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TABLE OF CONTENTS
OSI SYSTEMS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2012
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number 000-23125
OSI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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33-0238801
(I.R.S. Employer
Identification No.)
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12525 Chadron Avenue, Hawthorne, California
(Address of principal executive offices)
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90250
(Zip Code)
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Registrant's telephone number, including area code: (310) 978-0516
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.001 par value
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes:
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes:
o
No
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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:
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the
registrant was required to submit and post such
files). Yes:
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated filer
(Do not check if smaller reporting
company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes:
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No
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The aggregate market value of the registrant's voting and non-voting Common Stock held by non-affiliates computed by reference to the price
at which the Common Stock was last sold on December 30, 2011, the last business day of the registrant's most recently completed second fiscal quarter, was $923,227,890.
The
number of shares outstanding of the registrant's Common Stock as of August 7, 2012 was 19,866,315.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 2012annual meeting of stockholders are incorporated by reference into Part III. The proxy
statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant's fiscal year.
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PART I
Forward Looking Statements
This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to
expectations concerning matters that are not historical facts. Words such as "project,""believe,""anticipate,""plan,""expect,""intend,""may,"" should,""will,""would," and similar words and expressions
are intended to identify forward-looking statements. We believe that the expectations reflected in the forward-looking statements are reasonable, but those expectations may not prove to be correct.
Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, including, without limitation, those described in Part I,
Item 1, "Business," Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" as
well as elsewhere in this report 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 report 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.
ITEM 1. BUSINESS
General
OSI Systems, Inc., together with its subsidiaries, is 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.
Our company was originally incorporated in 1987 in California. In March 2010, we reincorporated our company in the State of Delaware. Our principal office is located at 12525 Chadron Avenue,
Hawthorne, California 90250.
We
have three operating divisions: (a) Security, providing security and inspection systems, turnkey security screening solutions and related services; (b) Healthcare,
providing patient monitoring, diagnostic cardiology and anesthesia systems; and (c) Optoelectronics and Manufacturing, providing specialized electronic components and electronic manufacturing
services for the Security and Healthcare divisions, as well as to external original equipment manufacturer clients for applications in the defense, aerospace, medical and industrial markets, among
others.
Through
our Security division, we design, manufacture, market and service security and inspection systems under the "Rapiscan Systems" trade name. Rapiscan Systems products fall into
four categoriesbaggage and parcel inspection; cargo and vehicle inspection; hold (checked) baggage screening; and people screening. They are used to search for weapons, explosives, drugs
and other contraband as well as for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of controlled materials.
Through recent acquisitions, we also offer radiation detection and trace detection products for screening applications. We also provide turnkey security screening solutions under the "S2" trade name,
which can include the construction, staffing and long-term operation of security screening checkpoints for our customers.
Through
our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems globally to end
users 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.
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Through
our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and provide electronics manufacturing services globally for use in a
broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostic products, telecommunications, test and measurement devices,
industrial automation systems, automotive diagnostic products and renewable energy technologies. We sell our optoelectronic devices under the "OSI Optoelectronics" trade name and perform our
electronics manufacturing services under the "OSI Electronics" trade name. We provide our optoelectronic devices and electronics manufacturing services to original equipment manufacturers, as well as
to our own Security and Healthcare divisions.
In
fiscal 2012, revenues from the Security division amounted to $391.8 million, or approximately 49% of our revenues; revenues from the Healthcare division amounted to
$235.6 million, or approximately 30% of our revenues; and third-party revenues from the Optoelectronics and Manufacturing division amounted to $165.6 million, or approximately 21% of
revenues. See Note 13 to the Consolidated Financial Statements for additional financial information concerning reporting segments and geographic areas.
Industry Overview
We sell our security and inspection systems and patient monitoring, diagnostic cardiology and anesthesia systems primarily to
end-users, while we design and manufacture our optoelectronic devices and value-added subsystems primarily for original equipment manufacturers.
Security.
A variety of technologies are currently used globally in security and inspection applications, including transmission
and backscatter
X-ray, computed tomography, metal detection, trace detection, gamma-ray and neutron analysis. We believe that the market for security and inspection products will continue to
be affected by the threat of terrorist incidents and by new government mandates and appropriations for security and inspection products in the United States and internationally.
As
a result of the September 11, 2001 terrorist attacks on the World Trade Center and subsequent attacks in other locations worldwide, security and inspection products have
increasingly been used at a wide range of facilities other than airports, such as border crossings, railway stations, seaports, cruise line terminals, freight forwarding operations, sporting venues,
government and military installations and nuclear facilities. Congress passed the Aviation and Transportation Security Act and integrated many U.S. security-related agencies, including the Federal
Aviation Administration, into the U.S. Department of Homeland Security. Under its directive from Congress, the U.S. Department of Homeland Security has since undertaken numerous initiatives to prevent
terrorists from entering the country, hijacking airliners, and obtaining and trafficking in weapons of mass destruction and their components, to secure sensitive U.S. technologies and to identify and
screen high-risk cargo before it is loaded onto airlines and ships, among others. These initiatives, known, for example, as the Strategic Border Initiative, the Customs-Trade Partnership
Against Terrorism, the U.S. Transportation Security Administration's Air Cargo Screening Mandate and the U.S. Customs and Border Protection Container Security Initiative, have resulted in an increased
demand for security and inspection products.
Certain
of the government sponsored initiatives in the United States, such as the U.S. Customs and Border Protection Container Security Initiative, the Customs-Trade Partnership Against
Terrorism and the U.S. Transportation Security Administration's Air Cargo Screening mandate have also stimulated security programs in other areas of the world because the U.S. initiatives call on
other nations to bolster their port security strategies, including acquiring or improving their security and inspection equipment and screening operations. The international market for
non-intrusive inspection equipment and related services, therefore, continues to expand as countries that ship goods directly to the United States participate in such programs and as they
choose to procure and operate equipment in order to secure their own borders, transportation networks, facilities and other venues.
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Congress
also passed legislation that calls for the inspection of international maritime cargo destined for the United States, domestic civil aviation cargo, and for radiological and
nuclear threats in cargo entering the United States. Certain of our cargo and vehicle inspection systems are already being used internationally and by the U.S. government to comply with these
standards.
Following
recommendations outlined in "The 9/11 Commission Report," issued by the National Commission on Terrorist Attacks Upon the United States, the U.S. Department of Homeland
Security now requires the screening of all cargo carried on passenger airlines in the United States. Several of our hold (checked) baggage and cargo screening systems have been approved by the U.S.
Department of Homeland Security for this purpose and are being procured and used by freight forwarders, airlines, transportation companies and other businesses to fulfill their compliance
requirements.
Following
an attempted bombing on an airline flight destined for Detroit, Michigan on Christmas Day 2009, during which a passenger tried to detonate explosives concealed beneath his
clothing, the U.S. Government initiated the widespread deployment of advanced imaging technology systems (body-scanners)such as our Secure 1000 systemto U.S.
airport checkpoints. These systems are used to detect both metallic and non-metallic threat objects concealed in or under clothing. This incident also prompted foreign governments to
initiate similar deployments at other airports across the world.
Furthermore,
the U.S. Department of Homeland Security's Science and Technology Directorate has recently supported the development of new security inspection technologies and products.
Our Security division participates in a number of such research and development efforts, including projects to develop new technologies for radiation and nuclear materials detection, aviation
screening and suicide bomber detection. The Science and Technology Directorate has also initiated programs for the development of technologies capable of protecting highways, railways and waterways
from terrorist attack.
In
addition, the U.S. Department of Defense has invested heavily in technologies and services that screen would-be attackers before they are able to harm U.S. and allied
forces. These technologies include products that can screen personnel, vehicles and other containers for the presence of explosives, improvised explosive devices (IEDs), weapons and other contraband.
Similar
initiatives and new regulations promulgated by international organizations have resulted in a growing global demand for airline, cargo, port and border inspection technologies.
For example, the European Union has issued uniform performance standards for systems that screen baggage and people at aviation checkpoints
and air cargo, as well as new directives related specifically to maritime security, among other security directives.
As
a result of these and other changes, sales of our security and inspection products have continued to grow. Major projects recently installed or currently underway include
installations at airports, ports and border crossings, government and military facilities and other locations in the United States and throughout the world. These projects contain various inspection
product offerings. We anticipate that there may be growing demand from governments and commercial enterprises for increasingly sophisticated, turnkey, security screening solutions. For example, in
fiscal 2012, we were awarded significant contracts to provide complete turnkey inspection products and services to Mexico's tax and customs authority as well as to provide security and inspection
products to the U.S. Army.
Healthcare.
Healthcare has been, and we believe will continue to be, a growing sector throughout much of the world. Many
developing countries in Asia
and Latin America are expected to continue to build healthcare infrastructure to serve expanding middle class populations. In developed countries, including the United States and Europe, an aging
population is expected to fuel growth for many years.
Many
factors such as stricter government requirements affecting staffing and accountability as well as shrinking reimbursements from health insurance organizations are forcing healthcare
providers to do more with
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less.
Our Healthcare division designs, manufactures and markets products that respond to these economic forces by helping hospitals reduce costs while maintaining or improving the quality of care
their physicians and nurses are able to deliver.
We
are a global manufacturer and distributor of patient monitoring, cardiac diagnostic and clinical networking solutions for use primarily in hospitals. We design, manufacture and market
patient monitoring solutions for critical, emergency and perioperative care areas of the hospital, wired and wireless networks, and ambulatory blood pressure monitors, all aimed at providing
caregivers with timely patient information. Our cardiac diagnostic systems include Holter recorders and analyzers, ambulatory blood pressure, ECG, stress event data management systems and related
software and services. By making critical patient information more readily accessible both inside and outside the hospital, delays in treatment related decision-making can be reduced, length of stay
can be shortened and treatment errors can be minimized.
We
are also a global manufacturer and distributor of anesthesia delivery systems, ventilators and vaporizers. We sell these products primarily to hospitals for use in operating rooms and
anesthesia induction areas as well as in magnetic resonance imaging (MRI) facilities. We also sell subsystems and components, such as anesthesia vaporizers and ventilators to pharmaceutical companies
and other manufacturers of anesthesia delivery systems.
Optoelectronics and Manufacturing.
Our optoelectronic devices are used in a wide variety of applications for diversified markets
including the
aerospace and defense, avionics, medical imaging and diagnostics, renewable energy, biochemistry analysis, pharmaceutical, nanotechnology, telecommunications, construction and homeland security
markets. Medical applications for our devices include diagnostic and imaging products, patient monitoring equipment, optometry instrumentation, and glucose monitors. Aerospace and defense applications
for our devices include satellite navigation sensors, laser guided munitions systems, range finders, weapons simulation systems, computer peripherals and other applications that require the conversion
of optical signals into electronic signals. Homeland security applications for our devices include X-ray based and other detection systems. Our optoelectronic devices and value-added
subsystems are also used in a wide variety of measurement control, monitoring and industrial applications and are key components in telecommunications technologies. We also offer electronics
manufacturing services to our optoelectronics customers, as well as to our Security and Healthcare divisions. We offer full turnkey and box-build manufacturing services, in which we
provide product design and development, supply chain management, and production manufacturing services.
We
believe that continued advances in technology and reductions in the cost of key components of optoelectronic systems, including computer processing power and memory, have broadened
the market by enabling the use of optoelectronic devices in a greater number of applications. In addition, we see a trend among original equipment manufacturers to increasingly outsource the design
and manufacture of optoelectronic devices as well as value-added subsystems to fully-integrated, independent manufacturers, like us, that may have greater specialization, broader expertise and more
flexibility to respond to short cycle times and quicker market expectations. We believe that our level of vertical integration, substantial engineering resources, expertise in the use and application
of optoelectronic technology and low-cost international manufacturing operations enable us to compete effectively in the market for optoelectronic products and for electronics
manufacturing services.
We
have also penetrated several related markets that depend on our optoelectronic technologies and electronics manufacturing capabilities. Through system engineering and product
development, we also develop, manufacture and sell laser-based products as well as sensors for vehicle classification in toll and traffic management systems.
Growth Strategy
We believe that one of our primary competitive strengths is our expertise in the cost-effective design and manufacture of
specialized electronic systems and components for critical applications. As a result, we have leveraged, and intend to continue to leverage, such expertise and capacity to gain price, performance and
agility
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advantages
over our competitors in the security, healthcare and optoelectronics fields, and to translate such advantages into profitable growth in those fields. At the same time, we continually seek
to identify new markets in which our core expertise and capacity will provide us with competitive advantages. Key elements of this strategy include:
Capitalizing on Global Reach.
We operate from locations throughout the world. We view our international operations as providing
an important
strategic advantage over competitors. First, international manufacturing facilities allow us to take advantage of competitive labor rates and favorable tax regulations in order to be a low cost
producer. Second, our international offices strengthen our sales and marketing efforts and our ability to service and repair our systems by providing direct access to growing markets and to our
existing international customer base. Third, our manufacturing locations allow us to reduce delivery times to our global customer base. In the future, we intend to continue to enhance our
international manufacturing and sales capabilities.
Capitalizing on Vertical Integration.
Our vertical integration provides several advantages in each of our divisions. These
advantages include reduced
manufacturing and delivery times, lower costs due to our access to competitive international labor markets, direct sourcing of raw materials and quality control. We also believe that we offer
significant added value to our customers by providing a full range of vertically-integrated services including component design and customization, subsystem concept design and application engineering,
product prototyping and development, efficient pre-production and short-run and high volume manufacturing. We believe that our vertical integration differentiates us from many
of our competitors and provides value to our customers who can rely on us to be an integrated supplier. We intend to continue to leverage our vertically integrated services to create greater value for
our customers in the design and manufacture of our products.
Capitalizing on the Growing Market for Security and Inspection Systems.
Attentiveness to terrorist and other security threats
may continue to drive
growth in the market for security and inspection systems in transportation security and also at ports and border crossings, government installations, military facilities and public event venues. The
trend toward increased screening of goods entering and departing from ports has resulted and may continue to result in growth in the market for cargo inspection systems and turnkey security screening
services that are capable of screening shipping containers for contraband and assisting customs officials in the verification of shipping manifests. Package and cargo screening by freight forwarders,
airlines and air cargo companies represents a growing sector, as new regulations in the U.S. and Europe require such screening in certain circumstances. We intend to expand our sales and marketing
efforts, both domestically and internationally, to capitalize on opportunities to replace, service and upgrade existing security installations, and to offer turnkey security screening solutions in
which we may construct, staff and/or operate on a long-term basis security screening checkpoints for our customers. Finally, we also intend to continue to develop new security and
inspection technologies, such as our proprietary real time tomography products, and to enhance our current product and service offerings through internal research and development and selective
acquisitions.
Improving and Complementing Existing Medical Technologies.
We develop and market patient monitoring systems, diagnostic
cardiology products,
anesthesia delivery systems, ventilators and vaporizers. We are able to market and sell many of our product offerings through shared sales channels and distribution networks. Our efforts to develop
new products and improve our existing medical technologies are focused on the needs of care providers and their patients. By making decision-critical patient information available to clinicians at the
bedside, throughout a hospital, or even away from the hospital, our products reduce time demands on physicians and nurses, enabling more rapid treatment decisions and improved patient care. Our
efforts to improve existing diagnostic cardiology and anesthesia delivery technologies will also continue to concentrate on providing products that are flexible and intuitive to use so that clinicians
can deliver accurate, precise, reliable and cost-effective care.
Selectively Entering New Markets.
We intend to continue to selectively enter new markets that complement our existing
capabilities in the design,
development and manufacture of specialized electronic systems and components for critical applications such as security inspection and patient monitoring, diagnostic cardiology and
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anesthesia
systems. We believe that by manufacturing products that rely on our existing technological capabilities, we will leverage our integrated design and manufacturing infrastructure to capture
greater margins and build a larger presence in new markets that present attractive competitive dynamics. We intend to achieve this strategy through internal growth and through selective acquisitions.
Acquiring New Technologies and Companies.
Our success depends in part on our ability to continually enhance and broaden our
product offerings in
response to changing technologies, customer demands and competitive pressures. We have developed expertise in our various lines of business and other areas through internal research and development
efforts as well as through selective acquisitions. We continue to seek acquisition opportunities to broaden our technological expertise and capabilities, lower our manufacturing costs and facilitate
our entry into new markets.
Products and Technology
We design, develop, manufacture and sell products ranging from security and inspection systems to patient monitoring, diagnostic
cardiology and anesthesia systems to discrete optoelectronic devices and value-added subsystems.
Security and Inspection Systems.
We design, manufacture and market security and inspection systems globally to end 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" trade
name, including the staffing and operation of security screening checkpoints.
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. As a result of the use at additional facilities, we have diversified our sales channels for security and inspection products.
Many
of our security and inspection systems include dual- or multi-energy X-ray technology with computer software enhanced imaging technology to facilitate the
detection of materials such as explosives, weapons, narcotics, currency or other contraband. While all X-ray systems produce a two-dimensional image of the contents of the
inspected object, the dual-energy X-ray systems also measure the X-ray absorption of the inspected object's contents at two X-ray energies to determine
the atomic number, mass and other characteristics of the object's contents. The various organic and inorganic substances in the inspected object appear to operators of the inspection systems in
various colors,
and this visual information can be used to identify and differentiate the inspected materials. We have developed a dual-view X-ray technology, now available on many of our
systems, that allows operators to examine objects from two orthogonal positions simultaneously, thereby reducing the need for re-scanning of objects and improving the operator's ability to
detect threats. Our baggage and parcel inspection, cargo and vehicle inspection and hold (checked) baggage screening inspection systems range in size from compact tabletop systems to large systems
comprising entire buildings in which trucks, shipping containers or pallets are inspected. Many of our inspection systems are also designed to be upgradeable to respond to new customer requirements as
they emerge or change.
Our
cargo and vehicle inspection applications, in which cars, trucks, shipping containers, pallets and other large objects can be inspected, are designed in various configurations,
including fixed-site, gantry, relocatable, portal and mobile systems. These products are primarily used to verify the contents of cars, trucks or cargo
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containers
and to detect the presence of contraband, including narcotics, weapons, explosives and other smuggled items. They offer significant improvements over past methods of cargo screening, such
as manual searches, as our cargo systems are faster, more thorough and do not subject the cargo to pilferage. Entire shipping containers or trucks containing densely packed goods can be screened
rapidly.
Many
of our cargo and vehicle inspection systems utilize X-ray or gamma-ray beams, in conjunction with digital imaging equipment, to non-intrusively
inspect objects and present images to an inspector, showing shapes, sizes, locations and relative densities of the contents. Many of these systems have been built to meet specific customer inspection
requirements.
Our
Security division is the only company in the market offering X-ray, gamma-ray and neutron-based material specific technologies. In addition, we are the only
company that offers inspection systems at energy levels ranging from 200 KeV (Kilo electron Volts), to 1 MeV (Mega electron Volts) , 4.5 MeV, 6 MeV and 9MeV. As a result, we believe that we offer the
broadest technology platform in the cargo and vehicle inspection systems industry. This broad platform also permits us to offer customers hybrid solutions utilizing two or more of the technologies
together, thereby optimizing flexibility, performance and cost to meet the customer's unique application requirements.
We
recently acquired a leading developer and manufacturer of radiation and nuclear detection systems and now offer a wide array of radiation and nuclear detection technologies to inspect
people, baggage, parcels, cargo, vehicles and trains. Our technologies use gamma-counting, neutron detection and spectroscopic identification in our new line of radiation detection products.
Our
Security division also offers hold (checked) baggage screening systems that are utilized by airports, freight forwarders and other parties responsible for screening baggage and cargo
before it is placed in the cargo hold of airplanes. Certain of our currently available systems utilize multiple, dual-energy X-ray beams to provide high-quality
images and to enable detection algorithms that assist operators in the detection of explosives. Other systems utilize a very large number of distributed X-ray emitters that rapidly capture
approximately 1,000 views of a bag and then utilize sophisticated software to reconstruct high resolution images. These systems are designed to meet the high-speed screening and analysis
demands of our customers. They can be operated in stand-alone mode, where a single operator views the images produced by a single system, or can be networked, allowing operators stationed at a remote
computer terminal to monitor multiple systems.
Our
Security division also offers people screening products, such as a line of "Metor" brand walk-through metal detection products for use at security checkpoints at
airports, amusement parks, banks, courthouses, government buildings, sports arenas and other venues, and the Secure 1000 personnel screener, which uses extremely low dose backscatter X-ray
imaging to detect contraband and weapons concealed underneath clothing and hair. The Secure 1000 provides enhanced screening when compared to metal detectors as it displays anomalies caused by very
small amounts of metal as well as non-metallic items. As a result, the Secure 1000 can simultaneously assist in the location and detection of conventional metal weapons, as well as ceramic
knives, explosives, illicit drugs, precious metals, cameras, recording devices and other contraband or security threats. We recently announced the development of a hand-held trace
detection system (HE-50) providing portable light-weight detection of trace amounts of explosives. This system is designed to be used in screening people, cargo, baggage and other items
for illicit materials and weapons.
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The
following table sets forth certain information related to the standard security and inspection products that we currently offer. We do, however, also customize our standard products
to suit specific applications and customer requirements.
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PRODUCT LINE
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PRODUCT NAME /
PRODUCT FAMILY
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TECHNOLOGY
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MARKET SEGMENT
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Baggage and Parcel Inspection
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Rapiscan 600 series
X-ray systems
Rapiscan HE-50
Rapiscan TSA Rad/Nuke
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Single and dual-energy X-ray
IMS hand-held explosives detection
Gamma and neutron detection of radioactive and nuclear material
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Checkpoint inspection at airports, prisons, border crossings, government buildings and postal facilities for mail screening
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Cargo and Vehicle Inspection
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Rapiscan Eagle
Rapiscan GaRDS
Rapiscan HE-50
Rapiscan TSA Rad/Nuke
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High energy X-ray
Gamma ray
IMS hand-held explosives detection
Gamma and neutron detection of radioactive and nuclear material
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Cargo and vehicle inspection at airports, border crossings and sea ports
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Hold (Checked) Baggage Screening
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Rapiscan MVXR 5000
Rapiscan RTT
Rapiscan HE-50
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Multi-view, dual energy X-ray
Computed Tomography
IMS hand-held explosives detection
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Baggage inspection at airports and freight forwarding facilities
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People Screening
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Metor series metal detectors
Rapiscan Secure 1000
Rapiscan HE-50
Rapiscan TSA Rad/Nuke
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Electromagnetic induction
Backscatter X-ray
IMS hand-held explosives detection
Gamma and neutron detection of radioactive and nuclear material
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Checkpoint inspection at airports, border crossings, stadiums, prisons and government facilities
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Patient Monitoring, Diagnostic Cardiology and Anesthesia Systems.
Our Healthcare division designs, manufactures and markets its
products globally to
end users primarily under the "Spacelabs" trade name.
Spacelabs
products include patient monitors for use in perioperative, critical care and emergency care environments with neonatal, pediatric and adult patients. Our patient monitoring
systems comprise monitors and central nursing stations connected via hardwired or wireless networks, as well as stand-alone monitors where the patient data can be transported physically from one
monitor to another as the patient is moved. This enables hospital staff to access patient data where and when it is required. In addition, these products are designed with an "open architecture" to
interact with hospital information systems. Many of these products allow clinicians to view and control various software applications on the patient monitor's display, eliminating the need for
separate computer terminals in the patient's room. Attending nurses can check laboratory results and other reports, enter orders, review protocols and complete medical charting at the patient's
bedside.
For
electrocardiograph monitoring or multiparameter monitoring of ambulatory patients, we offer a digital telemetry system. The system operates in government-protected bands, not used
for private land mobile radio, business radio services or broadcast analog and digital television. In April 2011, we introduced the XPREZZON patient monitor. It incorporates a
high-resolution display to provide crisp and visually rich patient information that can be accessed with a single touch, all designed to enhance patient care and ease of use. XPREZZON is
the first patient monitor sensitive to a patient's need for a good night's rest. It dims the display in low ambient light. It also delivers patient information to mobile devices, allowing clinicians
to monitor their patients anywhere they have mobile access. In June 2012, we added an additional new monitor to the product line, the qube compact monitor. The qube provides all the
clinical capability of the XPREZZON monitor in a compact and lightweight solution with
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a
long operating battery. The qube can be used in both bedside and transport applications. We received FDA clearance in June 2012 for a new telemetry transmitter, the AriaTele. The
AriaTele is a feature rich telemetry transmitter that is lightweight, comfortable to wear and fully waterproof. It provides a color screen to display ECG and SpO2 signal quality, heart rate, pulse
rate and oxygen saturation level, providing immediate feedback to the caregiver.
Our
Healthcare division also develops cardiac diagnostic systems, including Holter analyzers and recorders. Our Pathfinder SLHolter analyzer offers users interactive control with
advanced diagnostic parameters. Our evoHolter recorders provide low cost of ownership through, for example, the elimination of disposable batteries, memory cards with no moving parts to maintain and
other advances. Our Lifecard CF Aria recorders are worn by patients for up to seven days in order to capture heart arrhythmias that may occur in a patient only a few times per week. Patients that may
be experiencing even less frequent heart arrhythmias wear our CardioCall product, which stays with the patient over several weeks and transmits its findings over the phone to a receiving station in
the hospital.
We
are also a leading supplier of ambulatory blood pressure monitors which are routinely used in many European countries, clinical research organizations and are increasingly being used
in the United States. Many physicians are using ambulatory blood pressure monitoring to detect "white coat" hypertension, a condition in which people experience elevated blood pressure in the doctor's
office, but not in their daily lives. Ambulatory blood pressure monitoring helps improve diagnostic accuracy and minimize the associated costs of treatment.
We
also provide the Sentinel Cardiology Information Management System, which integrates data from Spacelabs-branded products into a central enterprise wide database system that can be
accessed by care providers and medical facility administrators thereby providing enhanced workflow and efficiencies.
