consists of a $250 million,
five-year revolving credit facility, including a $155 million sub-limit for
letters of credit. Borrowings under this
facility bear interest, as elected by us, at either (i) London Interbank
Offered Rate (LIBOR) plus margins that range from 2.00% to 2.50% or (ii) the
sum of margins that range from 1.00% to 1.50% and the higher of (a) the
banks prime rate, (b) Fed Funds rate plus 0.5% and (c) LIBOR plus
1.0%. The margins are determined by our
consolidated leverage ratio. Our
borrowings under the credit agreement are guaranteed by our domestic
subsidiaries and are secured by substantially all of the Companys and certain
subsidiaries assets. The agreement contains various representations,
warranties, affirmative, negative and financial covenants, and conditions of
default customary for financing agreements of this type, including restrictions
on our ability to pay cash dividends.
Prior to the closing of the
aforementioned revolving credit facility, we maintained a credit agreement with
certain lenders allowing for a $74.5 million revolving credit facility
(including a $64.5 million sub-limit for letters-of-credit) and an amortizing
five-year term loan, which would have matured in July 2012. Borrowings under the agreement bore interest,
based on at our option, at either (i) LIBOR plus margins that range from
2.00% to 2.50% or (ii) the sum of margins that range from 1.00% to 1.50%
and the higher of (a) the banks prime rate or (b) Fed Funds rate
plus 0.5%. The rates were determined based on our consolidated leverage
ratio. As of September 30, 2010,
the weighted-average interest rate under the credit agreement was 2.3%. Our
borrowings under the credit agreement were guaranteed by our domestic
subsidiaries and secured by substantially all of our and certain subsidiaries
assets. The agreement contained various representations, warranties,
affirmative, negative and financial covenants, and conditions of default
customary for financing agreements of this type, including restrictions on our
ability to pay cash dividends. As of September 30, 2010, $25.7 million was
outstanding under the term loan, while no debt was outstanding under the
revolving credit facility, and $38.0 million was outstanding under the
letter-of-credit facility.
Several of our foreign subsidiaries
maintain bank lines-of-credit, denominated in local currencies, to meet
short-term working capital requirements and for the issuance of
letters-of-credit. As of September 30, 2010, $18.6 million was outstanding
under these letter-of-credit facilities, while no debt was outstanding. As of
September 30, 2010, the total amount available under these credit
facilities was $13.9 million, with a total cash borrowing sub-limit of $4.2
million.
In fiscal 2005, we entered into a
bank loan of $5.3 million to fund the acquisition of land and buildings in the
U.K. The loan is payable over a 20-year period. The loan bears interest at
British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of
September 30, 2010, $3.1 million remained outstanding under this loan at
an interest rate of 1.9% per annum.
Long-term
debt consisted of the following (in thousands):
|
|
June 30,
2010
|
|
September 30,
2010
|
|
Five-year
term loan due in 2013
|
|
$
|
32,281
|
|
$
|
25,681
|
|
Twenty-year
term loan due in 2024
|
|
3,015
|
|
3,109
|
|
Capital
leases
|
|
711
|
|
584
|
|
Other
|
|
102
|
|
99
|
|
|
|
36,109
|
|
29,473
|
|
Less
current portion of long-term debt
|
|
12,743
|
|
8,632
|
|
Long-term
portion of debt
|
|
$
|
23,366
|
|
$
|
20,841
|
|
18
Table of
Contents
We
anticipate that existing cash borrowing arrangements and future access to
capital markets should be sufficient to meet our cash requirements for the
foreseeable future. However, our future capital requirements will depend on
many factors, including future business acquisitions, business development
opportunities and levels of research and development spending, among other
factors and the adequacy of available funds will depend on many factors, including
the success of our businesses in generating cash, continued compliance with
financial covenants contained in our credit facility, and the capital markets
in general, among other factors.
Stock Repurchase Program
Our
Board of Directors has authorized a stock repurchase program under which we can
repurchase up to 3,000,000 shares of our common stock. During the three months ended September 30,
2010, we did not repurchase any shares under this program and 711,205 shares
were available for repurchase under the program as of September 30, 2010.
Dividend Policy
We
have not paid cash dividends on our common stock in the past and have no plans
to do so in the foreseeable future.
Contractual Obligations
We presented our contractual
obligations in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2010. Except as discussed below, there have been no significant
changes in those obligations during the first three months of fiscal 2011.
As a result of current and prior
year acquisitions, we may have payment obligations based on the achievement by
the acquired operations of certain sales and profitability milestones. Some of
the purchase agreements we have entered into do not include a cap on the total
payments that may be earned, or a deadline for such payments. For acquisitions
accounted for under Statement of Financial Accounting Standards 141, Business
Combinations, we account for any such contingent payments as an addition to
the purchase price of the acquired company. For acquisitions accounted for
under ASC 805, the estimated fair value of these obligations will be recorded
as a liability in the consolidated balance sheet with subsequent revisions
reflected in the consolidated statements of operations. As of September 30,
2010, pursuant to ASC 805, $9.3 million of contingent payment obligations are
included in other long-term liabilities in the accompanying condensed
consolidated balance sheet.
Off Balance Sheet Arrangements
As
of September 30, 2010, we did not have any significant off balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
For
the three months ended September 30, 2010, no material changes occurred
with respect to market risk as disclosed in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2010.