Our
anesthesia delivery and ventilation group designs and manufactures anesthesia delivery systems, anesthesia vaporizers and ventilators. Our BleaseSirius, BleaseFocus, and BleaseGenius
anesthesia delivery systems provide flexible anesthesia solutions for operating room environments, anesthesia induction areas, day surgery centers, magnetic resonance imaging facilities and other
locations where the administration of anesthesia is required. Our BleaseDatum anesthesia vaporizers and Blease 700/900 anesthesia ventilators are also designed to be compatible with the anesthesia
delivery systems of several other manufacturers.
In
March 2012, we received FDA clearance for the ARKON Anesthesia System. This is a new high-performance anesthesia delivery system that offers functionality, comfort and
control. This anesthesia delivery system can be expanded to enable a wide-angle view of the clinical setting so the clinician can face the patient, as well as other clinical advancements.
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The following table sets forth a description of the more significant healthcare products that we currently offer:
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PRODUCT LINE
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PRODUCT NAME /
PRODUCT FAMILY
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MARKET SEGMENT
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Patient Monitoring and Connectivity
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XPREZZON
qube
Ultraview SL
Intesys Clinical Suite G2
ICS Xprezz
élance
AriaTele
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All hospital care areas, outpatient surgery centers and physician offices
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Diagnostic Cardiology
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Ambulatory blood pressure monitors
Pathfinder SL
CardioCall
Lifecard
evo
CardioExpress ECG machines
CardioDirect Stress Testing Systems
Sentinel Cardiology Data Management
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All hospital cardiology care areas and physician offices
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Anesthesia Delivery and Ventilation
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ARKON
Blease 700 and 900 series ventilators
BleaseSirius
BleaseSirius EFM
BleaseDatum Vaporizer
BleaseFocus
BleaseGenius
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Ambulatory surgery centers and operating rooms
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Optoelectronic Devices and Manufacturing Services.
Optoelectronic devices generally consist of both active and passive
components. Active components
sense light of varying wavelengths and convert the light detected into electronic signals, whereas passive components amplify, separate or reflect light. The active components we manufacture consist
of silicon, gallium arsenide and indium gallium arsenide photodetectors and light sources. Passive components include lenses, prisms, filters, mirrors and other precision optical products that are
used by us in the manufacture of our optoelectronic products or are sold to third parties for use in telescopes, laser printers, copiers, microscopes and other detection and vision equipment. The
devices we manufacture are both standard products and products customized for specific applications and are offered either as components or as subsystems. Our optoelectronic products and services are
provided primarily under the "OSI Optoelectronics" trade name.
In
addition to the manufacture of standard and original equipment manufacturer products, we also specialize in designing and manufacturing customized value-added subsystems for use in a
wide range of products and equipment. An optoelectronic subsystem typically consists of one or more optoelectronic devices that are combined with other electronic components and packaging for use in
an end product. The composition of a subsystem can range from a simple assembly of various optoelectronic devices that are incorporated into other subsystems (for example, a printed circuit board
containing our optoelectronic devices) to complete end-products (for example, pulse oximetry equipment).
We
also provide electronics design and manufacturing services both in North America and in the Asia Pacific region with enhanced, RoHS-compliant, printed circuit board and
cable and harness assemblies and box-build manufacturing services utilizing state-of-the-art automated surface mount technology lines. We offer
electronics manufacturing services to original equipment manufacturers for medical, automotive, defense, aerospace and industrial applications that do not utilize optoelectronic devices. Our
electronics manufacturing services are provided primarily under the "OSI Electronics" trade name.
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We
develop, manufacture and sell laser-based remote sensing devices that are used to detect and classify vehicles in toll and traffic management systems under the "OSI Laserscan" trade
name and blood pressure cuffs and unifusors for drug delivery applications under the "Statcorp Medical" trade name. We also manufacture and sell passive optical components under the "Ferson
Technologies" trade name. We offer solid-state laser products for aerospace, defense, telecommunication and medical applications under the "OSI LaserDiode" trade name.
The
following table sets forth a description of the more significant standard optoelectronics products that we currently offer. We also customize our standard products to suit specific
applications and customer requirements.
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PRODUCT LINE
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PRODUCT NAME /
PRODUCT FAMILY
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MARKET SEGMENT
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Optoelectronic Components and Instruments
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Photodiodes and Avalanche Photodetectors
UV and X-ray Linear and 2-D Arrays
Position Sensitive Devices
Optical Switches
Silicon and InGaAsPhotodetectors
Passive Optical Components
Solid State Laser Diodes
Laser Scanners (AS600 through AS800 Series)
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Medical devices and instrumentation, blood chemistry, optical instrumentation, bar code readers, security and inspection equipment, laser range finders, laser guided munitions, weapon simulation systems, navigation
sensors, telecommunication products, lenses, filters and toll and traffic management systems
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Medical Devices and Accessories
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Oximetry Sensors and Accessories
Blood Pressure Cuffs
Fluid Delivery Unifusors
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Medical devices and instrumentation
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Markets, Customers and Applications
Security and Inspection Products.
Most security and inspection products were developed in response to civilian airline
hijackings. Consequently, a
significant portion of our security and inspection products have been and continue to be sold for use at airports. Our security and inspection products are also used for security purposes at locations
in addition to airports, such as border crossings, shipping ports, military and other government installations, freight forwarding facilities, high-profile locations such as Buckingham
Palace, the Kremlin and the Vatican and for high-profile events such as the
Olympic Games and World Cup Finals. Furthermore, as terrorist attacks continue to occur, overall transportation and travel industry demands have increased, resulting in heightened attention for our
security and inspection products. We also provide turnkey security screening solutions, which can include the construction, staffing and long-term operation of security screening locations
for our customers.
Our
customers include, among many others, the U.S. Transportation Security Administration, U.S. Customs and Border Protection, U.S. Department of Defense and Federal Bureau of Prisons in
the United States, as well as the London Organising Committee of the Olympic Games and Paralympic Games, Her Majesty's Revenue and Customs and Manchester Airport Group in the United Kingdom, the
Servicio de AdministraciónTributaria in México, Chek Lap Kok Airport in Hong Kong, Ben Gurion International Airport in Israel, the Malaysian Airport Board in Malaysia and
the Port Authority of San Juan, Puerto Rico.
Patient Monitoring, Diagnostic Cardiology and Anesthesia Systems.
Our patient monitoring, diagnostic cardiology and anesthesia
systems are
manufactured and distributed globally for use in critical care, emergency and perioperative areas within hospitals as well as physicians' offices, medical clinics and ambulatory surgery centers. We
also provide wired and wireless networks and clinical information access solutions and ambulatory blood pressure monitors.
We
have sold these products to organizations such as Eisenhower Medical Center in Rancho Mirage, California, Spartanburg Regional Medical Center in Spartanburg, South Carolina, LSU
Medical Center in
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Shreveport,
Louisiana, Schüchtermannklinik in Germany, LKW Villach in Austria and Universitätsspital Zürich in Switzerland, among many other organizations.
We have also sold the products through various group purchasing organizations, including Novation, Inc. and MedAssets Supply Chain Systems, LLC, among others.
Optoelectronic Devices and Electronics Manufacturing Services.
Our optoelectronic devices and the electronics we manufacture are
used in a broad
range of products by a variety of customers. For example, they are utilized by customers in the following market segments: defense, aerospace and avionics; analytical and medical imaging; healthcare;
telecommunications; homeland security; office automation; toll and traffic management; and automotive diagnostic systems. Major customers in these segments include ITT Corporation, Raytheon,
Honeywell, FLIR Systems, Gilardoni, Covidien, Smiths Medical, Conmed Corporation, Inogen, Beckman Coulter, JDS Uniphase, Lockheed Martin, United Technologies, Northrop Grumman, Wincor and Bosch
(Vetronix), among others.
Marketing, Sales and Service
We market and sell our security and inspection products and turnkey security screening solutions globally through a direct sales and
marketing staff located in North America, Europe, Asia and Australia, in addition to an expansive global network of independent distributors. This sales staff is supported by a service organization
located primarily in North America, Latin America, Europe and Asia, as well as a global network of independent distributors. We also support these sales and customer relations efforts by providing
operator training, computerized training and testing equipment, in-country service support, software upgrades and service training for customer technicians.
We
market and sell our patient monitoring, diagnostic cardiology and anesthesia systems globally through a direct sales and marketing staff located in North America, Europe and Asia, in
addition to a global network of independent distributors. We also support these sales and customer service efforts by providing operator in-service training, software updates and upgrades
and service training for customer biomedical staff and distributors.
We
market and sell our optoelectronic devices and value-added manufacturing services, through both a direct sales and marketing staff located in North America, Europe and Asia, and
indirectly through a global network of independent sales representatives and distributors. Our sales staff is supported by an applications engineering group whose members are available to provide
technical support, which includes designing applications, providing custom tooling and process integration and developing products that meet customer defined specifications.
We
consider our maintenance service operations to be an important element of our business. After the expiration of our standard product warranty periods, we are sometimes engaged by our
customers to provide maintenance services for our security and inspection products through annual maintenance contracts. In addition, we believe that our expertise in installing, maintaining and
operating our security inspection products is an important factor for customers that are considering engaging us to provide turnkey security screening solutions. We provide a variety of service and
support options for our patient monitoring, diagnostic cardiology and anesthesia systems customers, including complete hospital on-site repair and maintenance service and telephone
support, parts exchange programs for customers with the internal expertise to perform a portion of their own service needs and a depot repair center at our main headquarters. We believe that our
international maintenance service capabilities allow us to be competitive in selling our security and inspection systems as well as our patient monitoring, diagnostic cardiology and anesthesia
systems. Furthermore, we believe that as the installed base of both our security and inspection systems and patient monitoring, diagnostic cardiology and anesthesia systems increases, revenues
generated from such annual maintenance service contracts and from the sale of replacement parts will increase.
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Research and Development
Our security and inspection systems are primarily designed at our facilities in the United States and internationally in Finland,
Malaysia, India and the United Kingdom. These products include mechanical, electrical, analog electronic, digital electronic and software subsystems, which are all designed by us. In addition to
product design, we provide system integration services to integrate our products into turnkey systems at the customer site. We support cooperative research projects with government agencies and
provide contract research for government agencies.
Our
patient monitoring, diagnostic cardiology and anesthesia systems are primarily designed at our facilities in the United States and internationally in China, India and the United
Kingdom. Such systems include mechanical, electrical, digital electronic and software subsystems, all of which are designed by us. We are also currently involved, both in the United States and
internationally, in several research projects aimed at improving our medical systems and at expanding our current product line.
We
design and manufacture optoelectronic devices and we provide electronics manufacturing services primarily in our facilities in the United States and internationally in India,
Indonesia, Malaysia and Singapore. We engineer and manufacture subsystems to solve the specific application needs of our original equipment manufacturer customers. In addition, we offer entire
subsystem design and manufacturing solutions. We consider our engineering personnel to be an important extension of our core sales and marketing efforts.
In
addition to close collaboration with our customers in the design and development of our current products, we maintain an active program for the development and introduction of new
products, enhancements and improvements to our existing products, including the implementation of new applications of our technology. We seek to further enhance our research and development program
and consider such program to be an important element of our business and operations. As of June 30, 2012, we engaged approximately 445 full-time engineers, technicians and support
staff. Our research and development expenses were $38.6 million in fiscal 2010, $45.5 million in fiscal 2011 and $49.6 million in fiscal 2012. We intend to continue to invest in
our research and development efforts in the future.
Manufacturing and Materials
We currently manufacture our security and inspection systems domestically in California and North Carolina, and internationally in
Malaysia and the United Kingdom. We currently manufacture our patient monitoring, diagnostic cardiology and anesthesia systems domestically in Washington and internationally in China. We currently
manufacture our optoelectronic devices and provide electronics manufacturing services domestically in California, Massachusetts, Mississippi, New Jersey and Florida, and internationally in India,
Indonesia, Malaysia and Singapore. Most of our high volume, labor intensive manufacturing and assembly activities are performed at our facilities in India, Indonesia and Malaysia. Since most of our
customers are located in the United States, Europe and Asia, our ability to manufacture products in these markets and provide follow-on service from offices located in these regions is an
important component of our global strategy.
Our
global manufacturing organization has expertise in optoelectronic, microelectronic and integrated electronics for commercial, medical, aerospace and defense industry applications.
Our manufacturing includes silicon wafer processing and fabrication, optoelectronic device assembly and screening, thin and thick film microelectronic hybrid assemblies, surface mounted and
thru-hole printed circuit board electronic assemblies and electronics services, including complete turnkey and box-build manufacturing. We outsource certain manufacturing
operations, including certain sheet metal fabrication and plastic components. The manufacturing process for components and subsystems consists of manual tasks performed by skilled technicians as well
as automated tasks.
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The
principal raw materials and subcomponents used in producing our security and inspection systems consist of X-ray generators, linear accelerators, radioactive isotopes,
neutron generators, detectors, data acquisition and computer systems, conveyance systems and miscellaneous mechanical and electrical components. A large portion of the optoelectronic devices,
subsystems and circuit card assemblies used in our inspection and detection systems are manufactured in-house. The metal enclosures used in our baggage and parcel inspection systems are
also manufactured in-house, while the X-ray generators, linear accelerators, radioactive isotopes, neutron generators and conveyance systems used in our cargo and vehicle
inspection systems are purchased from unaffiliated third party providers.
The
principal raw materials and subcomponents used in producing our patient monitoring, diagnostic cardiology and anesthesia systems consist of printed circuit boards, housings,
mechanical assemblies, pneumatic devices, touch screens, medical grade displays, cables, filters and packaging materials. We purchase certain devices, including computers, peripheral accessories and
remote displays from unaffiliated third party providers.
The
principal raw materials and subcomponents used in producing our optoelectronic devices and electronic subsystems consist of silicon wafers, electronic components, light emitting
diodes, scintillation crystals, passive optical components, printed circuit boards and packaging materials. The silicon-based optoelectronic devices manufactured by us are critical components in most
of our products and subsystems. We purchase silicon wafers and other electronic components from unaffiliated third party providers.
For
cost, quality control and efficiency reasons, at times we purchase raw materials and subcomponents only from single vendors with whom we have ongoing relationships. We do, however,
qualify second sources for most of our raw materials and critical components. We purchase the materials pursuant to purchase orders placed from time to time in the ordinary course of business.
Although to date none of our divisions has experienced any significant shortages or material delays in obtaining any of its raw materials or subcomponents, it is possible that they may face such
shortages or delays in one or more materials in the future.
Trademarks and Tradenames, Patents, and Licenses
Trademarks and Tradenames.
We have used, registered and applied to register certain trademarks and service marks to distinguish
our products,
technologies and services from those of our competitors in the United States and in foreign countries. We enforce our trademark, service mark and trade name rights in the United States and abroad.
Patents.
We hold a number of U.S. and foreign patents relating to various aspects of our security and inspection products,
patient monitoring,
diagnostic cardiology and anesthesia systems and optoelectronic devices and subsystems. Our current patents will expire at various times between 2012 and 2031. However, it remains possible that
pending patent applications or other applications that may be filed may not result in issued patents. In addition, issued patents may not survive challenges to their validity. Although we believe that
our patents have value, our patents, or any additional patents that may be issued in the future, may not be able to provide meaningful protection from competition.
Licenses.
Our Security, Healthcare and Optoelectronics and Manufacturing divisions have each entered into a variety of license
arrangements under
which certain third parties are permitted to manufacture, market, and/or
sell a limited number of the products that we offer and/or to service various types of software, data, equipment, components and enhancements to our own proprietary technology.
We
believe that our trademarks and tradenames, patents and licenses are important to our business. The loss of some of our trademarks, patents or licenses might have a negative impact on
our financial results and operations. Nevertheless, with the exception of the loss of either the Spacelabs® or Rapiscan® trademarks, the impact of the loss of any single
trademark, patent or license would not likely have a material adverse effect on our business. We
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consider
the Spacelabs® trademark an important asset and have registered it in approximately forty countries. In addition, we have instituted a registration program for the
Rapiscan® trademark.
Regulation of Medical Products
The patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and market are subject to regulation by numerous
government agencies, principally the U.S. Food and Drug Administration (FDA) and by certain state and foreign authorities. They are also subject to various U.S. and foreign electrical safety
standards.
The
FDA has broad regulatory powers with respect to pre-clinical and clinical testing of new medical products and the designing, manufacturing, marketing and advertising of
medical products. It requires that all medical devices introduced into the market be preceded either by a pre-market notification clearance order under section 510(k) of the Food,
Drug and Cosmetic Act, or an approved pre-market approval application. A 510(k) pre-market notification clearance order indicates that the FDA agrees with an applicant's
determination that the product for which clearance has been sought is substantially equivalent to another legally marketed medical device. The clearance of a pre-market approval
application, on the other hand, indicates that the FDA has determined that the device has been proven, through the submission of clinical trial data and manufacturing quality assurance information, to
be safe and effective for its labeled indications. The process of obtaining 510(k) clearance typically takes between three and six months, but can take substantially longer. The pre-market
approval application review process, on the other hand, can last more than a year. To date, all of the patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and sell in the
United States have required only 510(k) pre-market notification clearance.
Such
regulatory approvals, when granted, may entail limitations on the indicated uses for which a product may be marketed, and such product approvals, once granted, may be withdrawn if
problems occur after initial marketing. Manufacturers of FDA-regulated products are subject to pervasive and continuing governmental regulation, including extensive recordkeeping
requirements and reporting of adverse experiences associated with product manufacture and use. Compliance with these requirements is costly, and failure to comply can result in, among other things,
fines, total or partial suspension of production, product recalls, failure of the FDA to review pending marketing clearances or approval applications, withdrawal of marketing clearances or approvals
or even criminal prosecution.
We
are also subject to regulation in the foreign countries in which we manufacture and market our patient monitoring, diagnostic cardiology and anesthesia systems. For example, the
commercialization of medical devices in the European Union is regulated under a system that presently requires all medical devices sold in the European Union to bear the CE markan
international symbol of adherence to quality assurance standards. Our manufacturing facilities in Hawthorne, California; Issaquah, Washington; Johor Bahru, Malaysia; Batam, Indonesia; Hyderabad,
India; Jacksonville, Florida; and Suzhou, China are all certified to the International Organization for Standardization's ISO 13485 standard for medical device quality management systems. Our
Hawthorne, California and Issaquah, Washington facilities are also certified to the requirements of Annex II, section 3 of the Directive
93
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42
1EEC on Medical Devices,
which allows them to self-certify that manufactured products can bear the CE mark.
We
believe we are in compliance with all applicable federal, state and foreign regulations regarding the manufacture and sale of our patient monitoring, diagnostic cardiology and
anesthesia delivery systems except to an extent that would not have a material adverse effect on our business, financial condition or results of operations. Such regulations and their enforcement do,
however, constantly change, and we cannot predict what effect, if any, such changes may have on our businesses in the future.
Government
and private sector initiatives to limit the growth of healthcare costs, including price regulation and competitive pricing, coverage and payment policies, comparative
effectiveness therapies, technology assessments and managed care arrangements, are continuing in many countries where we do business, including the United
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States,
Europe and Asia. As a result of these changes, the marketplace has placed increased emphasis on the delivery of more cost-effective medical therapies. These various initiatives
have created increased price sensitivity over healthcare products generally and may impact demand for our products and technologies.
Healthcare
cost containment efforts have also prompted domestic hospitals and other customers of medical devices to consolidate into larger purchasing groups to enhance purchasing power,
and this trend is expected to continue. The medical device industry has also experienced some consolidation, partly in order to offer a broader range of products to large purchasers. As a result,
transactions with customers are larger, more complex and tend to involve more long-term contracts than in the past. These larger customers, due to their enhanced purchasing power, may
attempt to increase the pressure on product pricing.
In
2010, significant reforms to the healthcare system were adopted as law in the United States. Among other things, the law requires the medical device industry to subsidize healthcare
reform in the form of a 2.3% excise tax on United States sales of most medical devices beginning in 2013. The excise tax will increase our operating expenses. Because many parts of the 2010 healthcare
law remain subject to implementation later this year, the long-term impact on us is uncertain. The new law or any future legislation could impact the demand for our products or the prices
at which we sell our products.
Environmental Regulations
We are subject to various federal, state and local environmental laws, ordinances and regulations relating to the use, storage,
handling and disposal of certain hazardous substances and wastes used or generated in the manufacturing and assembly of our products. Under such laws, we may become liable for the costs of removal or
remediation of certain hazardous substances that have been released on or in our facilities or that have been disposed of off-site as waste. Such laws may impose liability without regard
to whether we knew of, or caused, the release of such hazardous substances. We believe that, except to an extent that would not have a material adverse effect on our business, financial condition or
results of operations, we are currently in compliance with all environmental regulations in connection with our manufacturing operations, and that we have obtained all environmental permits necessary
to conduct our business. The amount of hazardous substances and wastes produced and generated by us may increase in the future depending on changes in our operations. Any failure by us to comply with
present or future regulations could subject us to the imposition of substantial fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could
have a material adverse effect on our business, financial condition and results of operations.
We
conduct appropriate environmental investigations at our properties in the United States at which we manufacture products. These investigations address matters related to current and
former occupants and operations, historical land use, and regulatory oversight and status of associated properties and/or operations (including surrounding properties). The purpose of each study is to
identify, as of the date of such report, potential areas of environmental concern related to past and present activities or from nearby operations. The scope and extent of each investigation is
dependent upon the size and complexity of the property and/or operation and on recommendations by independent environmental consultants.
During
one investigation, we discovered soil and groundwater contamination at our Hawthorne, California facility. We filed the requisite reports concerning this problem with the
appropriate environmental authorities in fiscal 2001. We have not yet received any response to such reports, and no agency action or litigation is
presently pending or threatened. We also have notified the prior owners of the facility and the present owners and tenants of adjacent properties concerning the problem and have requested from such
parties agreements to toll of the statute of limitations for actions against such parties with respect to the contamination. Our 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 our premises or our immediate surroundings.
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Competition
The markets in which we operate are highly competitive and characterized by evolving customer needs and rapid technological change. We
compete with a number of other manufacturers, some of which have significantly greater financial, technical and marketing resources than we have. In addition, these competitors may have the ability to
respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements, may have stronger customer relationships, may have greater name recognition and may
devote greater resources to the development, promotion and sale of their products than we do. As a result, we may not be able to compete successfully against designers and manufacturers of specialized
electronic systems and components or within the markets for security and inspection systems, patient monitoring, diagnostic cardiology and anesthesia systems or optoelectronic devices. Future
competitive pressures may materially and adversely affect our business, financial condition and results of operations.
In
the security and inspection market, competition is based primarily on factors such as product performance, functionality and quality, the overall cost effectiveness of the system,
prior customer relationships, technological capabilities of the products, price, local market presence and breadth of sales and service organization. We believe that our principal competitors in the
market for security and inspection products are Smiths Detection; L-3 CommunicationsSecurity and Detection Systems division; American Science and Engineering; Morpho
Detection; SAIC; CEIA and Nuctech. Competition could result in price reductions, reduced margins and loss of market share. Although our competitors offer products in competition with one or more of
our products, we can supply a variety of system types and offer among the widest array of solutions available from a single supplier. This variety of technologies also permits us to offer unique
hybrid systems to our customers that utilize two or more of these technologies, thereby optimizing flexibility, performance and cost to meet the customer's unique application requirements.
In
the patient monitoring, diagnostic cardiology and anesthesia systems delivery market, competition is also based on a variety of factors including product performance, functionality,
value and breadth of sales and service organization. We believe that our principal competitors in the market for patient monitoring,
diagnostic cardiology and anesthesia systems are Philips Healthcare; GE Healthcare; Mindray Medical; Mortara Instrument; Dräger Medical; Nihon Kohden; Penlon and Maquet. Competition
could result in price reductions, reduced margins and loss of our market share. We believe that our patient monitoring products are easier to use than the products of many of our competitors because
we offer a consistent user interface throughout many of our product lines. We also believe that the capability of our monitoring systems to connect together, and to the hospital IT infrastructure, is
a key competitive advantage. Finally, while some of our competitors are also beginning to introduce portal technology, which allows remote access to data from the bedside monitor, central station or
other point of care, we believe that our competing technologies are superior in bringing instant access to labs, radiology and charting at the point of care. Although we have established relationships
with a number of large hospitals, we may not be able to successfully compete in the future with existing competitors or with new entrants.
In
the markets in which we compete to provide optoelectronic devices and electronics manufacturing services, competition is based primarily on such factors as expertise in the design and
development of optoelectronic devices, product quality, timeliness of delivery, price, customer technical support and the ability to provide fully integrated services from application development and
design through production. We believe that our major competitors in the optoelectronic device market are Excelitas Technologies, Hamamatsu and First Sensor. Because we specialize in custom subsystems
requiring a high degree of engineering expertise, we believe that we generally do not compete to any significant degree with any other large United States, European or Asian manufacturers of standard
optoelectronic components. Competition in the extensive electronic manufacturing services market ranges from multinational corporations with sales in excess of several billions of dollars, to large
regional competitors and to small local assembly companies. In our experience, the original equipment manufacturers to whom we provide such services prefer to engage companies that offer both local
and lower-cost off-shore facilities. As a result, our primary domestic competition for these services is located in Southern California and in New England, where our U.S.
facilities are also located. Such competition includes CTS; Stellar Microelectronics; Senior Systems Technology;
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Celestica;
Benchmark Electronics; Plexus and Jabil, among others. In addition, our high-volume, low-cost contract manufacturing locations in Southeast Asia compete with other
manufacturers in the same region.
Backlog
We measure our backlog as orders for which purchase orders or contracts have been signed, but which have not yet been shipped and for
which revenues have not yet been recognized.
We
ship most of our baggage and parcel inspection, hold (checked) baggage screening, people screening, patient monitoring, diagnostic cardiology and anesthesia systems and optoelectronic
devices and value-added subsystems within one to several months after receiving an order. However, such shipments may be delayed for a variety of reasons, including any special design or requirements
of the customer. In addition, large orders of security and inspection products typically require greater lead-times. Further, we provide turnkey screening services to certain customers for
which we may recognize revenue over multi-year periods.
Certain
of our cargo and vehicle inspection and hold (checked) baggage screening systems may require several months lead-time. We have experienced some significant shipping
delays associated with our cargo and vehicle inspection systems. Such delays can occur for many reasons, including: (i) additional time necessary to conduct inspections at the factory before
shipment; (ii) a customer's need to engage in time-consuming special site preparation to accommodate the system, over which we have no control or responsibility;
(iii) additional fine tuning of such systems once they are installed; (iv) design or specification changes by the customer; and (v) delays originating from other contractors on
the project.
As
of June 30, 2012, our consolidated backlog totaled approximately $1.1 billion, compared to approximately $0.3 billion as of June 30, 2011 and approximately
$0.2 billion at June 30, 2010. Sales orders underlying our backlog are firm orders; although, from time to time we may agree to permit a customer to cancel an order or an order may be
cancelled for other reasons. Variations in the size of orders, product mix, or delivery requirements, among other factors, may result in substantial fluctuations in backlog from period to period.
Backlog as of any particular date should not be relied upon as indicative of our revenues for any future period and cannot be considered a meaningful indicator of our performance on an annual or
quarterly basis.
Employees
As of June 30, 2012, we employed approximately 3,900 people, of whom 2,145 were employed in manufacturing, 445 were employed in
engineering or research and development, 386 were employed in administration, 383 were employed in sales and marketing and 539 were employed in service capacities. Of the total employees,
approximately 1,533 were employed in the Americas, 1,957 were employed in Asia and 408 were employed in Europe. Many of our employees in Europe have statutory collective bargaining rights. We have
never experienced a work stoppage or strike, and management believes that our relations with our employees are good.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. Therefore, we file periodic
reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room
of the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549 or by calling the Securities and Exchange Commission at
1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an internet website (http://www.sec.gov) that contains reports, proxy statements and
other information that issuers are required to file electronically.
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Our Internet address is: http://www.osi-systems.com. The information found on, or otherwise accessible through, our website is not incorporated into,
and does not form a part of, this annual report on Form 10-K or any other report or document we file with or furnish to the Securities and Exchange Commission. We make
available, free of charge through our internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and reports filed pursuant to
Section 16 of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange
Commission. Also available on our website free of charge are our Corporate Governance Guidelines, the Charters of our Nominating and Governance, Audit, Compensation and Executive Committees of our
Board of Directors and our Code of Ethics and Conduct (which applies to all Directors and employees, including our principal executive officer, principal financial officer and principal accounting
officer). A copy of this annual report on Form 10-K is available without charge upon written request addressed to: c/o Secretary, OSI Systems, Inc., 12525 Chadron Avenue,
Hawthorne, CA 90250 or by calling telephone number (310) 978-0516.
ITEM 1A. RISK FACTORS
We encourage you to carefully consider all of the following risk factors when making investment decisions regarding our company. If any
of the following risks materialize, our business, financial condition and operating results could be materially adversely affected.
Fluctuations in our operating results may cause our stock price to decline.
Given the nature of the markets in which we participate, it is difficult to reliably predict future revenues and profitability. Changes
in competitive, market and economic conditions may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to our significant sales, research and development and
manufacturing costs. Thus, small declines in revenue could disproportionately affect our operating results. Factors that may affect our operating results and the market price of our Common Stock
include:
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demand for and market acceptance of our products;
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competitive pressures resulting in lower selling prices;
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adverse changes in the level of economic activity in regions in which we do business;
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low or fluctuating levels of political stability in regions in which we do business;
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adverse changes in industries, such as semiconductors and electronics, on which we are particularly dependent;
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changes in the portions of our revenue represented by various products and customers;
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delays or problems in the introduction of new products;
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announcements or introductions of new products, services or technological innovations by our competitors;
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variations in our product mix;
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timing and amount of our expenditures in anticipation of future sales;
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availability of equity and credit markets to provide our customers with funding to make equipment purchases;
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exchange rate fluctuations;
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increased costs of raw materials or supplies;
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changes in the volume or timing of product orders;
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timing of completion of acceptance testing of some of our products;
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changes in regulatory requirements;
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natural disasters; and
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changes in general economic factors.
Unfavorable currency exchange rate fluctuations could adversely affect our profitability.
Our international sales and our operations in foreign countries expose us to risks associated with fluctuating currency values and
exchange rates. Gains and losses on the conversion of accounts receivable, accounts payable and other monetary assets and liabilities to U.S. dollars may contribute to fluctuations in our results of
operations. In addition, increases or decreases in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations.
We face aggressive competition in each of our operating divisions. If we do not compete effectively, our business will be harmed.
We encounter aggressive competition from numerous competitors in each of our divisions. In the security and inspection and patient
monitoring, diagnostic cardiology and anesthesia systems
markets, competition is based primarily on such factors as product performance, functionality and quality, cost, prior customer relationships, technological capabilities of the product, price,
certification by government authorities, local market presence and breadth of sales and service organization. In the optoelectronic devices and electronics manufacturing markets, competition is based
primarily on factors such as expertise in the design and development of optoelectronic devices, product quality, timeliness of delivery, price, customer technical support and on the ability to provide
fully-integrated services from application development and design through volume subsystem production. We may not be able to compete effectively with all of our competitors. To remain competitive, we
must develop new products and enhance our existing products and services in a timely manner. We anticipate that we may have to adjust the prices of many of our products to stay competitive. In
addition, new competitors may emerge and entire product lines or service offerings may be threatened by new technologies or market trends that reduce the value of these product lines or service
offerings.
The September 11, 2001 terrorist attacks, subsequent attacks in other locations worldwide and the creation of the U.S. Department of Homeland Security
have increased financial expectations that may not materialize.
The September 11, 2001 terrorist attacks, subsequent attacks in other locations worldwide and the creation of the U.S.
Department of Homeland Security have created increased interest in our security and inspection systems. However, we are not certain whether the level of demand will continue to be as high as it is
now. We do not know what solutions will continue to be adopted by the U.S. Department of Homeland Security, the U.S. Department of Defense, and similar agencies in other countries and whether our
products will be a part of those solutions. Additionally, should our products be considered as a part of the future security solutions, it is unclear what the level may be and how quickly funding to
purchase our products may be made available. These factors may adversely impact us and create unpredictability in revenues and operating results.
If operators of, or algorithms installed in, our security and inspection systems fail to detect weapons, explosives or other devices that are used to commit a
terrorist act, we could be exposed to product and professional liability and related claims for which we may not have adequate insurance coverage.
Our business exposes us to potential product liability risks that are inherent in the development, manufacturing, sale and service of
security and inspection systems as well as in the provision of training to our customers in the use and operation of such systems. Our customers use our security and inspection systems to help
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them
detect items that could be used in performing terrorist acts or other crimes. Some of our security and inspection systems require that an operator interpret an image of suspicious items within a
bag, parcel, container or other vessel. Others signal to the operator that further investigation is required. In either case, the training, reliability and competence of the customer's operator are
crucial to the detection of suspicious items.
Security
inspection systems that signal to the operator that further investigation is required are sometimes referred to in the security industry as "automatic" detection systems. Such
systems utilize software algorithms (often designed to meet government requirements) to interpret data produced by the system and to signal to the operator when a dangerous object may be present. Such
algorithms are probabilistic in nature and are also subject to significant technical limitations. Nevertheless, if such a system were to fail to signal to an operator when an explosive or other
contraband was in fact present, resulting in significant damage, we could become the subject of significant product liability claims.
Furthermore,
security inspection by technological means is circumstance and application-specific. Our security and inspection systems are not designed to work under all circumstances and
can malfunction.
We
also offer turnkey security screening solutions under which we perform certain of the security screening tasks that have historically been performed by our customers. Such tasks
include: design, layout and construction of the security checkpoint where the inspection equipment is located; selection of the security equipment to be used at the checkpoint; selection, training and
management of the personnel operating the checkpoint; operation of the security screening equipment ; interpretation of the images and other signals produced by the security screening equipment;
maintenance and security of the checkpoint as well as other related services. Such projects expose us to certain professional liability risks that are inherent in performing security inspection
services (in live checkpoint environments and over extended periods of time) for the purpose of assisting our customers in the detection of contraband items, including items that could be used in
performing terrorist acts or other crimes. If a contraband item were to pass through the checkpoint and be used to perform a terrorist act or other crime, we could become the subject of significant
professional liability claims.
In
addition, there are also many other factors beyond our control that could lead to liability claims should an act of terrorism occur. The 1993 World Trade Center bombing, the
September 11, 2001 attacks, subsequent attacks in other locations worldwide and the potential for future attacks, have caused commercial insurance for such threats to become extremely difficult
to obtain. Although we have been able to obtain insurance coverage, it is likely that, should we be found liable following a major act of terrorism, the insurance we currently have in place would not
fully cover the claims for damages.
The Support Anti-terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) may not shield us against all legal claims we may face
following an act of terrorism.
The SAFETY Act provides important legal liability protections for providers of qualified anti-terrorism products and
services. Under the SAFETY Act, providers, such as our Security division, may apply to the U.S. Department of Homeland Security for coverage of the products and services. If granted coverage, such
providers would receive certain legal protections against product liability, professional liability and certain other claims that could arise following an act of terrorism.
We
have applied to the U.S. Department of Homeland Security for many of the products and services offered by our Security division but we do not enjoy coverage (or the highest level of
coverage) for every product line, model number and service offering that our Security division provides. In addition, the terms of the SAFETY Act coverage decisions awarded to us by the U.S.
Department of Homeland Security contain conditions and requirements that we may not (or may not be able to) continue to satisfy in the future.
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In
the future, if we fail to maintain the coverage that we currently enjoy or fail to timely apply for coverage for new products and services as we introduce them, or if the U.S.
Department of Homeland Security limits the scope of any coverage previously awarded to us, denies us coverage or continued coverage for a particular product, product line or service offering, or
delays in making decisions about whether to grant us coverage, we may become exposed to legal claims that the SAFETY Act was otherwise designed to prevent.
The
SAFETY Act was not designed to shield providers of qualified anti-terrorism products and services from all types of claims that may arise from acts of terrorism,
including from many types of claims lodged in courts outside of the United States or acts of terrorism that occur outside of the United States. This too could leave us exposed to significant legal
claims and litigation defense costs despite the SAFETY Act awards we have received.
Our patient monitoring, diagnostic cardiology and anesthesia systems could give rise to product liability claims and product recall events that could
materially and adversely affect our financial condition and results of operations.
The development, manufacturing and sale of medical devices expose us to significant risk of product liability claims, product recalls
and, sometimes, product failure claims. We face an inherent business risk of financial exposure to product liability claims if the use of our medical devices results in personal injury or death.
Substantial product liability litigation currently exists within the medical device industry. Some of our patient monitoring, diagnostic cardiology and anesthesia systems products may become subject
to product liability claims and/or product recalls. Future product liability claims and/or product recall costs may exceed the limits of our insurance coverages or such insurance may not continue to
be available to us on commercially reasonable terms, or at all. In addition, a significant product liability claim or product recall could significantly damage our reputation for producing safe,
reliable and effective products, making it more difficult for us to market and sell our products in the future. Consequently, a product liability claim, product recall or other claim could have a
material adverse effect on our business, financial condition, operating results and cash flows.
If we are unable to sustain high quality processes for the manufacture and delivery of goods and services, our reputation could be harmed, our competitive
advantage could erode and we could incur significant costs.
Quality is extremely important to us and our customers due in part to the serious consequences of product failure. Our quality
certifications are critical both to the marketing success of our goods and services and to the satisfaction of both regulatory and contractual requirements under which we sell many of our products. If
we fail to meet these standards or other standards required in our industries, we could lose customers and market share, our revenue could decline and we could face significant costs and other
liabilities.
The loss of certain of our customers could have a negative effect on our reputation and could have a material adverse effect on our business, financial
condition and results of operations.
We sell many of our products to prominent, well-respected institutions, including agencies and departments of the U.S.
Government, state and local governments, foreign governments, renowned hospitals and hospital networks, and large military-defense and space-industry contractors. Many of these larger customers spend
considerable resources testing and evaluating our products and our design and manufacturing processes and services. Some of our smaller customers know this and rely on this as an indication of the
high-quality and reliability of our products and services. As a result, part of our reputation and success depends on our ability to continue to sell to larger institutions that are known
for demanding high standards of excellence. The loss or termination of a contract by such an institution, even if for reasons unrelated to the quality of our products or services, could therefore have
a
more wide-spread and potentially material adverse effect on our business, financial condition and results of operations.
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Further,
we are generating increasing revenues from certain customers, the loss of which could have a material adverse effect on our business. In particular, in January 2012, we entered
into a six-year contract with the Mexican government to provide a turnkey security screening solution along the country's borders, and in its ports and airports. This project is expected
to provide significant revenues over the life of the contract and will require substantial management and financial resources for capital equipment and infrastructure in anticipation of future
revenues and result in substantial cash-flow volatility, particularly over fiscal year 2013. Additionally, another significant contract with the U.S. Army for our performance as a prime
contractor and hardware systems integrator, awarded in September 2011, was substantially recognized in fiscal year 2012, further contributing to potential volatility.
Our revenues are dependent on orders of security and inspection systems, turnkey security screening solutions and patient monitoring, diagnostic cardiology and
anesthesia systems, which may have lengthy and unpredictable sales cycles.
Sales of security and inspection systems and turnkey security screening solutions often depend upon the decision of governmental
agencies to upgrade or expand existing airports, border crossing inspection sites, seaport inspection sites, military facilities and other security installations. In the case of turnkey security
screening solutions, the commencement of screening operations may be dependent on the approval, by a government agency, of the protocols and procedures that our personnel are to follow during the
performance of their activities. Sales outside of the United States of our patient monitoring, diagnostic cardiology and anesthesia systems depend in significant part on the decision of governmental
agencies to build new medical facilities or to expand or update existing medical facilities. Accordingly, a significant portion of our sales of security and inspection systems, turnkey security
screening solutions and our patient monitoring, diagnostic cardiology and anesthesia systems is often subject to delays associated with the lengthy approval processes. During these approval periods,
we expend significant financial and management resources in anticipation of future revenues that may not occur. If we fail to receive such revenues after expending such resources, such failure could
have a material adverse effect on our business, financial condition and results of operations.
Current economic conditions, including the slow pace of recovery from recession in the United States and other parts of the world, as well as further
disruptions in the financial markets could result in substantial declines in our revenues, earnings, cash flows and financial condition.
The worldwide economic slowdown has and could continue to adversely affect our businesses and our profitability. If economic growth
continues to remain slow, many customers may continue to delay purchases or reduce purchase quantities. This could result in the reduction in sales of certain of our products, slower adoption of both
new technologies and upgrades to existing technologies and could also result in increased price competition. Continued market disruptions and broader economic downturns also increase our exposure to
losses from bad debts. Among other effects we have seen during the slowdown, some of our customers, such as hospitals and healthcare systems in Europe and the United States, who rely on the credit
markets for access to capital, have and may continue to delay purchases of our products and services until the credit markets recover. If economic or other factors cause financial institutions to
fail, we could lose current or potential customers. We cannot predict when the world's credit 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. Any or all of these factors, as well as other consequences of the current economic
conditions which cannot currently be anticipated, could have a material adverse effect on our revenues, earnings and cash flows and otherwise adversely affect our financial condition.
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We have limited operating experience with our screening solutions business. If we fail to perform on our existing agreements to provide security screening
solutions to customers after expending substantial resources, such failure could have a material adverse effect on our business, financial condition and results of operations.
Although our S2 business has a limited operating history, we have recently entered into significant large-scale agreements to provide
turnkey security screening solutions to certain customers. In particular, in January 2012, we entered into a substantial six-year contract with the Mexican government to provide a turnkey
security screening solution along the country's borders, and in its ports and airports. The contract is expected to provide significant revenues over the life of the contract. However, this contract
requires substantial management and financial resources for capital equipment and infrastructure in anticipation of future revenues, as well as other performance risks. Under the agreement, we were
provided an advance of $100 million, however, we are obligated to provide a guarantee until the advance has been earned. If we fail to receive such revenues after expending such resources, such
failure could have a material adverse effect on our business, financial condition and results of operations.
If we do not introduce new products in a timely manner, our products could become obsolete and our operating results would suffer.
We sell many of our products in industries characterized by rapid technological changes, frequent new product and service introductions
and evolving industry standards and customer needs. Without the timely introduction of new products and enhancements, our products could become technologically obsolete over time, in which case our
revenue and operating results would suffer. The success of our new product offerings will depend upon several factors, including our ability to:
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accurately anticipate customer needs;
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innovate and develop new technologies and applications;
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successfully commercialize new technologies in a timely manner;
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price our products competitively and manufacture and deliver our products in sufficient volumes and on time; and
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differentiate our offerings from our competitors' offerings.
Some
of our products are used by our customers to develop, test and manufacture their products. We therefore must anticipate industry trends and develop products in advance of the
commercialization of our customers(2) products. In developing any new product, we may be required to make a substantial investment before we can determine the commercial viability of the new product.
If we fail to accurately foresee our customers(2) needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenues.
Interruptions in our ability to purchase raw materials and subcomponents may adversely affect our profitability.
We purchase raw materials and certain subcomponents from third parties. Standard purchase order terms are as long as one year at fixed
costs, but we do not have guaranteed long-term supply arrangements with our suppliers. In addition, for certain raw materials and subcomponents that we use, there are a limited number of
potential suppliers that we have qualified or that we are currently able to qualify. Consequently, some of the key raw materials and subcomponents that we use are currently available to us only from a
single vendor. The reliance on a single qualified vendor could result in delays in delivering products or increases in the cost of manufacturing the affected products. Any material interruption in our
ability to purchase necessary raw materials or subcomponents could adversely affect our ability to fulfill customer orders and therefore could ultimately have a material adverse effect on our
business, financial condition and results of operations.
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Delays by the construction firms we engage may interfere with our ability to complete projects on time.
Purchasers of our security and inspection systems and turnkey security screening solutions sometimes require, as a part of our
contract, the construction of the facilities that will house our systems and/or operations. Some of these construction projects are significant in size and complexity. We engage qualified construction
firms to perform this work. However, if such firms experience delays, if they perform sub-standard work or if we fail to properly monitor the quality of their work or the timeliness of
their progress, we may not be able to complete our construction projects on time. In any such circumstance, we could face the imposition of delay penalties and breach of contract claims by our
customer. In addition, we could be forced to incur significant expenses to rectify the problems caused by the construction firm. Any material delay caused by our construction firm subcontractors could
therefore ultimately have a material adverse effect on our business, financial condition and results of operations.
We may not be able to successfully implement our acquisitions and investment strategies, integrate acquired businesses into our existing business or make
acquired businesses profitable.
One of our strategies is to supplement our internal growth by acquiring and investing in businesses and technologies that complement or
augment our existing product lines. This growth has placed, and may continue to place, significant demands on our management, working capital and financial
resources. We may be unable to identify or complete promising acquisitions for many reasons, including:
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competition among buyers;
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the need for regulatory approvals, including antitrust approvals; and
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the high valuations of businesses.
Some
of the businesses we may seek to acquire or invest in may be marginally profitable or unprofitable. For these businesses to achieve acceptable levels of profitability, we must
improve their management, operations, products and market penetration. We may not be successful in this regard and we may encounter other difficulties in integrating acquired businesses into our
existing operations.
To
finance our acquisitions, we may have to raise additional funds, through either public or private financings. We may be unable to obtain such funds or may be able to do so only on
unfavorable terms.
Our acquisition and alliance activities could disrupt our ongoing business.
We intend to continue to make investments in companies, products and technologies, either through acquisitions, investments or
alliances. Acquisition and alliance activities often involve risks, including:
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difficulty in assimilating the acquired operations and employees and realizing synergies expected to result from the
acquisition;
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difficulty in managing product co-development activities with our alliance partners;
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difficulty in retaining the key employees of the acquired operation;
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disruption of our ongoing business;
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inability to successfully integrate the acquired technologies and operations into our businesses and maintain uniform
standards, controls, policies and procedures; and
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lacking the experience necessary to enter into new product or technology markets successfully.
Integrating
acquired businesses has been and will continue to be complex, time consuming and expensive, and can negatively impact the effectiveness of our internal control over financial
reporting. The use of debt to fund acquisitions or for other related purposes increases our interest expense and leverage. If we issue equity securities
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as
consideration in an acquisition, current stockholders(2) percentage ownership and earnings per share may be diluted. As a result of these and other risks, we cannot be certain that our previous or
future acquisitions will be successful and will not materially adversely affect the conduct, operating results or financial condition of our business.
Acquisition and alliance activities by our competitors could disrupt our ongoing business.
From time to time, our competitors acquire or enter into exclusive arrangements with companies with whom we do business or may do
business in the future. Reductions in the number of partners with whom we may do business in a particular context may reduce our ability to enter into critical alliances on attractive terms or at all,
and the termination of an existing alliance by a business partner may disrupt our operations.
Our ability to successfully adapt to ongoing organizational changes could impact our business results.
We have executed a number of significant business and organizational changes to rationalize our overall cost structure. These changes
have included and may continue to include the implementation of cost-cutting measures and the consolidation of facilities. We expect these types of changes may continue from time to time
in the future as we uncover additional opportunities to streamline our operations. Successfully managing these changes is critical to our productivity improvement and business success. If we are
unable to successfully manage these changes, while continuing to invest in business growth, our financial results could be adversely impacted.
Economic, political and other risks associated with international sales and operations could adversely affect our financial performance.
In fiscal 2010, revenues from shipments made to customers outside of the United States accounted for approximately 43% of our revenues.
They were 47% in fiscal 2011and 47% in fiscal 2012. Of the revenues generated during fiscal 2012 from shipments made to customers outside of the United States, 27% represented sales made by
subsidiaries based in the United States to foreign customers, and the balance represented sales generated by foreign subsidiaries. Since we sell certain of our products worldwide, our businesses are
subject to risks associated with doing business internationally. We anticipate that revenues from international operations will continue to represent a substantial portion of our total revenue. In
addition, many of our manufacturing facilities, and therefore employees, suppliers, real property, capital equipment, cash and other assets are located outside the United States. Accordingly, our
future results could be harmed by a variety of factors, including:
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changes in foreign currency exchange rates;
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changes in a country's or region's political or economic conditions, particularly in developing or emerging markets;
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political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict;
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longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;
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trade protection measures and import or export licensing requirements;
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differing legal and court systems;
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differing tax laws and changes in those laws;
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difficulty in staffing and managing widespread operations;
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difficulty in managing distributors and sales agents and their compliance with applicable laws;
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differing labor laws and changes in those laws;
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differing protection of intellectual property and changes in that protection; and
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differing regulatory requirements and changes in those requirements.
Third parties may claim we are infringing their intellectual property rights, and we could suffer significant litigation or licensing expenses or be prevented
from selling products.
As we introduce any new and potentially promising product, companies possessing competing technologies may be motivated to assert
infringement claims in order to delay or diminish potential sales and challenge our right to market such product. In addition, we may find it necessary to initiate litigation in order to protect our
patent or other intellectual property rights, and such intellectual property litigation is typically costly and time-consuming. Third parties could also obtain patents that may require us
to either redesign products or, if possible, negotiate licenses from such third parties. Adverse determinations in any such litigation could result in significant liabilities to third parties or
injunctions, or could require us to seek licenses from third parties, and if such licenses are not available on commercially reasonable terms, prevent us from manufacturing, selling or using certain
products, any one of which could have a material adverse effect on us. In addition, some licenses may be non-exclusive, which could provide our competitors access to the same technologies.
Under any of these circumstances, we may incur significant expenses.
Our ongoing success is dependent upon the continued availability of certain key employees.
We are dependent in our operations on the continued availability of the services of our employees, many of whom are individually key to
our current and future success, and the availability of new employees to implement our growth plans. In particular, we are dependent upon the services of Deepak Chopra, our Chairman of the Board of
Directors, President and Chief Executive Officer. The market for skilled employees is highly competitive, especially for employees in technical fields. While our compensation programs are intended to
attract and retain the employees required for us to be successful,
ultimately, we may not be able to retain the services of all of our key employees or a sufficient number to execute on our plans. In addition, we may not be able to continue to attract new employees
as required.
Future legislation or regulatory changes to the healthcare system may affect our ability to sell our products profitably.
There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the healthcare
system, and some could involve changes that could significantly affect our business. This legislation will significantly affect the ways in which doctors, hospitals, healthcare systems and health
insurance companies are compensated for the services they provide. For example, the 2010 health care reform includes a 2.3% excise tax on United States sales of a wide range of medical devices. The
excise tax will become effective in 2013. We expect the excise tax to increase our costs. Although some provisions of the health reform legislation have been implemented, many of the legislative
changes contained within the health reform legislation will not be effective or implemented until later this year. It is not clear at this time whether and to what extent this legislation may impact
the ability of hospitals and hospital networks to purchase the patient monitoring, diagnostic cardiology and anesthesia systems that we sell or if it will alter market-based incentives that hospitals
and hospital networks currently face to continually improve, upgrade and expand their use of such equipment. While this legislation could adversely affect us, at this time we cannot predict the extent
of any impact on our business or results of operations.
Apart
from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative proposals or reforms to implement
government controls could cause a reduction in sales or in the selling price of our products, which could adversely affect our business.
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Substantial government regulation in the United States and abroad may restrict our ability to sell our patient monitoring, diagnostic cardiology and anesthesia
systems.
The FDA and comparable regulatory authorities in foreign countries extensively and rigorously regulate our patient monitoring,
diagnostic cardiology and anesthesia systems, including related development activities and manufacturing processes. In the United States, the FDA regulates the introduction of medical devices as well
as the manufacturing, labeling and record-keeping procedures for such products. We are required to:
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obtain clearance before we can market and sell medical devices;
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satisfy content requirements applicable to our labeling, sales and promotional materials;
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comply with manufacturing and reporting requirements; and
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undergo rigorous inspections.