Market Risk
We are exposed to certain market
risks, which are inherent in our financial instruments and arise from
transactions entered into in the normal course of business. We may enter into
derivative financial instrument transactions in order to manage or reduce
market risk in connection with specific foreign-currency-denominated
transactions. We do not enter into derivative financial instrument transactions
for speculative purposes.
19
Table of Contents
We are subject to interest rate risk
on our short-term borrowings under our bank lines of credit. Borrowings under
these lines of credit do not give rise to significant interest rate risk
because these borrowings have short maturities and are borrowed at variable
interest rates. Historically, we have not experienced material gains or losses
due to interest rate changes.
Foreign Currency
We maintain the accounts of our
operations in each of the following countries in the following currencies:
Finland, France, Germany, Italy and Greece (Euros), United Kingdom (U.K.
pounds), Norway (Norwegian kroners), Cyprus (Cypriot pounds and U.S. dollars),
Singapore (Singapore dollars and U.S. dollars), Malaysia (Malaysian ringgits), India
(Indian rupees), Indonesia (Indonesian rupiah), Hong Kong (Hong Kong
dollars), China (Chinese renminbi), Canada (Canadian dollars), Mexico (Mexican
pesos), and Australia (Australian dollars). Foreign currency financial
statements are translated into U.S. dollars at period-end rates, with the
exception of revenues, costs and expenses, which are translated at average
rates during the reporting period. We include gains and losses resulting from
foreign currency transactions in income, while we exclude those resulting from
translation of financial statements from income and include them as a component
of accumulated other comprehensive income (AOCI). Transaction gains and losses, which were
included in our condensed consolidated statement of operations, amounted to a
loss of approximately $1.1 million and $0.1 million during the three months
ended September 30, 2010 and 2009, respectively. Furthermore, a 10%
appreciation of the U.S. dollar relative to the local currency exchange rates
would have resulted in a net increase in our operating income of approximately
$2 million in first quarter of fiscal 2011. Conversely, a 10% depreciation of the
U.S. dollar relative to the local currency exchange rates would have resulted
in a net decrease in our operating income of approximately $2 million in first
quarter of fiscal 2011.
Use of Derivatives
Our use of derivatives consists
primarily of foreign exchange contracts and interest rate swap agreements. As
discussed in note 1 to the condensed consolidated financials statements, as of
September 30, 2010, we had outstanding a foreign currency forward contract
and an interest rate swap agreement, which were considered effective cash flow
hedges in their entirety. As a result, the net losses on such derivative
contracts have been reported as a component of other comprehensive income in
the Consolidated Financials Statements and will be reclassified into net
earnings when the hedged transactions settle.
Importance of International Markets
International
markets provide us with significant growth opportunities. However, the
following events, among others, could adversely affect our financial results in
subsequent periods: periodic economic downturns in different regions of the
world, changes in trade policies or tariffs, wars and other forms of political
instability. We continue to perform ongoing credit evaluations of our customers
financial condition and, if deemed necessary, we require advance payments for
sales. We monitor economic and currency conditions around the world to evaluate
whether there may be any significant effect on our international sales in the
future. Due to our overseas investments and the necessity of dealing in local
currencies in many foreign business transactions, we are at risk with respect
to foreign currency fluctuations.
Inflation
We
do not believe that inflation had a material impact on our results of
operations during the three months ended September 30, 2010.
Interest Rate Risk
We utilize short-term and long-term
financing and may use interest rate hedges to manage the effect of interest
rate changes on our existing debt. As of September 30, 2010, we had an
interest rate swap agreement outstanding as discussed above under Use of
Derivatives.
Item 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
As
of September 30, 2010, the end of the period covered by this report, our
management, including our Chief Executive Officer and our Chief Financial
Officer, reviewed and evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule
20
Table of Contents
13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended). Such disclosure controls and procedures are
designed to ensure that material information we must disclose in this report is
recorded, processed, summarized and filed or submitted on a timely basis. Based
upon that evaluation our management, Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of September 30, 2010.
(b)
Changes in Internal Control over Financial Reporting
There
has been no change in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the quarter ended September 30,
2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We
are involved in various claims and legal proceedings which have been previously
disclosed in our quarterly and annual reports. The results of such legal
proceedings cannot be predicted with certainty. Should we fail to prevail in
any of these legal matters or should several of these legal matters be resolved
against us in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected.
We
are also involved in various other claims and legal proceedings arising out of
the ordinary course of business which have not been previously disclosed in our
quarterly and annual reports. In our opinion, after consultation with legal
counsel, the ultimate disposition of such proceedings will not likely have a
material adverse effect on our financial position, future results of operations
or cash flows.
Item 1A. Risk Factors
The
discussion of our business and operations in this Quarterly Report on form 10-Q
should be read together with the risk factors contained in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2010, filed with the
Securities and Exchange Commission, which describe various risks and
uncertainties to which we are or may become subject.
21
Table of Contents
Item 6. Exhibits
31.1
|
|
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
22
Table of Contents
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Hawthorne, State of California on the 27th day
of October 2010.
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OSI SYSTEMS, INC.
|
|
|
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By:
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/s/
Deepak Chopra
|
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Deepak
Chopra
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|
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President
and Chief Executive Officer
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|
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By:
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/s/
Alan Edrick
|
|
|
Alan
Edrick
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|
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Executive
Vice President and
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Chief
Financial Officer
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