Our
future products may not obtain FDA clearance on a timely basis, or at all. Our patient monitoring, diagnostic cardiology and anesthesia systems must also comply with the laws and
regulations of foreign countries in which we develop, manufacture and market such products. In general, the extent and complexity of medical device regulation is increasing worldwide. This trend is
likely to continue and the cost and time required to obtain marketing clearance in any given country may increase as a result. Our products may not obtain any necessary foreign clearances on a timely
basis, or at all.
Once
any of our patient monitoring, diagnostic cardiology and anesthesia systems is cleared for sale, regulatory authorities may still limit the use of such product, prevent its sale or
manufacture or require a recall or withdrawal of such product from the marketplace. Following initial clearance from regulatory authorities, we continue to be subject to extensive regulatory
requirements. Government authorities can withdraw marketing clearance due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems following initial
clearance. Ongoing regulatory requirements are wide-ranging and govern, among other things:
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annual inspections to retain a CE mark for sale of products in the European Union;
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product manufacturing;
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supplier substitution;
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product changes;
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process modifications;
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medical device reporting; and
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product sales and distribution.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.
The healthcare industry has been consolidating and organizations such as group purchasing organizations, independent delivery networks,
and large single accounts such as the United States Veterans Administration, continue to consolidate purchasing decisions for many of our healthcare provider customers. As a result, transactions with
customers are larger, more complex, and tend to involve more long-term contracts. The purchasing power of these larger customers has increased, and may continue to increase, causing
downward pressure on product pricing. If we are not one of the providers selected by one of these organizations, we may be precluded from making sales to its members or participants. Even if we are
one of the selected providers, we may be at a disadvantage relative to other selected providers that are able to offer volume discounts based on purchases of a broader range of products. Further, we
may be required to commit to pricing that has a material adverse effect on our revenues and profit margins, business, financial condition and results of operations. We expect that market
28
Table of Contents
demand,
governmental regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and
alliances, which may exert further downward pressure on the prices of our products and could adversely impact our business, financial condition, and results of operations.
Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and
frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new
standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any products or processes that we develop may become obsolete or uneconomical
before we recover any of the expenses incurred in connection with their development. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that
respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to
develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.
We are subject to various environmental regulations which may impose liability on us whether or not we knew of or caused the release of hazardous substances on
or in our facilities.
We are subject to various foreign and U.S. federal, state and local environmental laws, ordinances and regulations relating to the use,
storage, handling and disposal of certain hazardous substances and wastes used or generated in the manufacturing and assembly of our products. Under such laws, we may become liable for the costs of
removal or remediation of certain hazardous substances or wastes that have been or are being disposed of offsite as wastes or that have been or are being released on or in our facilities. Such laws
may impose liability without regard to whether we knew of or caused the release of such hazardous substances or wastes. For example, we continue to assess the risks related to U.S. federal, state and
local environmental laws related to the soil and groundwater contamination at our Hawthorne, California facility. Any failure by us to comply with present or future regulations could subject us to the
imposition of substantial fines, suspension of production, alteration of manufacturing processes, or cessation of operations, any of which could have a material adverse effect on our business,
financial condition and results of operations.
A failure of a key information technology system, process or site could have a material adverse impact on our ability to conduct business.
We rely extensively on information technology systems to interact with our employees and our customers. These interactions include, but
are not limited to, ordering and managing materials from suppliers, converting materials to finished products, shipping product to customers, processing transactions, summarizing and reporting results
of operations, complying with regulatory, legal and tax requirements, and other processes necessary to manage our business. If our systems are damaged or cease to function properly due to any number
of causes, ranging from the failures of third-party service providers, to
catastrophic events, to power outages, to security breaches, and our business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our ability to manage
operations which may adversely impact our results of operations and/or financial condition.
Our business and financial results could be negatively affected by cyber or other security threats.
Information technology is a critically important part of our business operations. Therefore, we may be exposed to cyber and other
security threats, including computer viruses, attacks by hackers or physical break-ins. Any
29
Table of Contents
electronic
or physical break-in or other security breach or compromise may jeopardize security of information stored or transmitted through our information technology systems and networks.
This could lead to unauthorized release of confidential or otherwise protected information and corruption of data. Although we have implemented policies, procedures and controls to protect against,
detect and mitigate these threats, attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated. Because of the evolving nature of these
security threats, there can be no assurance that our policies, procedures and controls have or will detect or prevent any of these threats and we cannot predict the full impact of any such incident.
Occurrence of any of these security threats could adversely affect our business operations and financial results.
We receive significant amounts of research and development funding for our security and inspection systems from government grants and contracts, but we may not
continue to receive comparable levels of funding in the future.
The U.S. government currently plays an important role in funding the development of certain of our security and inspection systems and
sponsoring their deployment at airports, ports, military installations and border crossings. However, in the future, additional research and development funds from the government may not be available
to us. If the government fails to continue to sponsor our technologies, we may have to expend more resources on product development or cease development of certain technologies, which could adversely
affect our business. In addition, any future grants to our competitors may improve their ability to develop and market competing products and cause our customers to delay purchase decisions, which
could harm our ability to market our products.
Our credit facility contains provisions that could restrict our ability to finance our future operations or engage in other business activities that may be in
our interest.
Our credit facility contains a number of significant covenants that, among other things, limit our ability
to:
-
-
dispose of assets;
-
-
incur certain additional indebtedness;
-
-
repay certain indebtedness;
-
-
create liens on assets;
-
-
pay dividends on our Common Stock;
-
-
make certain investments, loans and advances;
-
-
repurchase or redeem capital stock;
-
-
make certain capital expenditures;
-
-
engage in acquisitions, mergers or consolidations; and
-
-
engage in certain transactions with subsidiaries and affiliates.
These
covenants could limit our ability to plan for or react to market conditions, finance our operations, engage in strategic acquisitions or disposals or meet our capital needs or
could otherwise restrict our activities or business plans. Our ability to comply with these covenants may be affected by events beyond our control. In addition, our credit facility also requires us to
maintain compliance with certain financial ratios. Our inability to comply with the required financial ratios or covenants could result in an event of default under our credit facility. A default, if
not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further extensions of credit under our credit facility. If our
indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms
favorable to us or at all.
30
Table of Contents
Changes in our tax rates could affect our future financial results.
Our future effective tax rates could be favorably or unfavorably affected by changes in the valuation of our deferred tax assets and
liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We
regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from
these examinations will not have an adverse effect on our operating results and financial condition.
In
March 2010, significant reforms to the healthcare system were adopted as law in the United States. The law requires the medical device industry to subsidize healthcare reform in the
form of an excise tax on United States sales of most medical devices beginning in 2013. The excise tax will increase the Company's operating expenses. While the new law could reduce medical procedure
volumes, lower reimbursement for the Company's products, and impact the demand for the Company's products or the prices at which the Company
sells its products, at this time we cannot predict the extent of any impact on our business or results of operations.
Our Certificate of Incorporation and other agreements contain provisions that could discourage a takeover.
Our Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of Preferred Stock in one or more
series, to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of Preferred Stock, to fix the number of shares constituting any such series
and to fix the designation of any such series, without further vote or action by stockholders. The terms of any series of Preferred Stock, which may include economic rights senior to our Common Stock
and special voting rights, could adversely affect the rights of the holders of our Common Stock and thereby reduce the value of our Common Stock. The issuance of Preferred Stock, coupled with the
concentration of ownership in the directors and executive officers, could discourage certain types of transactions involving an actual or potential change in control of our company, including
transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current prices, could otherwise dilute the rights of holders of Common Stock and may
limit the ability of such stockholders to cause or approve transactions which they may deem to be in their best interests, all of which could have a material adverse effect on the market price of our
Common Stock.
Our Certificate of Incorporation limits the liability of our directors, which may limit the remedies we or our stockholders have available.
Our Certificate of Incorporation provides that, pursuant to the Delaware General Corporation Law, the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under Delaware law, as that law exists currently and as it may be amended in the future. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by us, or in our right for breach of a director's duties to us or our stockholders and may limit the remedies available to us
or our stockholders. Under Delaware law, this provision does not apply to eliminate or limit a director's monetary liabilities for: (i) breaches of the director's duty of loyalty to us or our
stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (iii) the unlawful payment of dividends or unlawful stock
repurchases or redemptions under Section 174 of the Delaware General Corporation Law or (iv) transactions in which the director received an improper personal benefit. Additionally, under
Delaware law, this provision does not limit a director's liability for the violation of, or otherwise relieve us or our directors from complying with, federal or state securities laws, nor does it
limit the availability of non-monetary remedies such as injunctive relief or rescission for a violation of federal or state securities laws.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
31
Table of Contents
ITEM 2. PROPERTIES
As of June 30, 2012, we owned four facilities. The following table lists these facilities:
|
|
|
|
|
|
|
Location
|
|
Description of Facility
|
|
Approximate
Square Footage
|
|
Hawthorne, California
|
|
Corporate headquarters and administrative, manufacturing, engineering, sales and marketing and service for our Optoelectronics and Manufacturing division
|
|
|
88,000
|
|
Surrey, England
|
|
Manufacturing, engineering, sales and marketing and service for our Security division
|
|
|
59,000
|
|
Batam, Indonesia (1)
|
|
Manufacturing for our Optoelectronics and Manufacturing division
|
|
|
59,000
|
|
Ocean Springs, Mississippi
|
|
Manufacturing, engineering, sales and marketing and service for our Security and Optoelectronics and Manufacturing
divisions
|
|
|
19,000
|
|
-
(1)
-
In
addition to this facility, our operations include a 21,000 square foot facility in Batam, Indonesia that we lease. This lease expires in 2014.
32
Table of Contents
As
of June 30, 2012, we leased all of our other facilities. The following table lists the principal (
i.e.
, facilities greater than
50,000 square feet) physical properties that we lease:
|
|
|
|
|
|
|
|
|
|
Location
|
|
Description of Facility
|
|
Approximate
Square Footage
|
|
Expiration
|
|
Camarillo, California
|
|
Manufacturing, engineering, sales and marketing and service for our Optoelectronics and Manufacturing division
|
|
|
60,000
|
|
|
2015
|
|
Sunnyvale, California
|
|
Manufacturing, engineering, sales and marketing and service for our Security division
|
|
|
62,500
|
|
|
2017
|
|
Torrance, California
|
|
Manufacturing, engineering, sales and marketing and service for our Security division
|
|
|
91,900
|
|
|
2017
|
|
Garner, North Carolina
|
|
Manufacturing, engineering, sales and marketing and service for our Security division
|
|
|
68,000
|
|
|
2012
|
|
Issaquah, Washington (1)
|
|
Manufacturing, engineering, sales and marketing and service for our Healthcare division
|
|
|
202,600
|
|
|
2014
|
|
Suzhou, China
|
|
Manufacturing, engineering, sales and marketing and service for our Healthcare division
|
|
|
53,000
|
|
|
2017
|
|
Hyderabad, India (2)
|
|
Manufacturing and engineering for our Security, Healthcare and Optoelectronics and Manufacturing divisions
|
|
|
50,400
|
|
|
2016
|
|
Johor Bahru, Malaysia
|
|
Manufacturing, engineering, sales and service for our Security division
|
|
|
89,000
|
|
|
2015
|
|
Johor Bahru, Malaysia
|
|
Manufacturing, engineering, sales and service for our Optoelectronics and Manufacturing division
|
|
|
71,000
|
|
|
2014
|
|
Stoke on Trent, United Kingdom
|
|
Manufacturing, engineering, sales, marketing and service for our Security division
|
|
|
65,000
|
|
|
2020
|
|
-
(1)
-
This
is comprised of two leases at the same facility. One lease covers a 107,000 square foot building and the other covers a 95,600 square foot building.
Both leases expire in 2014.
-
(2)
-
This
is comprised of three leases, ranging in size between 5,000 square feet and 33,600 square feet, at the same or nearby facilities.
In
May 2012, we entered into a purchase and sale agreement for a new headquarters facility for our Spacelabs division in the Greater Seattle area of Washington. This facility is expected
to replace our Issaquah, Washington facility whose lease expires in 2014. We expect to complete the move to the new Spacelabs headquarters facility in fiscal 2013. Pursuant to the purchase and sale
agreement, we made a $3.5 million non-refundable deposit and expect to incur a one-time charge in fiscal 2013 for expenses in conjunction with the move, including lease
expenses for the Issaquah, Washington facility through lease expiration to the extent we are unable to sublease the facility.
33
Table of Contents
We
believe that our facilities are in good condition and are adequate to support our operations for the foreseeable future. We currently anticipate that we will be able to renew the
leases that are scheduled to expire in the next few years on terms that are substantially the same as or better than those currently in effect. However, even if we were not able to renew one or more
of the leases, we believe that suitable substitute space is available to relocate any of the facilities. Accordingly, we do not believe that our failure to renew any of the leases that are scheduled
to expire in the next few years will have a material adverse effect on our operations.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal proceedings arising in the ordinary course of business. In our opinion after consultation
with legal counsel, the ultimate disposition of such proceedings will not likely have a material adverse effect on our business, financial condition and results of operations. In accordance with
accounting standards related to contingencies, we have not accrued for loss contingencies relating to such matters because we believe 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 us, the impact on our business, results of
operations, financial condition and/or liquidity could be material.
ITEM 4. MINE SAFETY DISCLOSURES
None.
34
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Other Information
Our Common Stock is traded on The NASDAQ Global Market under the symbol "OSIS."
The
following table sets forth the high and low sale prices of a share of our Common Stock as reported by The NASDAQ Global Market on a quarterly basis for fiscal 2011 and 2012. The
prices shown reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
2011:
|
|
High
|
|
Low
|
|
Quarter ended September 30, 2010
|
|
$
|
36.70
|
|
$
|
25.26
|
|
Quarter ended December 31, 2010
|
|
$
|
38.98
|
|
$
|
32.65
|
|
Quarter ended March 31, 2011
|
|
$
|
39.99
|
|
$
|
33.33
|
|
Quarter ended June 30, 2011
|
|
$
|
43.18
|
|
$
|
34.08
|
|
|
|
|
|
|
|
|
|
2012:
|
|
High
|
|
Low
|
|
Quarter ended September 30, 2011
|
|
$
|
45.28
|
|
$
|
31.92
|
|
Quarter ended December 31, 2011
|
|
$
|
49.89
|
|
$
|
31.00
|
|
Quarter ended March 31, 2012
|
|
$
|
64.08
|
|
$
|
48.27
|
|
Quarter ended June 30, 2012
|
|
$
|
68.00
|
|
$
|
57.00
|
|
As
of August 7, 2012, there were approximately 180 holders of record of our Common Stock. This number does not include beneficial owners holding shares through nominees or in
"street" name.
Dividend Policy
We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay
any cash dividends in the foreseeable future. Our Board of Directors will determine the payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of
cash dividends and future borrowings may contain similar restrictions.
Issuer Purchases of Equity Securities
Our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to 3,000,000 shares of our Common
Stock. This program does not have an expiration date. Upon repurchase, the shares are restored to the status of authorized but unissued and we record them as a reduction in the number of shares of
Common Stock issued and outstanding in our Consolidated Financial Statements.
35
Table of Contents
The
following table presents the shares acquired during the quarter ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total number of
shares (or units)
purchased
|
|
Average price
paid per share (or
unit)
|
|
Total number of
shares (or units)
purchased as
part of publicly
announced plans or
programs (2)
|
|
Maximum number
(or approximate
dollar value)
of shares (or units)
that may
yet be purchased
under the plans or
programs
|
|
April 1, 2012 to April 30, 2012
|
|
|
|
|
$
|
|
|
|
|
|
|
627,409
|
|
May 1, 2012 to May 31, 2012
|
|
|
2,615
|
(1)
|
$
|
66.31
|
|
|
400
|
|
|
627,009
|
|
June 1, 2012 to June 30, 2012
|
|
|
41,237
|
|
$
|
62.03
|
|
|
41,237
|
|
|
585,772
|
|
-
(1)
-
In
May 2012, a total of 2,215 shares were tendered to satisfy minimum statutory tax withholding obligations related to the vesting of restricted shares.
-
(2)
-
In
March 1999, our Board of Directors authorized a stock repurchase program of up to 2,000,000 shares. In September 2004, our Board of Directors authorized
an additional 1,000,000 shares for repurchase pursuant to this program.
Equity Compensation Plans
The following table provides information concerning our equity compensation plans as of June 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
Plan category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders (1)(2)
|
|
|
1,059,397
|
|
$
|
23.01
|
|
|
1,090,876
|
|
Equity participation plans not approved by security holders
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,059,397
|
|
$
|
23.01
|
|
|
1,090,876
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
shares of our Common Stock issuable upon exercise of options under our 2006 Equity Participation Plan.
-
(2)
-
Of
the 1,090,876 securities remaining available for future issuance under our 2006 Equity Participation Plan, 604,167 shares are available to be issued as
restricted stock.
36
Table of Contents
Performance Graph
The graph below compares the cumulative total stockholder return for the period beginning on the market close on the last trading day
before the beginning our fifth preceding fiscal year through and including the end of our last completed fiscal year with (a) The NASDAQ Composite Index and (b) a peer group of
publicly-traded issuers with which we have generally competed.
The
peer group includes the following companies: American Science & Engineering (AMEX Symbol: ASE) and Analogic Corporation (NASDAQ Symbol: ALOG).
The
graph assumes that $100.00 was invested on June 30, 2007 in (a) our Common Stock, (b) The NASDAQ Composite Index and (c) the companies comprising the peer
group described above (weighted according to each respective issuer's stock market capitalization at the beginning of each period for which a return is indicated). The graph assumes that all dividends
were reinvested. Historical stock price performance is not necessarily indicative of future stock price performance.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2007 through June 2012
Among OSI Systems, Inc.
The NASDAQ Composite Index and a Peer Group
The
following table provides the same information in tabular form as of June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
OSI Systems, Inc.
|
|
$
|
100.00
|
|
$
|
78.32
|
|
$
|
76.23
|
|
$
|
101.54
|
|
$
|
157.22
|
|
$
|
231.59
|
|
The NASDAQ Composite Index
|
|
|
100.00
|
|
|
84.54
|
|
|
73.03
|
|
|
82.88
|
|
|
110.33
|
|
|
115.30
|
|
Peer Group
|
|
|
100.00
|
|
|
88.23
|
|
|
75.80
|
|
|
88.91
|
|
|
98.78
|
|
|
93.27
|
|
37
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of and for each of the five fiscal years ended
June 30, 2012, and is derived from our Consolidated Financial Statements. The Consolidated Financial Statements as of June 30, 2011 and 2012, and for each of the years in the
three-year period ended June 30, 2012, are included elsewhere in this report. The following data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
|
(in thousands, except earnings per share data)
|
|
Consolidated Statements of Operations Data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
623,088
|
|
$
|
590,361
|
|
$
|
595,111
|
|
$
|
656,100
|
|
$
|
792,990
|
|
Cost of goods sold
|
|
|
404,049
|
|
|
388,910
|
|
|
377,077
|
|
|
416,834
|
|
|
524,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
219,039
|
|
|
201,451
|
|
|
218,034
|
|
|
239,266
|
|
|
268,642
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
150,082
|
|
|
137,985
|
|
|
139,830
|
|
|
142,633
|
|
|
151,746
|
|
Research and development
|
|
|
45,361
|
|
|
36,862
|
|
|
38,577
|
|
|
45,448
|
|
|
49,565
|
|
Restructuring and other charges
|
|
|
4,688
|
|
|
7,123
|
|
|
2,859
|
|
|
3,424
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
200,131
|
|
|
181,970
|
|
|
181,266
|
|
|
191,505
|
|
|
202,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,908
|
|
|
19,481
|
|
|
36,768
|
|
|
47,761
|
|
|
65,940
|
|
Interest expense and other income, net
|
|
|
4,469
|
|
|
2,936
|
|
|
1,772
|
|
|
1,026
|
|
|
3,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14,439
|
|
|
16,545
|
|
|
34,996
|
|
|
46,735
|
|
|
61,983
|
|
Provision for income taxes
|
|
|
579
|
|
|
5,393
|
|
|
11,439
|
|
|
13,313
|
|
|
16,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,860
|
|
$
|
11,152
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholdersdiluted
|
|
$
|
13,860
|
|
$
|
11,152
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.80
|
|
$
|
0.64
|
|
$
|
1.32
|
|
$
|
1.77
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.78
|
|
$
|
0.63
|
|
$
|
1.28
|
|
$
|
1.71
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted
|
|
|
17,735
|
|
|
17,596
|
|
|
18,389
|
|
|
19,548
|
|
|
20,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,232
|
|
$
|
25,172
|
|
$
|
51,989
|
|
$
|
55,619
|
|
$
|
91,452
|
|
Working capital
|
|
|
194,958
|
|
|
187,608
|
|
|
204,607
|
|
|
244,305
|
|
|
322,464
|
|
Total assets
|
|
|
507,641
|
|
|
474,828
|
|
|
513,114
|
|
|
584,916
|
|
|
749,896
|
|
Long-term debt
|
|
|
49,091
|
|
|
39,803
|
|
|
23,366
|
|
|
2,756
|
|
|
2,467
|
|
Total debt
|
|
|
74,341
|
|
|
52,360
|
|
|
36,109
|
|
|
2,977
|
|
|
2,682
|
|
Total stockholders' equity
|
|
|
278,021
|
|
|
276,000
|
|
|
313,710
|
|
|
384,800
|
|
|
434,119
|
|
-
(1)
-
Results
of operations for fiscal years 2008 through 2012, and our financial position as of June 30, 2008, 2009, 2010, 2011 and 2012 incorporate the
effect of several acquisitions.
38
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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: (a) Security, providing
security and inspection systems and turnkey security screening solutions; (b) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems; and
(c) Optoelectronics and Manufacturing, providing specialized electronic components for our Security and Healthcare divisions, as well as to third parties for applications in the defense and
aerospace markets, among others.
Security Division.
Through our Security division, we design, manufacture and market security and inspection systems worldwide for
sale primarily to
U.S. and foreign government agencies, and provide turnkey security screening solutions. These products and services are used to inspect baggage, cargo, vehicles and other objects for weapons,
explosives, drugs and other contraband as well as to screen people. Revenues from our Security division accounted for 49% of our total consolidated revenues for fiscal 2012.
Healthcare Division.
Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic
cardiology and
anesthesia delivery and ventilation systems worldwide for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the
hospital and provide such information, through wired and wireless networks, to physicians and nurses who may be at the patient's bedside, in another area of the hospital or even outside the hospital.
Revenues from our Healthcare division accounted for 30% of our total consolidated revenues for fiscal 2012.
Optoelectronics and Manufacturing Division.
Through our Optoelectronics and Manufacturing division, we design, manufacture and
market optoelectronic
devices and provide electronics manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging
and diagnostics, telecommunications, office automation, computer peripherals, industrial automation, automotive diagnostic systems and renewable energy. We also provide our optoelectronic devices and
value-added manufacturing services to our own Security and Healthcare divisions. Revenues from our Optoelectronics and Manufacturing division accounted for approximately 21% of our total consolidated
revenues for fiscal 2012.
Fiscal 2012 Compared with Fiscal 2011.
We reported consolidated operating profit of $65.9 million for fiscal 2012, an
$18.1 million or
38% improvement over the $47.8 million operating profit reported for fiscal 2011. This improved profitability was driven primarily by a 21% increase in sales, which resulted in a
$29.3 million increase in gross profit and a $2.0 million reduction in restructuring and other charges. These increases were partially offset by a $9.1 million, or 6%, increase in
selling, general and administrative (SG&A) expenses to support the sales growth and by a $4.1 million, or 9%, increase in research and development (R&D) expenses in support of new product
development. Included in the incremental SG&A are $4.3 million of start-up costs related to a large turnkey screening solution agreement expected to commence operations in fiscal
2013.
Fiscal 2011 Compared with Fiscal 2010.
We reported consolidated operating profit of $47.8 million for fiscal 2011, a 30%
improvement over the
$36.8 million operating profit reported for fiscal 2010. This improved profitability was driven primarily by a $21.3 million improvement in gross profit as a result of a 10% increase in
sales. This increase in gross profit was partially offset by a $2.8 million, or 2%, increase in SG&A to support sales growth and by a $6.9 million, or 18%, increase in R&D expenses in
support of new product development.
39
Table of Contents
Acquisitions.
Historically, an active acquisition program has been an important element of our corporate strategy. Over the past
three years, each of
our acquisitions has not been considered materially significant, either individually or in the aggregate. We continue to believe that an active acquisition program supports our long-term
strategic goals and we intend to look to acquisitions to strengthen our competitive position, expand our customer base and augment our considerable research and development programs. Through such
efforts we aim to accelerate innovation, improve earnings and increase overall stockholder value.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based on our Consolidated Financial
Statements, which have been prepared in conformity with accounting principles generally accepted in the United States. Our preparation of these Consolidated Financial Statements requires us to make
judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. As a
result, actual results may differ from such estimates. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
The following summarizes our critical accounting policies and significant estimates used in preparing our Consolidated Financial Statements:
Revenue Recognition.
We recognize revenue upon shipment of products when title and risk of loss passes, and when terms are fixed
and collection is
probable. In cases where product installation services are essential to the functionality of the equipment, we defer the portion of revenue for the sale attributable to installation until we have
completed the installation. When terms of sale include subjective customer acceptance criteria, we defer revenue until we have achieved the acceptance criteria. Concurrent with the shipment of a
product, we accrue estimated product return reserves and warranty expenses. Critical judgments made by management related to revenue recognition include the determination of whether or not customer
acceptance criteria are perfunctory or inconsequential. The determination of whether or not the customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of the
revenue that we recognize. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product.
We
recognize revenues from separate service maintenance contracts ratably over the term of the contracts. For services that are not derived from specific maintenance contracts, we
recognize service revenues as we perform the services. Deferred revenue for such services arises from payments received from customers for services not yet performed. We record billed shipping and
handling fees as revenue and the associated costs as cost of goods sold.
On
occasion, we receive advances from customers that are amortized against future customer payments pursuant to the underlying agreements. Such advances are classified in the
Consolidated Balance Sheets as either a current or long-term liability dependent upon when we estimate the corresponding amortization to occur.
Allowance for Doubtful Accounts.
The allowance for doubtful accounts involves estimates based on
management's judgment, review of individual receivables and analysis of historical bad debts. We monitor collections and payments from our customers and we maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make required payments. We also assess current economic trends that might impact the level of credit losses in the future. If the
financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Inventory.
Inventory is stated at the lower of cost or market. Cost is determined on the first-in, first-out method. We write
down inventory for slow-moving and obsolete inventory based on assessments of future demands, market conditions and customers who may be experiencing financial difficulties. If these
factors were to become less favorable than those projected, additional inventory write-downs could be required.
40
Table of Contents
Property and Equipment.
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are
computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated on the straight-line basis over the
shorter of the useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization of property and equipment under capital leases is included with
depreciation expense.
Income Taxes.
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in
the various
jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in
determining our tax expense and in evaluating our tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available.
Deferred
income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the
financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions by assessing
the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources
of income inherently rely on estimates. To provide insight, we use our historical experience and our short and long-range business forecasts. We believe it is
more likely than not that a portion of the deferred income tax assets may expire unused and therefore have established a valuation allowance against them. Although realization is not assured for the
remaining deferred income tax assets, we believe it is more likely than not that the deferred tax assets will be fully recoverable within the applicable statutory expiration periods. However, deferred
tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced or available tax planning strategies are no longer viable.
Business Combinations.
Under the acquisition method of accounting, we allocate the fair value of the consideration paid for the
businesses to the
tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of purchase price over the aggregate fair values as goodwill. We
engage third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make significant estimates and assumptions,
especially with respect to intangible assets and the fair value of contingent payment obligations. Critical estimates in valuing purchased technology, customer lists and other identifiable intangible
assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with
the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are
used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Impairment of Long-Lived Assets.
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in
business
combinations over their estimated fair value. Goodwill is allocated to our segments based on the nature of the product line of the acquired business. The carrying value of goodwill is not amortized,
but is annually tested for impairment during our second quarter and more often if there is an indicator of impairment. Intangible assets other than goodwill are amortized over their useful lives
unless these lives are determined to be indefinite.
We
assess qualitative factors of each of our reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
including goodwill. Such assessments indicated that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount, including goodwill. Thus, we have
determined that it is not necessary to proceed with the two-step goodwill impairment test. There was no goodwill impairment for each of three fiscal years ended June 30, 2012.We
evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of
41
Table of Contents
the
asset may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment
does exist, we measure the impairment loss and record it based on the discounted estimate of future cash flows. In estimating future cash flows, we group assets at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from other asset groups. Our estimate of future cash flows is based upon, among other things, certain assumptions about expected
future operating performance, growth rates and other factors.
Although
we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported
financial results. More conservative estimates of the anticipated future benefits from these businesses could result in impairment charges, which would decrease net income and result in lower asset
values on our balance sheet.
Stock-Based Compensation Expense.
We account for stock-based compensation using fair value recognition provisions. Thus, we
record stock-based
compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, we recognize stock-based compensation cost only for those stock-based awards that are estimated to
ultimately vest over their requisite vesting period, based on the vesting provisions of the individual grants.
The
process of estimating the fair value of stock-based compensation awards and recognizing stock-based compensation cost over their requisite vesting period involves significant
assumptions and judgments. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option-valuation model which requires that we make certain assumptions
regarding: (i) the expected volatility in the market price of our Common Stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time
employees are expected to hold the award prior to exercise. We estimate the fair value of restricted stock awards on the date of the grant using the market price of our Common Stock on that date. In
addition, we are required to estimate the expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to vest. If actual forfeiture rates differ
materially from our estimates, stock-based compensation expense could differ significantly from the amounts we have recorded in the current period. We periodically review actual forfeiture experience
and revise our estimates, as necessary. We recognize the cumulative effect on current and prior periods change in the estimated forfeiture rate as compensation cost in earnings in the period of the
revision. As a result, if we revise our assumptions and estimates, our stock-based compensation expense could change materially in the future. Certain shares of restricted stock granted to senior
management vest based upon the achievement of pre-established performance goals. See Note 7 to the Consolidated Financial Statements for a further discussion of stock-based
compensation.
Legal and Other Contingencies.
We are subject to various claims and legal proceedings. Each fiscal quarter, we review the status
of each significant
legal dispute to which we are a party and assess our potential financial exposure, if any. If the potential financial exposure from any claim or legal proceeding is considered probable and the amount
can be reasonably estimated, we record a liability and an expense for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether
an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes
available, we reassess the potential liability related to our pending claims and litigation and revise our estimates accordingly. Such revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and financial position.
42
Table of Contents
Net Revenues
The table below and the discussion that follows are based upon the way we analyze our business. See Note 13 to the Consolidated
Financial Statements for additional information about business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% of
Net Sales
|
|
2011
|
|
% of
Net Sales
|
|
2012
|
|
% of
Net Sales
|
|
2010-2011
% Change
|
|
2011-2012
% Change
|
|
|
|
(Dollars in millions)
|
|
Security
|
|
$
|
251.5
|
|
|
42
|
%
|
$
|
294.7
|
|
|
45
|
%
|
$
|
391.8
|
|
|
49
|
%
|
|
17
|
%
|
|
33
|
%
|
Healthcare
|
|
|
206.6
|
|
|
35
|
%
|
|
215.0
|
|
|
33
|
%
|
|
235.6
|
|
|
30
|
%
|
|
4
|
%
|
|
10
|
%
|
Optoelectronics / Manufacturing
|
|
|
171.2
|
|
|
29
|
%
|
|
192.9
|
|
|
29
|
%
|
|
210.8
|
|
|
27
|
%
|
|
13
|
%
|
|
9
|
%
|
Elimination of Intersegment Revenue
|
|
|
(34.2
|
)
|
|
(6
|
)%
|
|
(46.5
|
)
|
|
(7
|
)%
|
|
(45.2
|
)
|
|
(6
|
)%
|
|
36
|
%
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
595.1
|
|
|
|
|
$
|
656.1
|
|
|
|
|
$
|
793.0
|
|
|
|
|
|
10
|
%
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012 Compared with Fiscal 2011.
Net revenues for fiscal 2012 increased $136.9 million, or 21%, to
$793.0 million from
$656.1 million for fiscal 2011.
Revenues
for the Security division for fiscal 2012 increased $97.1 million, or 33%, to $391.8 million, from $294.7 million for fiscal 2011. The increase was
primarily attributable to: (i) an $80.6 million, or 35%, increase in equipment sales, primarily attributable to our performance as a prime contractor and hardware systems integrator on a
large contract which will not result in significant revenues in fiscal 2013; and (ii) an $11.8 million, or 19%, increase in service revenue due to the growing installed base of products
from which we derive service revenue as warranty periods expire.
Revenues
for the Healthcare division for fiscal 2012 increased $20.6 million, or 10%, to $235.6 million, from $215.0 million for fiscal 2011. The increase was
primarily attributable to a $20.2 million, or 13%, increase in our patient monitoring product line sales with increases primarily in North America.
Revenues
for the Optoelectronics and Manufacturing division for fiscal 2012 increased $17.9 million, or 9%, to $210.8 million from $192.9 million for fiscal 2011.
This increase was driven both by an increase in commercial optoelectronics sales, which increased by $9.8 million, or 11%, both to external customers and through intersegment sales, primarily
to our Security division and due to an increase in contract manufacturing sales of $7.7 million, or 8%. The Optoelectronics and Manufacturing division recorded intersegment sales of
$45.2 million, compared to $46.5 million in the comparable prior-year period. Such intersegment sales are eliminated in consolidation.
Fiscal 2011 Compared with Fiscal 2010.
Net revenues for fiscal 2011 increased $61.0 million, or 10%, to $656.1 million
from
$595.1 million for fiscal 2010.
Revenues
for the Security division for fiscal 2011 increased $43.2 million, or 17%, to $294.7 million, from $251.5 million for fiscal 2010. The increase was
attributable to a $30.5 million, or 15%, increase in equipment sales, primarily driven by a $23.4 million increase in baggage and parcel inspection, people screening and hold (checked)
baggage screening products and a $3.1 million increase in revenues from our cargo inspection products. In addition, service revenues increased by $12.0 million, or 24%, due to the
growing installed base of products from which we derive service revenue as warranty periods expire.
Revenues
for the Healthcare division for fiscal 2011 increased $8.4 million, or 4%, to $215.0 million, from $206.6 million for fiscal 2010. The increase was
primarily attributable to a $7.8 million, or 5%, increase in our patient monitoring product line sales with increases in all regions.
Revenues
for the Optoelectronics and Manufacturing division for fiscal 2011 increased $21.7 million, or 13%, to $192.9 million from $171.2 million for fiscal 2010.
This increase was primarily driven by an increase in
43
Table of Contents
commercial
optoelectronics sales, which increased by $27.4 million, or 41%, both to external customers and through intersegment sales, primarily to our Security division. These increases were
partially offset by a reduction of $4.7 million in contract manufacturing sales, mainly driven by the winding down of a large defense-industry related contract, which we anticipated. The
Optoelectronics and Manufacturing division recorded intersegment sales of $46.5 million, compared to $34.2 million in the comparable prior-year period. This increase in
intersegment sales is consistent with the growth of our Security and Healthcare divisions during the period. Such intersegment sales are eliminated in consolidation.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% of
Net Sales
|
|
2011
|
|
% of
Net Sales
|
|
2012
|
|
% of
Net Sales
|
|
|
|
(Dollars in millions)
|
|
Gross profit
|
|
$
|
218.0
|
|
|
36.6
|
%
|
$
|
239.3
|
|
|
36.5
|
%
|
$
|
268.6
|
|
|
33.9
|
%
|
Fiscal 2012 Compared with Fiscal 2011.
Gross profit increased $29.3 million, or 12%, to $268.6 million for fiscal 2012,
from
$239.3 million for fiscal 2011, primarily as a result of a 21% increase in sales. Our gross margin during the period declined to 33.9% from 36.5% for the prior-year period. The
decrease was mainly due to a less favorable mix of the products we sold, as sales by our Healthcare division, which generates the highest gross margin of our three divisions, increased at a lesser
rather than that of our Security division. In addition, product mix within our Security division negatively impacted gross margin as a significant portion of growth in our Security division was
attributable to large hardware systems integration contract.
Fiscal 2011 Compared with Fiscal 2010.
Gross profit increased $21.3 million, or 10%, to $239.3 million for fiscal 2011,
from
$218.0 million for fiscal 2010, primarily due to a 10% increase in sales. Our gross margin percentage was flat in fiscal 2011 as compared to fiscal 2010, as improvements in gross margin
stemming from further leveraging of our manufacturing and distribution infrastructure associated with increased sales, were offset by a less favorable mix of the products we sold, as sales by our
Healthcare division, which generates the highest gross margin when compared to our other two divisions, did not increase as quickly as sales by our other two divisions.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% of
Net Sales
|
|
2011
|
|
% of
Net Sales
|
|
2012
|
|
% of
Net Sales
|
|
2010-2011
% Change
|
|
2011-2012
% Change
|
|
|
|
(Dollars in millions)
|
|
Selling, general and administrative
|
|
$
|
139.8
|
|
|
23.5
|
%
|
$
|
142.6
|
|
|
21.7
|
%
|
$
|
151.7
|
|
|
19.1
|
%
|
|
2
|
%
|
|
6
|
%
|
Research and development
|
|
|
38.6
|
|
|
6.5
|
%
|
|
45.5
|
|
|
7.0
|
%
|
|
49.6
|
|
|
6.3
|
%
|
|
18
|
%
|
|
9
|
%
|
Restructuring and other charges
|
|
|
2.9
|
|
|
0.5
|
%
|
|
3.4
|
|
|
0.5
|
%
|
|
1.4
|
|
|
0.2
|
%
|
|
17
|
%
|
|
(59
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
181.3
|
|
|
30.5
|
%
|
$
|
191.5
|
|
|
29.2
|
%
|
$
|
202.7
|
|
|
25.6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses consisted primarily of compensation paid to sales, marketing and administrative
personnel, professional service fees and marketing expenses.
Fiscal 2012 Compared with Fiscal 2011.
For fiscal 2012, SG&A expenses increased by $9.1 million, or 6%, to
$151.7 million, from
$142.6 million for fiscal 2011. This $9.1 million increase was primarily attributable to $4.3 million of start-up costs related to a large turnkey screening solutions
agreement, which is expected to generate revenues in fiscal 2013 and an increase in SG&A costs to support our 21% revenue growth. As a percentage of revenue, SG&A expenses were 19.1% for fiscal 2012,
compared to 21.7% for the comparable prior year period as we further leveraged our infrastructure.
44
Table of Contents
Fiscal 2011 Compared with Fiscal 2010.
For fiscal 2011, SG&A expenses increased by $2.8 million, or 2%, to
$142.6 million, from
$139.8 million for fiscal 2010. This increase was primarily to support revenue growth in the Security and Optoelectronics and Manufacturing divisions, partially offset by lower spending in the
Healthcare division resulting from cost containment initiatives that were a part of our continuous effort to leverage our cost structure.
Research and Development
Our Security and Healthcare divisions have historically invested substantial amounts in research and development (R&D). We intend to
continue this trend in future years, although
specific programs may or may not continue to be funded and funding levels may fluctuate. R&D expenses included research related to new product development and product enhancement expenditures.
Fiscal 2012 Compared with Fiscal 2011.
For fiscal 2012, such expenses increased by $4.1 million, or 9%, to
$49.6 million, from
$45.5 million for fiscal 2011. As a percentage of revenues, R&D expenses were 6.3% in fiscal 2012, compared to 7.0% in fiscal 2011. The increase in R&D spending in fiscal 2012 resulted
primarily from an increase in both our Security and Healthcare divisions in support of new product introductions.
Fiscal 2011 Compared with Fiscal 2010.
For fiscal 2011, such expenses increased by $6.9 million, or 18%, to
$45.5 million, from
$38.6 million for fiscal 2010. As a percentage of revenues, R&D expenses were 7.0% in fiscal 2011, compared to 6.5% in fiscal 2010. The increase in R&D spending in fiscal 2011 occurred in both
our Security and Healthcare divisions in support of new product introductions.
Restructuring and Other Charges
Beginning in fiscal 2007, we initiated a series of restructuring activities that were intended to realign our global capacity and
infrastructure with demand by our customers and fully integrate acquisitions made in prior years, thereby improving our operational efficiency. These activities included reducing excess workforce and
capacity, consolidating and relocating certain manufacturing facilities and reviewing the value of certain technologies and product lines. The overall objectives of the restructuring activities were
to lower costs and better utilize our existing manufacturing capacity. Then in fiscal 2009, as a result of the worldwide economic downturn, we continued our ongoing focus to aggressively seek
operating efficiencies and fixed cost structure reduction. During fiscal 2010 through 2012, we continued these efforts to further increase operating efficiencies, although we implemented fewer changes
than those made in prior fiscal years. Our efforts have helped enhance our ability to improve operating margins, retain and expand existing relationships with customers and attract new business. We
may utilize similar measures in the future to realign our operations to further increase our operating efficiencies. The effect of these efforts may materially affect our future operating results.
Fiscal 2012 Compared with Fiscal 2011.
During fiscal 2012, we incurred $1.4 million of restructuring and other charges
primarily related to
headcount reductions and facility consolidation. Of this amount, $0.2 million was recorded within our Healthcare division, $0.3 million was recorded within our Security division, and
$0.9 million was recorded within our Corporate holding company segment. During fiscal 2011, we incurred total restructuring and other charges of $3.4 million with $2.2 million
related to headcount reductions and
$1.2 million related to a debt restructuring charge from the early termination of a credit facility which was replaced with a new credit facility.
Fiscal 2011 Compared with Fiscal 2010.
During fiscal 2011, we incurred $3.4 million of restructuring and other charges, of
which
$2.2 million related to headcount reductions and $1.2 million related to a debt restructuring charge from the early termination of a credit facility, which we replaced with a new credit
facility. See Note 6 to the Consolidated Financial Statements for further discussion. Of this $3.4 million of restructuring costs, $1.5 million was recorded within our Healthcare
division, $0.6 million was recorded within our Security division, and
45
Table of Contents
$1.3 million
was recorded within our Corporate holding company segment. During fiscal 2010, we incurred total restructuring and other charges of $2.9 million related to headcount
reductions, costs associated with the closure of certain facilities and a non-recurring litigation charge.
Interest Expense and Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% of
Net Sales
|
|
2011
|
|
% of
Net Sales
|
|
2012
|
|
% of
Net Sales
|
|
|
|
(Dollars in millions)
|
|
Interest expense and other income, net
|
|
$
|
1.8
|
|
|
(0.3
|
)%
|
$
|
1.1
|
|
|
(0.2
|
)%
|
$
|
4.0
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012 Compared with Fiscal 2011.
In fiscal 2012, the $2.9 million increase in interest expense and other income, net
was primarily due
to higher utilization of the letters-of-credit facility and a loss related to the performance of a foreign currency forward contract, which was not treated as a cash flow
hedge, partially offset by lower levels of outstanding debt during fiscal 2012.
Fiscal 2011 Compared with Fiscal 2010.
In fiscal 2011, a $0.7 million reduction in interest expense and other income, net,
resulted from
reduced average debt levels outstanding and a reduction in the liability for contingent acquisition consideration that was recorded as other income during the year.
Provision for Income Taxes
The effective tax rate for a particular period varies depending on a number of factors including (i) the mix of income earned in
various tax jurisdictions, each of which applies a unique range of income tax rates and income tax credits, (ii) changes in previously established valuation allowances for deferred tax assets
(changes are based upon our current analysis of the likelihood that these deferred tax assets will be realized), (iii) the level of non-deductible expenses and (iv) tax
holidays granted to certain of our international subsidiaries.
Fiscal 2012 Compared with Fiscal 2011.
In fiscal 2012, our income tax expense was $16.4 million, compared to an income tax
expense of
$13.3 million for fiscal 2011. The effective income tax rate for fiscal 2012 decreased to 26.5%, from 28.5% for fiscal 2011. In fiscal 2012, the effective tax rate was reduced by 2.3% from the
one-time utilization of a tax loss carry-forward that had previously been offset by a valuation allowance.
Fiscal 2011 Compared with Fiscal 2010.
In fiscal 2011, our income tax expense was $13.3 million, compared to an income tax
expense of
$11.4 million for fiscal 2010. The effective income tax rate for fiscal 2011 decreased to 28.5%, from 32.7% for fiscal 2010. The largest driver of this 4.2% decrease in our income tax rate is
the jurisdictions where taxable income was recognized. In fiscal 2011, a higher percentage of income was recognized in foreign jurisdictions with low tax rates and where we benefit from special tax
exemptions.
Liquidity and Capital Resources
Over the past several years we have financed our business primarily through cash flow from operations and by utilizing our credit
facilities. Cash and cash equivalents totaled $91.5 million at June 30, 2012, an increase of $35.9 million, or 65%, from $55.6 million at June 30, 2011. In fiscal
2013 significant capital spending is expected to be incurred in preparation for a large turnkey security screening solution agreement. Such spending is expected
46
Table of Contents
to
be funded by existing cash balances, cash flow from operations or our existing credit facility. The changes in our working capital and cash and cash equivalent balances are described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2010-2011
% Change
|
|
2011-2012
% Change
|
|
|
|
(Dollars in millions)
|
|
Working capital
|
|
$
|
204.6
|
|
$
|
244.3
|
|
$
|
322.5
|
|
|
19
|
%
|
|
32
|
%
|
Cash and cash equivalents
|
|
|
52.0
|
|
|
55.6
|
|
|
91.5
|
|
|
7
|
%
|
|
65
|
%
|
Working Capital
Fiscal 2012 Compared with Fiscal 2011.
Working capital increased by $78.2 million, or 32%, during fiscal 2012 primarily due
to: (i) a
$100.0 million customer advance, partially offset by a $50.9 million use of cash for capital expenditures, both related to a large turnkey screening solutions customer; (ii) a
$25.5 million increase in inventory, mainly in our Security division, to support future order fulfillment; (iii) a $20.2 million increase in accounts receivable driven in part by
our 21% revenue growth, and (iv) a $10.0 million decrease in accounts payable due to timing of payments. These increases to working capital were partially offset by: (i) a
$5.8 million decrease in prepaid expenses and other current assets; (ii) a $4.6 million increase in other accrued expenses and other current liabilities; (iii) a
$4.2 million increase in deferred revenue, and (iv) a $3.0 million increase in accrued warranties.
Fiscal 2011 Compared with Fiscal 2010.
Working capital increased by $39.7 million, or 19%, during fiscal 2011 primarily due
to: (i) a
$43.7 million increase in inventory, mainly in our Security and Optoelectronic and Manufacturing divisions, to support anticipated growth in shipments, (ii) a $12.5 million
decrease in the current portion of long term debt due to the repayment and termination of our former credit facility, which occurred when we entered into a new $250 million credit facility in
October 2010, (iii) a $4.0 million increase in accounts receivable and (iv) a $3.6 million increase in cash and cash equivalents. These increases to working capital were
partially offset by a $16.8 million increase in accounts payable, driven by the increase in inventory previously noted and an $8.3 million increase in deferred revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2010-2011
% Change
|
|
2011-2012
% Change
|
|
|
|
(Dollars in millions)
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
52.1
|
|
$
|
40.1
|
|
$
|
120.6
|
|
|
(23
|
)%
|
|
201
|
%
|
Investing activities
|
|
|
(24.4
|
)
|
|
(24.0
|
)
|
|
(81.2
|
)
|
|
(2
|
)%
|
|
238
|
%
|
Financing activities
|
|
|
(3.0
|
)
|
|
(15.9
|
)
|
|
(1.7
|
)
|
|
430
|
%
|
|
(89
|
)%
|
Cash Provided by (Used in) Operating Activities
Cash flows from operating activities can fluctuate significantly from period to period as profitability, tax timing differences and
other items can significantly impact cash flows. Our largest source of operating cash flows is cash collections from our customers following the sale of our products and services. Our primary uses of
cash for operating activities are for purchasing inventory in support of the products that we sell, personnel related expenditures, facilities costs and payments for general operating matters.
Fiscal 2012 Compared with Fiscal 2011.
Cash generated by operating activities in fiscal 2012 was $120.6 million, an
increase of
$80.5 million, or 201%, from fiscal 2011. This increase was primarily due to changes in working capital in the current-year period when compared to the prior-year
period, including: (i) a $100.5 million increase in advances received from customers; (ii) $15.2 million improvement in the change in cash flow from inventory;
(iii) a $7.8 million increase in net income for fiscal 2012, after giving consideration to non-cash operating items including depreciation and amortization, stock-based
compensation, deferred taxes, provision for losses on accounts receivable and tax effect on the exercise of stock options among others for both periods, and
47
Table of Contents
(iv) a
$2.3 million increase in cash from accrued payroll and related expenses. These favorable changes in cash flow were partially offset by the following unfavorable changes in working
capital: (i) a $27.3 million decrease in cash from accounts payable; (ii) a $14.4 million decrease in the change in cash flow from accounts receivables primarily in our
Security division partially as a result of the 33% increase in Security division revenues; and (iii) a $5.7 million decrease in the change in other accrued expense and current
liabilities.
Fiscal 2011 Compared with Fiscal 2010.
Cash generated by operating activities in fiscal 2011 was $40.1 million, a decrease
of
$12.0 million, or 23%, from fiscal 2010. This reduction was primarily due to changes in working capital in the current-year period when compared to the prior-year
period, including: (i) a $59.6 million increase in inventory, reflecting both a build-up of inventory, mainly in our Security and Optoelectronics and Manufacturing divisions
to support growth as well as improvements realized in the prior fiscal year from inventory reduction initiatives; (ii) a $15.6 million decrease in advances received from customers; and
(iii) a $5.1 million decrease in accrued payroll and related expenses. These unfavorable changes in cash flow were partially offset by the following favorable changes in working capital:
(i) a $20.3 million improvement in the change from accounts
receivable reflecting our ongoing focus on collection activity; (ii) a $19.8 million increase in cash from accounts payable, which largely corresponds to the aforementioned inventory
buildup; (iii) a $9.2 million increase in cash from deferred revenues and (iv) an $18.1 million increase in net income for fiscal 2011, after giving consideration to
non-cash operating items including depreciation and amortization, stock-based compensation, deferred taxes, provision for losses on accounts receivable and tax effect on the exercise of
stock options among others for both periods.
Cash Provided by (Used in) Investing Activities
The changes in cash flows from investing activities were primarily related to capital expenditures as well as the acquisition of a
business and other assets to support our growth plans.
Fiscal 2012 Compared with Fiscal 2011.
Net cash used in investing activities was $81.2 million in fiscal 2012, an increase
of
$57.2 million, or 238%, as compared to the $24.0 million used in fiscal 2011. During fiscal 2012, we invested $68.5 million in capital expenditures primarily in our Security
division related to the preparation of a large turnkey screening services agreement, as compared to $13.4 million invested during fiscal 2011.
Fiscal 2011 Compared with Fiscal 2010.
Net cash used in investing activities was $24.0 million in fiscal 2011, a decrease
of
$0.4 million, or 2%, as compared to the $24.4 million used in fiscal 2010. This decrease was primarily due to a $4.7 million reduction in capital expenditures offset by a
$3.1 million increase in cash used to acquire businesses and a $1.2 million increase in cash used for the acquisition of intangible and other assets.
Cash Provided by (Used in) Financing Activities
The changes in cash flows from financing activities primarily relate to (i) borrowings and payments under debt obligations;
(ii) the issuance of and/or repurchase of Common Stock and (iii) employee stock plan activities.
Fiscal 2012 Compared with Fiscal 2011.
Net cash used in financing activities was $1.7 million in fiscal 2012, compared to
$15.9 million
used in fiscal 2011. In fiscal 2012 we used $6.4 million in cash to repurchase shares of our Common Stock under our stock repurchase program and settle tax obligations arising out of our stock
plans as compared to $2.2 million to repurchase treasury shares during fiscal 2011. These payments were partially offset by the receipt of $4.9 million in proceeds from the exercise of
stock options and the purchase of stock under our employee stock purchase plan in fiscal 2012, compared to $19.6 million in fiscal 2011.
Fiscal 2011 Compared with Fiscal 2010.
Net cash used in financing activities was $15.9 million in fiscal 2011, compared to
net cash of
$3.0 million used in fiscal 2010. In fiscal 2011, we repaid a $32.6 million term loan that was outstanding under our former credit facility as well as a capital lease obligation of
$0.7 million, as
48
Table of Contents
compared
to fiscal 2010 when we paid down $12.0 million of scheduled debt and capital leases and reduced our bank lines of credit by $4.0 million. These payments were partially offset by
the receipt of $19.6 million in proceeds from the exercise of stock options and the purchase of stock under our employee stock purchase plan in fiscal 2011, compared to $13.0 million in
fiscal 2010. In addition, in fiscal 2011 we used $2.2 million in cash to repurchase 58,396 shares of our Common Stock under our Common Stock repurchase program, but did not make any such share
repurchases in fiscal 2010.
Borrowings
Outstanding lines of credit and current and long-term debt totaled $2.7 million at June 30, 2012, a decrease
of $0.3 million from $3.0 million at June 30, 2011. See Note 6 to the Consolidated Financial Statements for further discussion.
The
following is a summary of our contractual obligations and commitments at June 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
2-3 years
|
|
4-5 years
|
|
After
5 years
|
|
Total debt
|
|
$
|
2,682
|
|
$
|
215
|
|
$
|
430
|
|
$
|
430
|
|
$
|
1,607
|
|
Operating leases
|
|
$
|
31,238
|
|
$
|
11,203
|
|
$
|
15,818
|
|
$
|
3,236
|
|
$
|
981
|
|
Purchase obligations
|
|
$
|
36,033
|
|
$
|
35,443
|
|
$
|
206
|
|
$
|
|
|
$
|
384
|
|
Defined benefit plan obligation
|
|
$
|
8,638
|
|
$
|
209
|
|
$
|
569
|
|
$
|
408
|
|
$
|
7,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
78,591
|
|
$
|
47,070
|
|
$
|
17,023
|
|
$
|
4,074
|
|
$
|
10,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitmentsletters of credit
|
|
$
|
189,234
|
|
$
|
9,653
|
|
$
|
16,239
|
|
$
|
390
|
|
$
|
162,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
anticipate that cash generated from our operations, in addition to 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, capital expenditures, litigation, stock
repurchases and levels of research and development spending, among other factors. 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 health of capital markets in general, among other factors.
Stock Repurchase Program
Our Board of Directors authorized a stock repurchase program under which we may repurchase up to 3,000,000 shares of our Common Stock.
During fiscal 2012, we repurchased 67,037 shares under this program. As of June 30, 2012, 585,772 shares were available for additional repurchase under the program. During fiscal 2011, we
repurchased 58,396 shares under this program. Upon repurchase, the shares are restored to the status of authorized but unissued shares and we record them as a reduction in the number of shares of
Common Stock issued and outstanding in our Consolidated Financial Statements.
Off Balance Sheet Arrangements
As of June 30, 2012, we had no off balance sheet arrangements, as defined in Item 303(a)(4) of
Regulation S-K, other than those previously disclosed.
49
Table of Contents
New Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our Consolidated Financial
Statements, see Note 1 to the Consolidated Financial Statements.
Related-Party Transactions
In 1994, we, together with an unrelated company, formed ECIL-Rapiscan Security Products Limited, a joint venture organized
under the laws of India. We own a 36% interest in the joint venture, our Chairman and Chief Executive Officer owns a 10.5% interest, and our Executive Vice President and the President of our Security
division owns a 4.5% ownership interest. Our initial investment was $0.1 million. For the years ended June 30, 2010, 2011 and 2012, our equity earnings in the joint venture amounted to
$0.4 million, $0.6 million and $0.4 million, respectively. We, our Chairman and Chief Executive Officer and our Executive Vice President and the President of our Security division
collectively control less than 50% of the board of directors voting power in the joint venture. As a result, we account for the investment under the equity method of accounting. The joint venture was
formed for the purpose of the manufacture, assembly, service and testing of security and inspection systems and other products. Some of our subsidiaries are suppliers to the joint venture, which in
turn manufactures and sells the resulting products. Sales to the joint venture for fiscal 2010, 2011 and 2012 were approximately $4.4 million, $7.1 million and $5.8 million,
respectively. Receivables from the joint venture were $2.2 million and $1.5 million as of June 30, 2011 and 2012, respectively.
We
have contracted with entities owned by our Chief Executive Officer and/or his family members to provide messenger services, auto rental and printing services. Included in cost of
sales and selling, general and administrative expenses for fiscal 2010, 2011 and 2012, are approximately $64,000, $60,000 and $65,000, respectively, for messenger service and auto rental; and $60,000,
$31,000 and $14,000, respectively, for printing services. Further, a subsidiary of the Company is leasing warehouse space on a month-to-month basis for approximately $3,000 per
month from an entity controlled by our Chief Executive Officer.
50
Table of Contents
UNAUDITED QUARTERLY RESULTS
The following tables present unaudited quarterly financial information for the four quarters ended June 30, 2011 and 2012 (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
September 30,
2010
|
|
December 31,
2010
|
|
March 31,
2011
|
|
June 30,
2011
|
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
128,453
|
|
$
|
169,287
|
|
$
|
174,931
|
|
$
|
183,429
|
|
Costs of goods sold
|
|
|
81,555
|
|
|
109,264
|
|
|
112,678
|
|
|
113,337
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,898
|
|
|
60,023
|
|
|
62,253
|
|
|
70,092
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
31,976
|
|
|
33,958
|
|
|
37,116
|
|
|
39,583
|
|
Research and development
|
|
|
9,231
|
|
|
11,842
|
|
|
12,436
|
|
|
11,939
|
|
Restructuring and other charges
|
|
|
256
|
|
|
903
|
|
|
905
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41,463
|
|
|
46,703
|
|
|
50,457
|
|
|
52,882
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,435
|
|
|
13,320
|
|
|
11,796
|
|
|
17,210
|
|
Interest expense and other income, net
|
|
|
590
|
|
|
506
|
|
|
(612
|
)
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
4,845
|
|
|
12,814
|
|
|
12,408
|
|
|
16,668
|
|
Provision for income taxes
|
|
|
1,453
|
|
|
3,596
|
|
|
3,642
|
|
|
4,622
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,392
|
|
$
|
9,218
|
|
$
|
8,766
|
|
$
|
12,046
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.18
|
|
$
|
0.49
|
|
$
|
0.46
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.18
|
|
$
|
0.47
|
|
$
|
0.45
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
September 30,
2011
|
|
December 31,
2011
|
|
March 31,
2012
|
|
June 30,
2012
|
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
161,317
|
|
$
|
187,993
|
|
$
|
208,439
|
|
$
|
235,241
|
|
Costs of goods sold
|
|
|
108,460
|
|
|
122,169
|
|
|
139,308
|
|
|
154,411
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
52,857
|
|
|
65,824
|
|
|
69,131
|
|
|
80,830
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
34,367
|
|
|
35,979
|
|
|
37,063
|
|
|
44,337
|
|
Research and development
|
|
|
10,880
|
|
|
11,546
|
|
|
12,932
|
|
|
14,207
|
|
Restructuring and other charges
|
|
|
|
|
|
|
|
|
931
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
45,247
|
|
|
47,525
|
|
|
50,926
|
|
|
59,004
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,610
|
|
|
18,299
|
|
|
18,205
|
|
|
21,826
|
|
Interest expense and other income, net
|
|
|
799
|
|
|
721
|
|
|
792
|
|
|
1,645
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
6,811
|
|
|
17,578
|
|
|
17,413
|
|
|
20,181
|
|
Provision for income taxes
|
|
|
2,050
|
|
|
5,277
|
|
|
4,838
|
|
|
4,270
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,761
|
|
$
|
12,301
|
|
$
|
12,575
|
|
$
|
15,911
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.24
|
|
$
|
0.62
|
|
$
|
0.63
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.24
|
|
$
|
0.61
|
|
$
|
0.62
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
51
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to certain market risks, which are inherent in our financial instruments and arise from transactions entered into in the
normal course of business. We may enter into derivative financial instrument transactions in order to manage or reduce market risk in connection with specific foreign-currency-denominated
transactions. We do not enter into derivative financial instrument transactions for speculative purposes.
We
are subject to interest rate risk on our short-term borrowings under our bank lines of credit. Borrowings under these lines of credit do not give rise to significant
interest rate risk because these
borrowings have short maturities although 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 respective currencies: Finland, France, Germany,
Italy and Greece (Euros), Singapore (U.S. dollars), Malaysia (U.S. dollars), United Kingdom (U.K. pounds), Norway (Norwegian kroners), India (Indian rupees), Indonesia (Indonesian rupiah and U.S.
dollars), Hong Kong (Hong Kong dollars), China (Chinese yuan), Canada (Canadian dollars), Mexico (Mexican pesos and U.S. dollars), Australia (Australian dollars) and Cyprus (Cypriot pounds). Foreign
currency financial statements are translated into U.S. dollars at fiscal year-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during
the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and
include them as a component of accumulated other comprehensive income. Transaction gains and losses, which were included in our consolidated statement of operations, amounted to a gain (loss) of
approximately $(3.2) million, ($2.0) million and $0.4 million for the fiscal years ended June 30, 2010, 2011 and 2012, 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 $8.0 million in fiscal 2012. 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 $8.0 million in fiscal 2012.
Use of Derivatives
Our use of derivatives consists primarily of foreign exchange contracts. As discussed in Note 1 to the Consolidated Financial
Statements, as of June 30, 2012, we had outstanding foreign currency forward contracts of approximately $6.2 million. These contracts do not meet the criteria as an effective cash flow
hedge. Therefore, the net gain (loss) is reported in Interest expense and other income, net in the Consolidated Statement of Operations.
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, civil or military conflict and other political
instability. We continue to perform ongoing credit evaluations of our
customers' financial condition. 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 with local currencies in our foreign business transactions, we are at risk with respect to foreign currency fluctuations.
Inflation
We do not believe that inflation has had a material impact on our results of operations.
52
Table of Contents
Interest Rate Risk
The principal maturity and estimated value of our long-term debt exposure as of June 30, 2012 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018 and
thereafter
|
|
Total
|
|
Fair
Value
|
|
Secured long term loans
|
|
$
|
215
|
|
$
|
215
|
|
$
|
215
|
|
$
|
215
|
|
$
|
215
|
|
$
|
1,607
|
|
$
|
2,682
|
|
$
|
2,682
|
|
Average interest rate
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
|
|
The
principal maturity and estimated value of our long-term debt exposure as of June 30, 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017 and
thereafter
|
|
Total
|
|
Fair
Value
|
|
Secured long term loans and capital lease obligations
|
|
$
|
221
|
|
$
|
221
|
|
$
|
221
|
|
$
|
221
|
|
$
|
221
|
|
$
|
1,872
|
|
$
|
2,977
|
|
$
|
2,977
|
|
Average interest rate
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
2.0%
|
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We make reference here to the Index to Consolidated Financial Statements that appears on page F-1 of this report.
The Report of Independent Registered Public Accounting Firm from Moss Adams LLP, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2012, the end of the period covered by this report, our management, including our Chief Executive Officer and our
Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 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, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were
effective as of June 30, 2012.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is
defined in Rule 13a-15(f) or 15d-15(f) of the Securities and Exchange Act of 1934, as amended). Under the supervision and with the participation of management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal ControlIntegrated
Framework
issued by the Committee of
53
Table of Contents
Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2012.
Moss
Adams LLP, an independent registered public accounting firm, has audited and reported on the consolidated financial statements of OSI Systems, Inc. and on the
effectiveness of our internal control over financial reporting. The report of Moss Adams LLP is contained in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during fiscal 2012 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
54
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our annual
stockholders' meeting presently scheduled to be held in December 2012.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our annual
stockholders' meeting presently scheduled to be held in December 2012.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our annual
stockholders' meeting presently scheduled to be held in December 2012.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our annual
stockholders' meeting presently scheduled to be held in December 2012.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our annual
stockholders' meeting presently scheduled to be held in December 2012.
55
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The
following documents are filed as part of this report:
1.
Financial Statements.
Please see the accompanying Index to Consolidated Financial Statements, which appears on
page F-1 of the report. The Report of Independent Registered Public Accounting Firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed
in the Index to Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by reference into Item 8 above.
2.
Financial Statement Schedules
.
Schedule IIValuation
and Qualifying Accounts
No
other financial statement schedules are presented as the required information is either not applicable or included in the Consolidated Financial Statements or Notes thereto.
3.
Exhibits.
Reference is made to item 15(b) below.
(b)
Exhibits.
The exhibits listed on the accompanying Exhibit Index immediately following the signature page are
filed as part of, or are incorporated by reference into, this report.
(c)
Financial Statement Schedules.
Reference is made to Item 15(a)(2) above.
56
Table of Contents
OSI SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of OSI Systems, Inc.:
We
have audited the accompanying consolidated balance sheets of OSI Systems, Inc. and Subsidiaries (the "Company") as of June 30, 2011 and 2012, and the related
consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2012. Our audits also included the
financial statement schedule listed in the index at Item 15 in
Schedule II. We also have audited the Company's internal control over financial reporting as of June 30, 2012, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal
Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control
over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OSI Systems, Inc. and
Subsidiaries as of June 30, 2011 and 2012, and the consolidated results of their operations, their comprehensive income and their cash flows for each of the three years in the period ended
June 30, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, OSI Systems, Inc.
and Subsidiaries, maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/
MOSS ADAMS LLP
Los Angeles, California
August 10, 2012
F-2
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,619
|
|
$
|
91,452
|
|
Accounts receivable, net of allowance for doubtful accounts of $5,793 and $5,054 as of June 30, 2011 and 2012, respectively
|
|
|
136,716
|
|
|
156,867
|
|
Inventories
|
|
|
169,634
|
|
|
195,178
|
|
Deferred income taxes
|
|
|
17,156
|
|
|
19,205
|
|
Prepaid expenses and other current assets
|
|
|
26,161
|
|
|
20,411
|
|
|
|
|
|
|
|
Total current assets
|
|
|
405,286
|
|
|
483,113
|
|
Property and equipment, net
|
|
|
55,017
|
|
|
111,664
|
|
Goodwill
|
|
|
70,292
|
|
|
82,149
|
|
Intangible assets, net
|
|
|
33,707
|
|
|
37,742
|
|
Other assets
|
|
|
20,614
|
|
|
35,228
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
584,916
|
|
$
|
749,896
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
66,462
|
|
$
|
56,422
|
|
Accrued payroll and related expenses
|
|
|
24,417
|
|
|
24,749
|
|
Advances from customers
|
|
|
25,191
|
|
|
22,677
|
|
Accrued warranties
|
|
|
14,530
|
|
|
17,562
|
|
Deferred revenue
|
|
|
15,956
|
|
|
20,194
|
|
Other accrued expenses and current liabilities
|
|
|
14,425
|
|
|
19,045
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
160,981
|
|
|
160,649
|
|
Long-term debt
|
|
|
2,756
|
|
|
2,467
|
|
Advances from customers
|
|
|
|
|
|
100,000
|
|
Other long-term liabilities
|
|
|
36,379
|
|
|
52,661
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
200,116
|
|
|
315,777
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par valueauthorized, 10,000,000 shares; no shares issued or outstanding
|
|
|
|
|
|
|
|
Common stock, $0.001 par valueauthorized, 100,000,000 shares; issued and outstanding, 19,507,065 and 19,821,064 shares at June 30, 2011 and
2012, respectively
|
|
|
272,552
|
|
|
282,756
|
|
Retained earnings
|
|
|
110,103
|
|
|
155,651
|
|
Accumulated other comprehensive income (loss)
|
|
|
2,145
|
|
|
(4,288
|
)
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
384,800
|
|
|
434,119
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
584,916
|
|
$
|
749,896
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-3
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Revenues
|
|
$
|
595,111
|
|
$
|
656,100
|
|
$
|
792,990
|
|
Cost of goods sold
|
|
|
377,077
|
|
|
416,834
|
|
|
524,348
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
218,034
|
|
|
239,266
|
|
|
268,642
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
139,830
|
|
|
142,633
|
|
|
151,746
|
|
Research and development
|
|
|
38,577
|
|
|
45,448
|
|
|
49,565
|
|
Restructuring and other charges
|
|
|
2,859
|
|
|
3,424
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
181,266
|
|
|
191,505
|
|
|
202,702
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
36,768
|
|
|
47,761
|
|
|
65,940
|
|
Interest expense and other income, net
|
|
|
1,772
|
|
|
1,026
|
|
|
3,957
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
34,996
|
|
|
46,735
|
|
|
61,983
|
|
Provision for income taxes
|
|
|
11,439
|
|
|
13,313
|
|
|
16,435
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.32
|
|
$
|
1.77
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.28
|
|
$
|
1.71
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,874
|
|
|
18,843
|
|
|
19,732
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,389
|
|
|
19,548
|
|
|
20,330
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-4
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Net income
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(3,202
|
)
|
|
7,233
|
|
|
(5,597
|
)
|
Defined benefit pension plans, net of tax
|
|
|
(296
|
)
|
|
165
|
|
|
(763
|
)
|
Net unrealized gain (loss) on investments and derivatives
|
|
|
(1,601
|
)
|
|
717
|
|
|
(73
|
)
|
Reclassification of net realized loss on investments and derivatives
|
|
|
523
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(4,576
|
)
|
$
|
9,142
|
|
$
|
(6,433
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
18,981
|
|
$
|
42,564
|
|
$
|
39,115
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-5
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
Number of
Shares
|
|
Amount
|
|
Retained
Earnings
|
|
Total
|
|
BalanceJune 30, 2009
|
|
|
17,411,569
|
|
$
|
225,297
|
|
$
|
53,124
|
|
$
|
(2,421
|
)
|
$
|
276,000
|
|
Exercise of stock options
|
|
|
660,764
|
|
|
11,226
|
|
|
|
|
|
|
|
|
11,226
|
|
Vesting of restricted shares
|
|
|
112,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax benefit of stock options exercised/forfeited
|
|
|
|
|
|
732
|
|
|
|
|
|
|
|
|
732
|
|
Shares issued under employee stock purchase program
|
|
|
141,136
|
|
|
1,760
|
|
|
|
|
|
|
|
|
1,760
|
|
Stock compensation expense
|
|
|
|
|
|
5,011
|
|
|
|
|
|
|
|
|
5,011
|
|
Net income
|
|
|
|
|
|
|
|
|
23,557
|
|
|
|
|
|
23,557
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(4,576
|
)
|
|
(4,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceJune 30, 2010
|
|
|
18,326,133
|
|
$
|
244,026
|
|
$
|
76,681
|
|
$
|
(6,997
|
)
|
$
|
313,710
|
|
Exercise of stock options
|
|
|
719,515
|
|
|
12,988
|
|
|
|
|
|
|
|
|
12,988
|
|
Vesting of restricted shares
|
|
|
161,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax benefit of stock options exercised/forfeited
|
|
|
|
|
|
4,862
|
|
|
|
|
|
|
|
|
4,862
|
|
Shares issued under employee stock purchase program
|
|
|
142,671
|
|
|
1,973
|
|
|
|
|
|
|
|
|
1,973
|
|
Shares issuedexercise of warrants
|
|
|
216,018
|
|
|
4,679
|
|
|
|
|
|
|
|
|
4,679
|
|
Stock compensation expense
|
|
|
|
|
|
5,789
|
|
|
|
|
|
|
|
|
5,789
|
|
Repurchase of common stock
|
|
|
(58,396
|
)
|
|
(2,218
|
)
|
|
|
|
|
|
|
|
(2,218
|
)
|
Other
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
|
453
|
|
Net income
|
|
|
|
|
|
|
|
|
33,422
|
|
|
|
|
|
33,422
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
9,142
|
|
|
9,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceJune 30, 2011
|
|
|
19,507,065
|
|
$
|
272,552
|
|
$
|
110,103
|
|
$
|
2,145
|
|
$
|
384,800
|
|
Exercise of stock options
|
|
|
140,385
|
|
|
2,492
|
|
|
|
|
|
|
|
|
2,492
|
|
Vesting of restricted shares
|
|
|
208,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax benefit of stock options exercised/forfeited
|
|
|
|
|
|
3,187
|
|
|
|
|
|
|
|
|
3,187
|
|
Shares issued under employee stock purchase program
|
|
|
82,752
|
|
|
2,391
|
|
|
|
|
|
|
|
|
2,391
|
|
Stock compensation expense
|
|
|
|
|
|
8,530
|
|
|
|
|
|
|
|
|
8,530
|
|
Repurchase of common stock
|
|
|
(117,514
|
)
|
|
(6,396
|
)
|
|
|
|
|
|
|
|
(6,396
|
)
|
Net income
|
|
|
|
|
|
|
|
|
45,548
|
|
|
|
|
|
45,548
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(6,433
|
)
|
|
(6,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceJune 30, 2012
|
|
|
19,821,064
|
|
$
|
282,756
|
|
$
|
155,651
|
|
$
|
(4,288
|
)
|
$
|
434,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-6
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18,561
|
|
|
18,529
|
|
|
20,199
|
|
Stock based compensation expense
|
|
|
5,011
|
|
|
5,789
|
|
|
8,530
|
|
Provision for losses on accounts receivable
|
|
|
291
|
|
|
1,844
|
|
|
417
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(402
|
)
|
|
(552
|
)
|
|
(350
|
)
|
Tax benefit of share based compensation plan
|
|
|
732
|
|
|
4,862
|
|
|
3,187
|
|
Deferred income taxes
|
|
|
2,714
|
|
|
4,806
|
|
|
(941
|
)
|
Other
|
|
|
289
|
|
|
191
|
|
|
126
|
|
Changes in operating assets and liabilitiesnet of business acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,373
|
)
|
|
(3,066
|
)
|
|
(17,445
|
)
|
Inventories
|
|
|
19,898
|
|
|
(39,700
|
)
|
|
(24,525
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,213
|
)
|
|
(7,276
|
)
|
|
(5,535
|
)
|
Accounts payable
|
|
|
(5,375
|
)
|
|
14,401
|
|
|
(12,925
|
)
|
Accrued payroll and related expenses
|
|
|
4,865
|
|
|
(249
|
)
|
|
2,093
|
|
Advances from customers
|
|
|
14,145
|
|
|
(1,477
|
)
|
|
99,025
|
|
Accrued warranties
|
|
|
1,065
|
|
|
3,051
|
|
|
3,126
|
|
Deferred revenue
|
|
|
(1,087
|
)
|
|
8,066
|
|
|
8,279
|
|
Other accrued expenses and current liabilities
|
|
|
(4,528
|
)
|
|
(2,502
|
)
|
|
(8,246
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
52,150
|
|
|
40,139
|
|
|
120,563
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(18,050
|
)
|
|
(13,392
|
)
|
|
(68,490
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(3,241
|
)
|
|
(6,311
|
)
|
|
(7,989
|
)
|
Acquisition of intangible and other assets
|
|
|
(3,103
|
)
|
|
(4,306
|
)
|
|
(4,703
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(24,394
|
)
|
|
(24,009
|
)
|
|
(81,182
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net repayments of bank lines of credit
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(11,349
|
)
|
|
(32,602
|
)
|
|
(217
|
)
|
Payments of capital lease obligations
|
|
|
(644
|
)
|
|
(710
|
)
|
|
|
|
Proceeds from exercise of stock options, warrants and employee stock purchase plan
|
|
|
12,986
|
|
|
19,640
|
|
|
4,883
|
|
Repurchase of common shares
|
|
|
|
|
|
(2,218
|
)
|
|
(6,396
|
)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,007
|
)
|
|
(15,890
|
)
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
2,068
|
|
|
3,390
|
|
|
(1,818
|
)
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
26,817
|
|
|
3,630
|
|
|
35,833
|
|
Cash and cash equivalentsbeginning of year
|
|
|
25,172
|
|
|
51,989
|
|
|
55,619
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of year
|
|
$
|
51,989
|
|
$
|
55,619
|
|
$
|
91,452
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,758
|
|
$
|
1,626
|
|
$
|
3,168
|
|
Income taxes
|
|
$
|
7,588
|
|
$
|
6,244
|
|
$
|
7,150
|
|
See accompanying notes to Consolidated Financial Statements.
F-7
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 2012
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, turnkey security screening solutions and related services; (ii) Healthcare,
providing patient monitoring, diagnostic cardiology and anesthesia systems, and related services and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and
electronic manufacturing services for the Security and Healthcare divisions as well as to external original equipment manufacturing clients for applications in the defense, aerospace, medical and
industrial markets, among others.
Through
its Security division, the Company designs, manufactures, markets and services security and inspection systems and provides turnkey security screening solutions. The Security
division's products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband and to screen people. These products and services are also used
for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of controlled materials.
Through
its Healthcare division, the Company designs, manufactures, markets and services patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems
worldwide 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 diagnostic products, telecommunications, test and measurement
devices, industrial automation systems, automotive diagnostic products and renewable energy technologies. This division provides products and services to original equipment manufacturers and end users
as well as to the Company's own Security and Healthcare divisions.
Consolidation
The Consolidated Financial Statements include the accounts of OSI Systems, Inc. and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in joint ventures over which the Company has significant influence but does not
have voting control are accounted for using the equity method. Investments over which the Company does not have significant influence are accounted for using the cost method.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America
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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of approximately three months or less as of the
acquisition date to be cash equivalents.
F-8
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Components
of cash and cash equivalents consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
2012
|
|
Cash in bank
|
|
$
|
55,575
|
|
$
|
47,402
|
|
Money market
|
|
|
44
|
|
|
34,063
|
|
Commercial paper
|
|
|
|
|
|
9,987
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,619
|
|
$
|
91,452
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
The allowance for doubtful accounts involves estimates based on management's judgment, review of individual
receivables and analysis of historical bad debts. The Company monitors collections and payments from its customers and maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories
Inventories are generally stated at the lower of cost (first-in, first-out) or market. The Company writes down
inventory for slow-moving and obsolete inventory based on assessments of future demands, market conditions and customers who may be experiencing financial difficulties. If these factors
are less favorable than those projected, additional inventory write-downs may be required.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated on the straight-line basis over the
shorter of the useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization of property and equipment under capital leases is included with
depreciation expense.
Goodwill and Other Intangible Assets and Valuation of Long-Lived Assets
Goodwill represents the excess purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair value. Goodwill is allocated to the Company's segments based on the nature of the product line of the acquired business.
The carrying value of goodwill is not amortized, but is annually tested for impairment during the Company's second quarter and more often if there is an indicator of impairment. Intangible assets
other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. The Company assesses qualitative factors of each of its reporting units to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Such assessments indicated that it is not more likely than not that the
fair value of each reporting unit is less than its carrying amount, including goodwill. Thus, the Company has determined that it is not necessary to proceed with the two-step goodwill
impairment test. There was no goodwill impairment for each of three fiscal years ended June 30, 2012.
The
Company evaluates long-lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment does exist, the
Company measures the impairment loss and records it based on the discounted estimate of future cash flows. In estimating future cash flows, the Company groups assets at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows from other asset groups. The
F-9
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Company's
estimate of future cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors.
Income Taxes
Deferred income taxes are provided for temporary differences between the financial statement and income tax basis of the Company's
assets
and liabilities, based on enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Income
tax accounting standards prescribe a two-step process for the financial statement measurement and recognition of a tax position taken or expected to be
taken in a tax return. The first step involves the determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be sustained upon
examination, based on the technical merits of the position. The second step requires that any tax position that meets the more-likely-than-not recognition threshold
be measured and recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The income tax
accounting standards also provide guidance on the accounting for related interest and penalties, financial statement classification and disclosure. The cumulative effect of applying these standards is
to be reported as an adjustment to the opening balance of retained earnings in the period of adoption. See Note 8 for additional information.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, marketable securities, accounts receivable,
accounts payable and debt instruments. The carrying values of financial instruments, other than debt instruments, are representative of their fair values due to their short-term
maturities. The carrying values of the Company's long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or
comparable to current rates offered to the Company.
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company
has determined that all of its marketable securities fall into the "Level 1" category, which values assets at the quoted prices in active markets for identical assets; while the Company's
derivative instruments fall into the "Level 2" category, which values assets and liabilities from observable inputs other than quoted market prices. 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 (liabilities) were:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
2012
|
|
Level 1
|
|
$
|
8,115
|
|
$
|
10,955
|
|
Level 2
|
|
|
(187
|
)
|
|
13
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,928
|
|
$
|
10,968
|
|
|
|
|
|
|
|
Derivative Instruments and Hedging Activity
The Company's use of derivatives consists primarily of foreign exchange contracts. As of June 30,
2012, the Company had outstanding foreign currency forward contracts of approximately $6.2 million. These contracts do not meet the criteria as an effective cash flow hedge. Therefore, the net
gain (loss) is reported in Interest expense and other income, net in the Consolidated Statement of Operations.
F-10
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Revenue Recognition
The Company recognizes revenue upon shipment of products when title and risk of loss passes, and when terms are fixed and
collection is probable. The portion of revenue for the sale attributable to installation is deferred and recognized when the installation service is provided. In an instance where terms of sale
include subjective customer acceptance criteria, revenue is deferred until we have achieved the acceptance criteria. Concurrent with the shipment of the product, the Company accrues estimated product
return reserves and warranty expenses. Critical judgments made by management related to revenue recognition include the determination of whether or not customer acceptance criteria are perfunctory or
inconsequential. The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of revenue recognized. Critical judgments also include
estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.
Revenues
from out-of-warranty service maintenance contracts are recognized ratably over the term of such contract. For services not derived from specific
maintenance contracts, revenues are recognized as the services are performed. Deferred revenue for such services arises from payments received from customers for services not yet performed.
On
occasion, the Company receives advances from customers that are amortized against future customer payments pursuant to the underlying agreements. Such advances are classified in the
Consolidated Balance Sheets as either a current or long-term liability dependent upon when the Company estimates the corresponding amortization to occur.
Freight
The Company records shipping and handling fees it charges to its customers as revenue and related costs as cost of goods sold.
Research and Development Costs
Research and development costs are those costs related to the development of a new product, process or service, or
significant improvement to an existing product, process or service. Such costs are charged to operations as incurred.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is
recognized
as expense over the employee's requisite service period for all stock-based awards granted or modified. Certain shares of restricted stock vest based on the achievement of pre-established
performance goals. The Company amortizes the fair value of performance-based shares over the requisite service period for each separate vesting tranche of the award. See Note 7 to the
Consolidated Financial Statements.
Restructuring and Other Charges
The Company consolidates processes and facilities of its subsidiaries to better align with demand by its customers
and
thereby improve its operational efficiencies. The associated charges, including reducing workforce and capacity, are recognized as restructuring charges in the Consolidated Financial Statements.
During fiscal years 2010, 2011 and 2012, the Company consolidated manufacturing and administrative processes and facilities of certain businesses that resulted in pre-tax restructuring
charges of $2.9 million, $3.4 million and $1.4 million, respectively. See Note 5 for additional information about these restructuring charges.
Concentrations of Credit Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash
equivalents, marketable securities and accounts receivable. The Company restricts investments in cash equivalents to financial institutions with high credit standing. Credit risk on accounts
receivable is minimized as a result of the large and diverse nature of the Company's worldwide customer base. No
F-11
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
individual
customer accounted for more than 10% of accounts receivable as of June 30, 2011 or 2012. During fiscal 2012, one customer exceeded 10% of revenues; while no individual customer
accounted for more than 10% of revenues for the years ended June 30, 2010 or 2011. The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances
for potential credit losses.
Foreign Currency Translation
The Company transacts business in various foreign currencies. In countries where the functional currency of the
underlying operations has been determined to be the local country's currency, revenues and expenses of operations outside the United States are translated into United States dollars using average
exchange rates while assets and liabilities of operations outside the United States are translated into United States dollars using year-end exchange rates. The effects of foreign currency
translation adjustments are included in stockholders' equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Transaction gains and losses,
which were included in our consolidated statement of operations, amounted to a gain (loss) of approximately $(3.2) million, ($2.0) million and $0.4 million for the fiscal years ended
June 30, 2010, 2011 and 2012, respectively.
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 provided. The acquisition method of accounting for business combinations requires us to use significant
estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to
exceed one year, in which we may adjust the provisional amounts recognized for a business combination) in a manner that is generally similar to the previous purchase method of accounting.
Under
the acquisition method of accounting we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an
acquiree, generally at the acquisition
date fair value. We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the
identifiable assets acquired and liabilities assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of
consideration and we charge them to general and administrative expense as they are incurred. Under the acquisition method we also account for acquired company restructuring activities that we initiate
separately from the business combination. Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report
provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and
circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial
statements. We apply those measurement period adjustments that we determine to be significant retrospectively to comparative information in our financial statements, including adjustments to
depreciation and amortization expense.
Earnings per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common and
dilutive potential common shares outstanding. Potential common shares consist of the shares issuable upon the exercise of stock options or warrants under the treasury stock method.
F-12
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The
following table sets forth the computation of basic and diluted earnings per share for the fiscal years ended June 30 (in thousands, except earnings per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Net income available to common stockholders
|
|
$
|
23,557
|
|
$
|
33,422
|
|
$
|
45,548
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
17,874
|
|
|
18,843
|
|
|
19,732
|
|
Dilutive effect of stock options and warrants
|
|
|
515
|
|
|
705
|
|
|
598
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstandingdiluted
|
|
|
18,389
|
|
|
19,548
|
|
|
20,330
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.32
|
|
$
|
1.77
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.28
|
|
$
|
1.71
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2010 approximately 0.4 million of potentially dilutive shares associated with stock options and stock warrants were not included in diluted earnings per
common share calculations because to do so would
have been antidilutive. There were no such shares that were antidilutive for the fiscal years ending on June 30, 2011 and June 30, 2012.
Provision for Warranties
The Company offers its customers warranties on most products that it sells. These warranties typically provide for
repairs
for a specified time period. Concurrent with the sale of products, a provision for estimated warranty expenses is recorded with a corresponding increase in cost of goods sold. This provision is
adjusted periodically based on historical experience and anticipated expenses. Actual expenses of repairs under warranty, including parts and labor, are charged to this provision when incurred.
|
|
|
|
|
|
|
Provision for
Warranties
(in thousands)
|
|
Balance on June 30, 2009
|
|
$
|
10,106
|
|
Additions
|
|
|
6,653
|
|
Reductions for warranty repair costs
|
|
|
(5,829
|
)
|
|
|
|
|
Balance on June 30, 2010
|
|
$
|
10,930
|
|
Additions
|
|
|
9,175
|
|
Reductions for warranty repair costs
|
|
|
(5,575
|
)
|
|
|
|
|
Balance on June 30, 2011
|
|
$
|
14,530
|
|
Additions
|
|
|
8,620
|
|
Reductions for warranty repair costs
|
|
|
(5,588
|
)
|
|
|
|
|
Balance on June 30, 2012
|
|
$
|
17,562
|
|
|
|
|
|
Recent Accounting Updates Not Yet Adopted
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU)
No 2011-11,
Disclosures about Offsetting Assets and Liabilities
, which is intended to facilitate comparison between entities reporting
under U.S. GAAP and IFRS in disclosing derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. Both
the gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement
similar to a master netting arrangement are required to be disclosed. The ASU
F-13
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
is
effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company has not yet adopted this update and is currently
evaluating the impact it may have on its financial disclosures.
In
December 2011, the FASB issued ASU No 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out
of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,
which defers the effective date pertaining to reclassification
adjustments out of accumulated other comprehensive income in ASU No. 2011-05,
Presentation of Comprehensive Income
. The ASU is
effective for at the same time as the amendments in ASU No. 2011-05. The Company early adopted ASU No. 2011-05 and will await the outcome from the FASB's further
evaluation of the reclassification presentation treatment.
2. INVENTORIES
Net inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
2012
|
|
Raw materials
|
|
$
|
92,373
|
|
$
|
103,747
|
|
Work-in-process
|
|
|
37,202
|
|
|
28,096
|
|
Finished goods
|
|
|
40,059
|
|
|
63,335
|
|
|
|
|
|
|
|
Total
|
|
$
|
169,634
|
|
$
|
195,178
|
|
|
|
|
|
|
|
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
Estimated
Useful
Lives
|
|
|
|
2011
|
|
2012
|
|
Land
|
|
N/A
|
|
$
|
5,296
|
|
$
|
5,193
|
|
Buildings
|
|
20 years
|
|
|
9,638
|
|
|
13,597
|
|
Leasehold improvements
|
|
1-20 years
|
|
|
12,989
|
|
|
12,385
|
|
Equipment and tooling
|
|
3-10 years
|
|
|
72,104
|
|
|
74,789
|
|
Furniture and fixtures
|
|
3-13 years
|
|
|
4,431
|
|
|
3,982
|
|
Computer equipment
|
|
3-5 years
|
|
|
14,034
|
|
|
13,937
|
|
Computer software 3-10 years
|
|
3-10 years
|
|
|
14,618
|
|
|
15,245
|
|
Construction in process
|
|
N/A
|
|
|
|
|
|
52,269
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
133,110
|
|
|
191,397
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(78,093
|
)
|
|
(79,733
|
)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
55,017
|
|
$
|
111,664
|
|
|
|
|
|
|
|
|
|
During
fiscal 2010, 2011 and 2012, depreciation expense was approximately $14.4 million, $14.2 million and $15.5 million, respectively. There were no assets under
capital leases as of June 30, 2011 or June 30, 2012.
F-14
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal 2011 and 2012 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
Group
|
|
Healthcare
Group
|
|
Optoelectronics
and
Manufacturing
Group
|
|
Consolidated
|
|
Balance as of June 30, 2010
|
|
$
|
16,566
|
|
$
|
35,403
|
|
$
|
11,972
|
|
$
|
63,941
|
|
Goodwill acquired during the period
|
|
|
3,863
|
|
|
|
|
|
1,654
|
|
|
5,517
|
|
Foreign currency translation adjustment
|
|
|
611
|
|
|
209
|
|
|
14
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2011
|
|
$
|
21,040
|
|
$
|
35,612
|
|
$
|
13,640
|
|
$
|
70,292
|
|
Goodwill acquired or adjusted during the period
|
|
|
7,106
|
|
|
374
|
|
|
5,063
|
|
|
12,543
|
|
Foreign currency translation adjustment
|
|
|
(563
|
)
|
|
(99
|
)
|
|
(24
|
)
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2012
|
|
$
|
27,583
|
|
$
|
35,887
|
|
$
|
18,679
|
|
$
|
82,149
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
June 30, 2012
|
|
|
|
Weighted
Average
Lives
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangibles
Net
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangibles
Net
|
|
Amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
|
5 years
|
|
$
|
13,090
|
|
$
|
3,807
|
|
$
|
9,283
|
|
$
|
15,175
|
|
$
|
4,140
|
|
$
|
11,035
|
|
Patents
|
|
15 years
|
|
|
2,975
|
|
|
449
|
|
|
2,526
|
|
|
4,259
|
|
|
526
|
|
|
3,733
|
|
Core technology
|
|
10 years
|
|
|
2,151
|
|
|
1,376
|
|
|
775
|
|
|
2,093
|
|
|
1,548
|
|
|
545
|
|
Developed technology
|
|
12 years
|
|
|
18,823
|
|
|
10,718
|
|
|
8,105
|
|
|
20,022
|
|
|
12,560
|
|
|
7,462
|
|
Customer relationships/backlog
|
|
7 years
|
|
|
10,411
|
|
|
6,824
|
|
|
3,587
|
|
|
11,955
|
|
|
7,611
|
|
|
4,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable assets
|
|
|
|
|
47,450
|
|
|
23,174
|
|
|
24,276
|
|
|
53,504
|
|
|
26,385
|
|
|
27,119
|
|
Non-amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
9,431
|
|
|
|
|
|
9,431
|
|
|
10,623
|
|
|
|
|
|
10,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
$
|
56,881
|
|
$
|
23,174
|
|
$
|
33,707
|
|
$
|
64,127
|
|
$
|
26,385
|
|
$
|
37,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense for fiscal 2010, 2011 and 2012 was $4.1 million, $4.3 million and $4.7 million, respectively. Future acquisitions could cause these amounts to
increase. At June 30, 2012, estimated future amortization expense was as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
4,728
|
|
2014
|
|
|
3,541
|
|
2015
|
|
|
2,135
|
|
2016
|
|
|
1,993
|
|
2017
|
|
|
1,732
|
|
2018 and thereafter
|
|
|
12,990
|
|
|
|
|
|
Total
|
|
$
|
27,119
|
|
|
|
|
|
F-15
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
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 greater of (i) the amount computed using the ratio that current gross revenues for a product bear to the
total current and anticipated future gross revenues for that product and (ii) the straight-line method over the remaining estimated economic life of the product. During fiscal 2010,
2011 and 2012, the Company capitalized software development costs in the amount of $2.1 million, $1.2 million and $2.1 million, respectively.
5. RESTRUCTURING AND OTHER CHARGES
In response to challenging worldwide economic conditions, the Company continued to optimize its cost structure by reducing excess
workforce and facilities and consolidating and relocating certain manufacturing facilities. Such efforts resulted in restructuring charges of $2.9 million in 2010, $3.4 million in 2011
and $1.4 million in 2012. The restructuring accruals are included in other accrued expenses and current liabilities in the Consolidated Balance Sheets. The following table analyzes the key
components of these restructuring and other charges throughout fiscal 2010, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
Division
|
|
Healthcare
Division
|
|
Optoelectronics
and
Manufacturing
Division
|
|
Corporate
|
|
Consolidated
|
|
Accrued balance as of June 30, 2009
|
|
$
|
698
|
|
$
|
78
|
|
$
|
199
|
|
$
|
2,160
|
|
$
|
3,135
|
|
Expensed during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure
|
|
|
509
|
|
|
89
|
|
|
559
|
|
|
|
|
|
1,157
|
|
Employee termination costs
|
|
|
6
|
|
|
1,210
|
|
|
396
|
|
|
90
|
|
|
1,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expensed during year
|
|
|
515
|
|
|
1,299
|
|
|
955
|
|
|
90
|
|
|
2,859
|
|
Paid during the year
|
|
|
750
|
|
|
644
|
|
|
854
|
|
|
2,250
|
|
|
4,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance as of June 30, 2010
|
|
$
|
463
|
|
$
|
733
|
|
$
|
300
|
|
$
|
|
|
$
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee termination costs
|
|
|
595
|
|
|
1,059
|
|
|
43
|
|
|
535
|
|
|
2,232
|
|
Debt restructuring
|
|
|
|
|
|
449
|
|
|
|
|
|
743
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expensed during the year
|
|
|
595
|
|
|
1,508
|
|
|
43
|
|
|
1,278
|
|
|
3,424
|
|
Paid during the year
|
|
|
593
|
|
|
2,062
|
|
|
239
|
|
|
1,250
|
|
|
4,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance as of June 30, 2011
|
|
$
|
465
|
|
$
|
179
|
|
$
|
104
|
|
$
|
28
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure
|
|
|
|
|
|
|
|
|
233
|
|
|
|
|
|
233
|
|
Employee termination costs
|
|
|
290
|
|
|
170
|
|
|
698
|
|
|
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expensed during the year
|
|
|
290
|
|
|
170
|
|
|
931
|
|
|
|
|
|
1,391
|
|
Paid during the year
|
|
|
458
|
|
|
179
|
|
|
1,029
|
|
|
19
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance as of June 30, 2012
|
|
$
|
297
|
|
$
|
170
|
|
$
|
6
|
|
$
|
9
|
|
$
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
6. LINE-OF-CREDIT BORROWINGS AND DEBT
The Company has a $425 million credit agreement, as amended, maturing November 2016. The credit agreement consists of a
$425 million revolving credit facility, including a $375 million sub-limit for letters of credit. The Company has the ability to increase the facility by $100 million
under certain circumstances. Borrowings under this facility bear interest at the London Interbank Offered Rate (LIBOR) plus a margin of 1.5% as of June 30, 2012. This margin is determined by
the Company's consolidated leverage ratio and may range from 1.5% to 2.0%. Letters of credit reduce the amount available to borrow by their face value. The unused portion of the facility bears a
commitment fee of 0.25%. The Company's borrowings under the credit agreement are guaranteed by the Company's U.S.-based subsidiaries and are secured by substantially all of the Company's and certain
subsidiaries' assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this
type. As of June 30, 2012, there were no borrowings under the revolving credit facility and letters-of-credit outstanding totaled $179.7 million.
Several
of the Company's foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies, to meet short-term working capital
requirements and for the issuance of letters-of-credit. As of June 30, 2012, $9.5 million was outstanding under these letter-of-credit
facilities, while no debt was outstanding. As of June 30, 2012, the total amount available under these credit facilities was $32.7 million, with a total cash borrowing
sub-limit of $4.1 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 June 30, 2012, $2.7 million remained outstanding under this loan at an
interest rate of 2.0% per annum.
Long-term
debt consisted of the following at June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
2011
|
|
2012
|
|
Twenty-year term loan due in 2024
|
|
$
|
2,977
|
|
$
|
2,682
|
|
Less current portion of long-term debt
|
|
|
221
|
|
|
215
|
|
|
|
|
|
|
|
Long-term portion of debt
|
|
$
|
2,756
|
|
$
|
2,467
|
|
|
|
|
|
|
|
Fiscal
year principal payments of long-term debt as of June 30, 2012 are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
215
|
|
2014
|
|
|
215
|
|
2015
|
|
|
215
|
|
2016
|
|
|
215
|
|
2017
|
|
|
215
|
|
2018 and thereafter
|
|
|
1,607
|
|
|
|
|
|
Total
|
|
$
|
2,682
|
|
|
|
|
|
F-17
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
7. STOCK-BASED COMPENSATION
As of June 30, 2012, the Company maintained one significant stock-based compensation planthe Amended and Restated
2006 Equity Participation Plan of OSI Systems, Inc. (the "OSI Plan"). The OSI Plan allows for the issuance of restricted stock and the granting of stock options. The Company recorded
stock-based-compensation expense in the consolidated statement of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Cost of goods sold
|
|
$
|
287
|
|
$
|
378
|
|
$
|
465
|
|
Selling, general and administrative
|
|
|
4,499
|
|
|
5,176
|
|
|
7,811
|
|
Research and development
|
|
|
225
|
|
|
235
|
|
|
254
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense before taxes
|
|
|
5,011
|
|
|
5,789
|
|
|
8,530
|
|
Less: Related income tax benefit
|
|
|
1,750
|
|
|
1,994
|
|
|
3,050
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense, net of estimated taxes
|
|
$
|
3,261
|
|
$
|
3,795
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2012, total unrecognized compensation cost related to non-vested stock-based compensation grants amounted to $2.3 million for stock options and
$10.4 million for restricted stock under the OSI Plan. The Company expects to recognize these costs over a weighted-average period of 2.0 years with respect to the options and
2.5 years for grants of restricted stock.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which eligible employees may purchase a limited number of shares of
Common Stock at a discount of up to 15% of the market value of such stock at pre-determined, plan-defined dates. During the three years ended June 30, 2010, 2011 and
2012, employees purchased 141,136, 142,671 and 82,752 shares, respectively. As of June 30, 2012, there were 1,089,411 shares of the Company's Common Stock available for issuance under the plan.
OSI Plan
Under the OSI Plan, the Company is authorized to grant up to 6,700,000 shares of Common Stock in the form of incentive options,
nonqualified options or restricted stock. Under the plan, the exercise price of nonqualified options and incentive stock options may not be less than the fair market value of the Company's Common
Stock on the date of grant. The exercise price of nonqualified options and incentive stock options granted to individuals who own more than 10% of the Company's voting stock may not be less than 110%
of the fair market value of the Company's Common Stock on the date of grant. Stock options granted under the OSI Plan typically vest over three years based on continued service. Restricted stock
typically vests over three to four years based on continued service. Certain shares of restricted stock granted to senior management vest based on the achievement of pre-established
performance goals.
No
single method of estimating volatility is proper under all circumstances and to the extent that a company can derive implied volatility based on the trading of its financial
instruments on a public market, it may be appropriate to use both implied and historical volatility in its assumptions. The Company has certain financial instruments that are publicly traded from
which the Company can derive the implied volatility. Therefore, the Company used implied and historical volatility for valuing its stock options. The Company believes that implied and historical
volatility is a better indicator of expected volatility because it is generally reflective of both historical volatility and expectations of how future volatility will differ from historical
volatility.
F-18
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The
Company determined the fair value of stock options issued during fiscal 2010, 2011 and 2012 as of the date of the grant, using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Expected dividend
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
1.4
|
%
|
|
0.6
|
%
|
Expected volatility
|
|
|
39.0
|
%
|
|
40.0
|
%
|
|
35.6
|
%
|
Expected life (in years)
|
|
|
4.3
|
|
|
4.3
|
|
|
4.3
|
|
The
following summarizes stock option activity for fiscal years 2010, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-Average
Remaining Contractual
Term
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at June 30, 2009
|
|
|
2,175,863
|
|
|
17.69
|
|
|
|
|
|
|
|
Granted
|
|
|
257,500
|
|
|
16.41
|
|
|
|
|
|
|
|
Exercised
|
|
|
(660,764
|
)
|
|
16.98
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(216,489
|
)
|
|
20.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
|
1,556,110
|
|
|
17.46
|
|
|
|
|
|
|
|
Granted
|
|
|
107,140
|
|
|
30.62
|
|
|
|
|
|
|
|
Exercised
|
|
|
(719,515
|
)
|
|
18.05
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(12,823
|
)
|
|
21.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011
|
|
|
930,912
|
|
|
18.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
269,469
|
|
|
35.98
|
|
|
|
|
|
|
|
Exercised
|
|
|
(140,385
|
)
|
|
17.75
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(599
|
)
|
|
16.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2012
|
|
|
1,059,397
|
|
|
23.01
|
|
|
7.2 years
|
|
$
|
42,729
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2012
|
|
|
636,227
|
|
$
|
17.61
|
|
|
6.3 years
|
|
$
|
29,092
|
|
|
|
|
|
|
|
|
|
|
|
The
per-share weighted-average grant-date fair value of stock options granted under the OSI Plan was $5.64, $10.50 and $10.67 for fiscal 2010, 2011 and 2012,
respectively. The total intrinsic value of options exercised during fiscal 2012 was $4.8 million.
F-19
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Restricted Stock Awards
A summary of restricted stock award activity for the periods indicated was as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Fair Value
|
|
Nonvested at June 30, 2009
|
|
|
359,691
|
|
$
|
17.07
|
|
Granted
|
|
|
247,800
|
|
|
18.20
|
|
Vested
|
|
|
(112,665
|
)
|
|
17.99
|
|
Forfeited
|
|
|
(15,289
|
)
|
|
17.18
|
|
|
|
|
|
|
|
Nonvested at June 30, 2010
|
|
|
479,537
|
|
$
|
17.44
|
|
Granted
|
|
|
268,406
|
|
|
29.48
|
|
Vested
|
|
|
(161,124
|
)
|
|
18.08
|
|
Forfeited
|
|
|
(21,706
|
)
|
|
19.55
|
|
|
|
|
|
|
|
Nonvested at June 30, 2011
|
|
|
565,113
|
|
$
|
22.89
|
|
Granted
|
|
|
230,597
|
|
|
36.99
|
|
Vested
|
|
|
(208,376
|
)
|
|
21.41
|
|
Forfeited
|
|
|
(6,866
|
)
|
|
31.10
|
|
|
|
|
|
|
|
Nonvested at June 30, 2012
|
|
|
580,468
|
|
$
|
28.93
|
|
|
|
|
|
|
|
The per-share weighted average grant-date fair value of restricted stock granted under the OSI Plan was $18.20, $29.48 and
$36.99 for fiscal 2010, 2011 and 2012, respectively. The total fair value of shares vested during fiscal 2010, 2011 and 2012 was $2.0 million, $2.9 million and $4.5 million,
respectively.
As
of June 30, 2012, there were 1,090,876 shares available for grant under the OSI Plan. Under the terms of the OSI Plan, no more than 604,167 of these shares may be granted in
the form of restricted stock.
8. INCOME TAXES
The following is a geographical breakdown of income before the provision (benefit) for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,888
|
|
$
|
26,855
|
|
$
|
21,335
|
|
Foreign
|
|
|
20,108
|
|
|
19,880
|
|
|
40,648
|
|
|
|
|
|
|
|
|
|
Total pre-tax income
|
|
$
|
34,996
|
|
$
|
46,735
|
|
$
|
61,983
|
|
|
|
|
|
|
|
|
|
F-20
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The Company's provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,809
|
|
$
|
5,068
|
|
$
|
8,176
|
|
State
|
|
|
745
|
|
|
1,040
|
|
|
2,396
|
|
Foreign
|
|
|
2,644
|
|
|
2,398
|
|
|
7,320
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
6,198
|
|
|
8,506
|
|
|
17,892
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,640
|
|
$
|
3,085
|
|
$
|
(3,565
|
)
|
State
|
|
|
(374
|
)
|
|
1,192
|
|
|
(554
|
)
|
Foreign
|
|
|
2,975
|
|
|
530
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
5,241
|
|
|
4,807
|
|
|
(1,457
|
)
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
11,439
|
|
$
|
13,313
|
|
$
|
16,435
|
|
|
|
|
|
|
|
|
|
The exercise of stock options during the fiscal year ended June 30, 2010, 2011 and 2012 resulted in additional tax benefit and has been
reflected as an adjustment of income taxes payable and an adjustment of additional paid-in capital. The adjustments recorded were $0.7 million, $4.9 million and
$3.2 million for the years ended June 30, 2010, 2011 and 2012, respectively.
As
of June 30, 2011 and 2012, the Company's liability for uncertain tax positions was $9.8 million and $8.3 million, respectively. Of the $8.3 million,
$7.0 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The
Company recognizes potential interest and penalties related to income tax matters in income tax expense. As of June 30, 2012, the Company had accrued $1.2 million for
interest and penalties, accordingly. The Company's uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include fiscal years after
2009 for federal purposes, fiscal years after 2008 for state purposes and fiscal years after 2003 for various foreign jurisdictions. Facts and circumstances could arise that could cause the Company to
reduce the liability for unrecognized tax benefits, including, but not limited to, settlement of income tax positions or expiration of statutes of limitation. Since the ultimate resolution of
uncertain tax positions depends on many factors and assumptions, the Company is not able to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such
changes.
F-21
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
A
summary of activity of unrecognized tax benefits for fiscal 2010, 2011 and 2012 was as follows (in thousands).
|
|
|
|
|
Balance as July 1, 2009
|
|
$
|
5,887
|
|
Additions on tax positions for the current year
|
|
|
1,119
|
|
Additions on tax positions from prior years
|
|
|
780
|
|
Reductions as a result of a lapse of statute of limitations
|
|
|
(456
|
)
|
Reduction in tax position from prior year
|
|
|
(453
|
)
|
|
|
|
|
Balance as June 30, 2010
|
|
$
|
6,877
|
|
Additions on tax positions for the current year
|
|
|
454
|
|
Additions on tax positions from prior years
|
|
|
365
|
|
Reduction in tax position from prior year
|
|
|
(327
|
)
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
7,369
|
|
Additions on tax positions for the current year
|
|
|
264
|
|
Additions on tax positions from prior years
|
|
|
503
|
|
Reduction in tax position from prior year
|
|
|
(1,063
|
)
|
|
|
|
|
Balance at June 30, 2012
|
|
$
|
7,073
|
|
|
|
|
|
The
Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries as it is the Company's intention to utilize those earnings in the foreign
operations for an indefinite period of time. At June 30, 2012, undistributed earnings of the foreign subsidiaries amounted to approximately $197 million. It is not practical to determine
the amount of income or withholding tax that would be payable upon the remittance of these earnings.
F-22
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Deferred
income tax assets (liabilities) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
2012
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
R&D tax credit carryforwards
|
|
$
|
4,178
|
|
$
|
3,603
|
|
Net operating loss carryforwards
|
|
|
6,075
|
|
|
5,863
|
|
Revitalization zone deductions
|
|
|
855
|
|
|
741
|
|
Allowance for doubtful accounts
|
|
|
1,355
|
|
|
1,537
|
|
Inventory reserve
|
|
|
6,539
|
|
|
7,777
|
|
Inventory capitalization
|
|
|
2,219
|
|
|
2,619
|
|
Accrued liabilities
|
|
|
5,422
|
|
|
5,005
|
|
Deferred compensation
|
|
|
2,438
|
|
|
6,564
|
|
Unrecognized tax benefit
|
|
|
1,475
|
|
|
663
|
|
Other assets
|
|
|
6,478
|
|
|
7,620
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
37,034
|
|
|
41,992
|
|
Valuation allowance
|
|
|
(8,292
|
)
|
|
(8,858
|
)
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
28,742
|
|
|
33,134
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,109
|
)
|
|
(3,036
|
)
|
State income taxes
|
|
|
(743
|
)
|
|
(1,076
|
)
|
Amortization of intangible assets
|
|
|
(9,403
|
)
|
|
(9,859
|
)
|
Other liabilities
|
|
|
|
|
|
(1,865
|
)
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(12,255
|
)
|
|
(15,836
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
16,487
|
|
$
|
17,298
|
|
|
|
|
|
|
|
As
of June 30, 2012, the Company had state and foreign net operating loss carry forwards of approximately $0.6 million and $21.5 million. In addition, the Company
had state tax credit carry forwards, including research and development and revitalization zone credits, of approximately $2.2 million. The Company's state tax credit carry forwards will begin
to expire in the tax year ending June 30, 2013. As of June 30, 2012, the Company has a federal research and development tax credit carry forward of approximately $2.2 million and
foreign tax credit carry forwards of $1.5 million. The Company's federal credit carry forwards will begin to expire in the tax year ending June 30, 2021.
The
Company has established valuation allowances that relate to the net operating loss of certain subsidiaries, foreign tax credits, R&D credits, and revitalization zone credits. During
the year ended June 30, 2012, the Company recorded a net aggregated increase of $0.5 million to these valuation allowances. The Company reviews the adequacy of individual valuation
allowances and releases such allowances when it is determined that it is more likely than not that the related benefits will be realized.
F-23
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The
consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Provision for income taxes at federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes and creditsnet of federal benefit
|
|
|
0.7
|
|
|
3.1
|
|
|
1.9
|
|
Research and development tax credits
|
|
|
(3.2
|
)
|
|
(2.2
|
)
|
|
(0.5
|
)
|
Foreign tax credits
|
|
|
(0.6
|
)
|
|
(3.5
|
)
|
|
(0.1
|
)
|
Subpart F income
|
|
|
0.6
|
|
|
2.8
|
|
|
0.1
|
|
Foreign income subject to tax at other than federal statutory rate
|
|
|
(5.3
|
)
|
|
(9.0
|
)
|
|
(11.0
|
)
|
Nondeductible expenses
|
|
|
0.1
|
|
|
0.4
|
|
|
1.3
|
|
Change in valuation allowance
|
|
|
1.0
|
|
|
1.1
|
|
|
1.6
|
|
Unrecognized tax benefit
|
|
|
1.8
|
|
|
0.2
|
|
|
(1.8
|
)
|
Other
|
|
|
2.6
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
32.7
|
%
|
|
28.5
|
%
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
The
provision for income taxes consists of provisions for federal, state, and foreign income taxes. The Company operates in an international environment with significant operations in
various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
9. COMMITMENTS AND CONTINGENCIES
The following is a summary of commitments as of June 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 year
|
|
2-3 years
|
|
4-5 years
|
|
After
5 years
|
|
Total debt
|
|
$
|
2,682
|
|
$
|
215
|
|
$
|
430
|
|
$
|
430
|
|
$
|
1,607
|
|
Operating leases
|
|
$
|
31,238
|
|
$
|
11,203
|
|
$
|
15,818
|
|
$
|
3,236
|
|
$
|
981
|
|
Defined benefit plan obligation
|
|
$
|
8,638
|
|
$
|
209
|
|
$
|
569
|
|
$
|
408
|
|
$
|
7,452
|
|
|
|
Operating Leases
The Company leases facilities and certain equipment under various operating lease agreements. Certain leases provide for periodic
rent increases and may contain escalation clauses and renewal options. Rent expense totaled $10.4 million, $11.3 million and $13.0 million for fiscal years 2010, 2011 and 2012,
respectively.
Commitments
Under the terms and conditions of the purchase agreements associated with certain acquisitions, the Company may be obligated to make
additional payments based on the achievement by the acquired operations of certain sales or profitability milestones. The maximum amount of such payments under arrangements with contingent
consideration caps is $69 million. In addition, one of the purchase agreements the Company entered into requires royalty payments through 2022 based on the license of, or sales of products
containing the technology of CXR Limited, a company acquired in 2004. For acquisitions that occurred prior to fiscal year 2010, which were accounted for under Statement of Financial Accounting
Standards 141, "Business Combinations," the
F-24
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Company
accounts for such contingent payments as an addition to the purchase price of the acquired business. For acquisitions accounted for under Accounting Standards Codification 805, "Business
Combinations," ("ASC 805"), the estimated fair value of these obligations is recorded as a liability in the Consolidated Balance Sheets with subsequent revisions reflected in the Consolidated
Statements of Operations. As of June 30, 2011 and June 30, 2012, pursuant to ASC 805, $9.2 million and $20.8 million of contingent payment obligations, respectively, are
included in other long-term liabilities in the accompanying Consolidated Balance Sheets. During fiscal 2011 and 2012, the fair values of these contingent obligations were revised and
resulted in reductions of $1.2 million and $2.2 million, respectively.
Environmental Contingencies
The Company is subject to various environmental laws. The Company's practice is to conduct appropriate environmental
investigations for each of its properties in the United States at which the Company manufactures products in order to identify, as of the date of such report, potential areas of environmental concern
related to past and present activities or from nearby operations. In certain cases, the Company has conducted further environmental assessments consisting of soil and groundwater testing and other
investigations deemed appropriate by independent environmental consultants.
During
one investigation, the Company discovered soil and groundwater contamination at its Hawthorne, California facility. The Company filed the requisite reports concerning this problem
with the appropriate environmental authorities in fiscal 2001. The Company has not yet received any response to such reports, and no agency action or litigation is presently pending or threatened. The
Company's site was previously used by
other companies for semiconductor manufacturing similar to that presently conducted on the site by us, and it is not presently known who is responsible for the contamination or, if required, the
remediation. The groundwater contamination is a known regional problem, not limited to the Company's premises or its immediate surroundings.
The
Company has not accrued for loss contingencies relating to environmental matters because it believes that, although unfavorable outcomes may be possible, they are not considered by
the Company's management to be probable and reasonably estimable. If one or more of environmental matters are resolved in a manner adverse to the Company, the impact on the Company's results of
operations, financial position and/or liquidity could be material.
Legal Proceedings
The Company is involved in various claims and legal proceedings arising out of the ordinary course of business. In the Company's
opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on its financial position, future results of operations or
cash flows. The Company has not accrued for loss contingencies relating to such matters because the Company believes that, although unfavorable outcomes in the proceedings may be possible, they are
not considered by management to be probable or reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company's results of operations,
financial position and/or liquidity could be material.
10. STOCKHOLDERS' EQUITY
Stock Repurchase Program
The Company's Board of Directors has authorized a Common Stock repurchase program. During fiscal 2010, the Company did not repurchase
any shares under this program. During fiscal 2011 and 2012, the Company repurchased 58,396 shares and 67,037 shares, respectively, under this program. As of June 30, 2012, 585,772 shares were
available for additional repurchase under the program. Upon repurchase, the shares were restored to the status of authorized but unissued shares in the accompanying Consolidated Financial Statements.
F-25
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Warrants
In June 2004, the Company issued and sold an aggregate of 1,500,000 shares of Common Stock in a private placement to institutional
investors and received net proceeds of $31 million. As part of the transaction, the Company issued warrants to purchase 337,500 additional shares of the Company's Common Stock at an exercise
price of $27.73 per share exercisable at any time, in full or part, expiring on June 1, 2011. These warrants were exercised in fiscal 2011 and the Company received $4.7 million in
proceeds from warrant holders that paid cash. As permitted under the terms of the agreement, certain warrants were tendered for cashless exercise.
11. RELATED-PARTY TRANSACTIONS
In 1994, the Company, together with an unrelated company, formed ECIL-Rapiscan Security Products Limited, a joint venture
organized under the laws of India. The Company owns a 36% interest in the joint venture, the Company's Chairman and Chief Executive Officer owns a 10.5% interest, and the Company's Executive Vice
President and President of the Company's Security division owns a 4.5% ownership interest. The Company's initial investment was approximately $0.1 million. For the years ended June 30,
2010, 2011 and 2012, the Company's equity earnings in the joint venture were approximately $0.4 million, $0.6 million and $0.4 million, respectively. The Company, its Chairman and
Chief Executive Officer and the Company's Executive Vice President and President of the Company's Security division collectively control less than 50% of the board of directors voting power in the
joint venture. As a result, the Company accounts for the investment under the equity method of accounting. The joint venture was formed for the purpose of the manufacture, assembly, service and
testing of security and inspection systems and other products. Some of the Company's subsidiaries are suppliers to the joint venture partner, which in turn manufactures and sells the resulting
products. Sales to the joint venture partner for fiscal 2010, 2011 and 2012 were approximately $4.4 million, $7.1 million and $5.8 million, respectively. Receivables from the
joint venture were $2.2 million and $1.5 million as of June 30, 2011 and 2012, respectively.
The
Company has contracted with entities owned by its Chief Executive Officer and/or his family members to provide messenger service, auto rental and printing services. Such expenses for
2010, 2011 and 2012 were approximately $64,000, $60,000 and $65,000 for messenger services and auto rental and $60,000, $31,000 and $14,000 for printing services, respectively. Further, a subsidiary
of the Company is leasing warehouse space on a month-to-month basis for approximately $3,000 per month from an entity controlled by its Chief Executive Officer.
12. EMPLOYEE BENEFIT PLANS
Employee Retirement Savings Plans
The Company has various qualified employee retirement savings plans. Participants can contribute certain amounts to the plans and the
Company matches a certain portion of employee contributions. The Company contributed approximately $3.4 million, $3.6 million and $3.9 million to the plans for the fiscal years
ended June 30, 2010, 2011 and 2012, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan, which meets the requirements for deferred compensation under Section 409A of the
Internal Revenue Code. The plan provides that selected employees are eligible to defer up to 80% of their salaries and up to 100% of their bonuses. The Company may also make employer contributions to
participant accounts in certain circumstances. The benefits under this plan are unsecured. Participants are
F-26
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
generally
eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment for any reason or at a later date to comply with the
restrictions of Section 409A. Discretionary Company contributions and the related earnings are subject to a vesting schedule dependent upon years of service to the Company and, also, vest
completely upon the participant's disability, death or a change of control. The Company made contributions of $0.5 million, $0.9 million and $0.7 million during fiscal year 2010,
2011 and 2012, respectively. As of June 30, 2012, the Company held assets of $8.2 million and liabilities of $7.9 million. Assets related to this plan are included in other assets
and liabilities related to this plan are included in other long-term liabilities in the Consolidated Balance Sheets. The plan liabilities include accrued employer contributions not yet
funded to the plan.
Employee Pension Plans
The Company sponsors a number of qualified and nonqualified pension plans for its employees at certain locations. In accordance with
accounting standards for employee pension and postretirement benefits, the Company fully recognizes the overfunded or underfunded status of each of its defined benefit plans as an asset or liability
in the Consolidated Balance Sheets. The asset or liability equals the difference between the fair value of the plans' assets and their benefit obligations. The liabilities associated with underfunded
plans are classified as noncurrent, except to the extent the fair value of the plans' assets is less than the plans' estimated benefit payments over the next 12 months. The Company measures its
pension and postretirement benefit plans' assets and benefit obligations as of June 30.
F-27
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The
following provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets for fiscal years 2011 and 2012, and a statement of the funded status as
of June 30, 2011 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
2011
|
|
2012
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
9,365
|
|
$
|
10,326
|
|
Translation adjustment
|
|
|
659
|
|
|
(428
|
)
|
Service costs
|
|
|
41
|
|
|
54
|
|
Interest costs
|
|
|
497
|
|
|
487
|
|
Curtailment / plan amendment
|
|
|
|
|
|
1,794
|
|
Plan participants' contributions
|
|
|
(131
|
)
|
|
|
|
Actuarial loss
|
|
|
184
|
|
|
(225
|
)
|
Benefits paid
|
|
|
(289
|
)
|
|
(250
|
)
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
10,326
|
|
|
11,758
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
5,254
|
|
|
6,066
|
|
Translation adjustment
|
|
|
554
|
|
|
(336
|
)
|
Actual return on plan assets
|
|
|
543
|
|
|
158
|
|
Company contributions
|
|
|
275
|
|
|
327
|
|
Plan participants' contributions
|
|
|
(195
|
)
|
|
|
|
Benefits paid
|
|
|
(365
|
)
|
|
(185
|
)
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
6,066
|
|
|
6,030
|
|
|
|
|
|
|
|
Funded status
|
|
|
(4,260
|
)
|
|
(5,728
|
)
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(4,260
|
)
|
$
|
(5,728
|
)
|
|
|
|
|
|
|
Amount recognized in Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
Investments
|
|
$
|
250
|
|
$
|
315
|
|
Accrued pension liability
|
|
|
(4,510
|
)
|
|
(6,043
|
)
|
Accumulated other comprehensive income
|
|
|
2,770
|
|
|
3,883
|
|
The
following table provides the net periodic benefit costs for each of the fiscal years ended June 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
Net Periodic Benefit Costs
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
$
|
49
|
|
$
|
41
|
|
$
|
54
|
|
Interest costs
|
|
|
464
|
|
|
458
|
|
|
487
|
|
Expected return on plan assets
|
|
|
(306
|
)
|
|
(352
|
)
|
|
(359
|
)
|
Amortization of prior service costs
|
|
|
258
|
|
|
335
|
|
|
335
|
|
Recognized actuarial loss
|
|
|
284
|
|
|
310
|
|
|
109
|
|
Curtailment
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
735
|
|
$
|
792
|
|
$
|
626
|
|
|
|
|
|
|
|
|
|
F-28
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Plan Assumptions
|
|
|
|
|
|
|
|
|
|
2011
|
|
2012
|
|
Weighted average assumptions at year-end:
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.2
|
%
|
|
5.4
|
%
|
Expected return on plan assets
|
|
|
6.0
|
%
|
|
5.8
|
%
|
Rate of compensation increase
|
|
|
2.5
|
%
|
|
2.2
|
%
|
The
long term return on assets has been derived from the weighted average of assumed returns on each of the major asset categories. The weighted average is based on the actual proportion
of each major asset class held, rather than a benchmark portfolio of assets. The expected returns for each major asset class have been derived from a combination of both historical market returns and
current market data as well as the views of a range of investment managers.
Plan Assets and Investment Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
June 30, 2011
|
|
Fiscal year ended
June 30, 2012
|
|
|
|
Proportion of
Fair Value
|
|
Expected Rate
of Return
|
|
Proportion of
Fair Value
|
|
Expected Rate
of Return
|
|
Equity securities
|
|
|
75
|
%
|
|
7
|
%
|
|
49
|
%
|
|
8
|
%
|
Debt securities
|
|
|
20
|
%
|
|
4
|
%
|
|
41
|
%
|
|
2
|
%
|
Other
|
|
|
5
|
%
|
|
1
|
%
|
|
10
|
%
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
100
|
%
|
|
6.0
|
%
|
|
100
|
%
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The
defined benefit plans' assets are invested in a range of pooled investment funds that provide access to a diverse range of asset classes. The investment objective is to maximize the
investment return over the long term without exposing the fund to an unnecessary level of risk. Within this objective, it is recognized that benefits will be secured by the purchase of annuities at
the time of employee retirement.
The
benchmark is to hold assets in both equity and debt securities. The proportion in each investment class is not mandated and is allowed to fluctuate with market movements. The equity
holdings are maintained in balanced funds under the control of investment managers.
Day-to-day
equities selection decisions are delegated to investment managers, although these are monitored against performance and risk targets. Due to the nature
of the pooled funds, there are no significant holdings in any single company (greater than 5% of the total assets). The investment strategy is reviewed on a regular basis, based on the results of the
liability studies.
F-29
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
Projected Benefit Payments
The following table reflects estimated benefits payments, based upon the same assumptions used to measure the benefit obligation and
net pension cost, as of June 30, 2012 (in thousands):
|
|
|
|
|
|
|
Pension Benefits
|
|
July 1, 2012 to June 30, 2013
|
|
|
209
|
|
July 1, 2013 to June 30, 2014
|
|
|
363
|
|
July 1, 2014 to June 30, 2015
|
|
|
206
|
|
July 1, 2015 to June 30, 2016
|
|
|
201
|
|
July 1, 2016 to June 30, 2017
|
|
|
207
|
|
July 1, 2017 to June 30, 2022
|
|
|
7,452
|
|
Company Contribution
Currently, the Company's weighted average contribution rate is 9% of pensionable salaries. If Company contributions continue at the
current rate, the estimated total Company contributions for fiscal 2013 will be approximately $0.3 million.
13. SEGMENT INFORMATION
The Company has determined that it operates in three identifiable industry segments, (a) security and inspection systems
(Security division), (b) medical monitoring and anesthesia systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division).
The Company also has a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses; expenses related to stock issuances; and legal and
audit and other professional service fees not allocated to product segments. Both the Security and
Healthcare divisions comprise primarily end-product businesses whereas the businesses of the Optoelectronics and Manufacturing division primarily supplies components and subsystems to
original equipment manufacturers, including to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values. All other accounting policies of
the segments are the same as described in Note 1, Summary of Significant Accounting Policies.
Revenues
from one customer of the Company's Security division represent approximately $99.2 million of the Company's consolidated revenues.
F-30
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
The
following tables present the operations and identifiable assets by industry segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Security
Division
|
|
Healthcare
Division
|
|
Optoelectronics
and
Manufacturing
Division
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
251,479
|
|
$
|
206,557
|
|
$
|
137,075
|
|
$
|
|
|
$
|
|
|
$
|
595,111
|
|
Revenue between product segments
|
|
|
|
|
|
|
|
|
34,162
|
|
|
|
|
|
(34,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
251,479
|
|
$
|
206,557
|
|
$
|
171,237
|
|
$
|
|
|
|
(34,162
|
)
|
$
|
595,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
23,351
|
|
$
|
13,113
|
|
$
|
11,958
|
|
$
|
(10,878
|
)
|
$
|
(776
|
)
|
$
|
36,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments assets
|
|
$
|
221,019
|
|
$
|
138,739
|
|
$
|
85,170
|
|
$
|
72,731
|
|
$
|
(4,545
|
)
|
$
|
513,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
12,362
|
|
$
|
2,290
|
|
$
|
2,414
|
|
$
|
1,021
|
|
$
|
|
|
$
|
18,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
6,210
|
|
$
|
8,365
|
|
$
|
3,449
|
|
$
|
537
|
|
$
|
|
|
$
|
18,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
Security
Division
|
|
Healthcare
Division
|
|
Optoelectronics
and
Manufacturing
Division
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
294,686
|
|
$
|
215,050
|
|
$
|
146,364
|
|
$
|
|
|
$
|
|
|
$
|
656,100
|
|
Revenue between product segments
|
|
|
|
|
|
|
|
|
46,509
|
|
|
|
|
|
(46,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
294,686
|
|
$
|
215,050
|
|
$
|
192,873
|
|
$
|
|
|
|
(46,509
|
)
|
$
|
656,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
25,352
|
|
$
|
17,857
|
|
$
|
17,211
|
|
$
|
(11,322
|
)
|
$
|
(1,337
|
)
|
$
|
47,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments assets
|
|
$
|
245,068
|
|
$
|
152,048
|
|
$
|
109,961
|
|
$
|
84,082
|
|
$
|
(6,243
|
)
|
$
|
584,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,038
|
|
$
|
2,983
|
|
$
|
2,267
|
|
$
|
1,104
|
|
$
|
|
|
$
|
13,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
6,462
|
|
$
|
7,675
|
|
$
|
3,720
|
|
$
|
672
|
|
$
|
|
|
$
|
18,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Table of Contents
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
Security
Division
|
|
Healthcare
Division
|
|
Optoelectronics
and
Manufacturing
Division
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
391,808
|
|
$
|
235,548
|
|
$
|
165,634
|
|
$
|
|
|
$
|
|
|
$
|
792,990
|
|
Revenue between product segments
|
|
|
|
|
|
|
|
|
45,169
|
|
|
|
|
|
(45,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
391,808
|
|
$
|
235,548
|
|
$
|
210,803
|
|
$
|
|
|
|
(45,169
|
)
|
$
|
792,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
30,552
|
|
$
|
28,330
|
|
$
|
18,743
|
|
$
|
(11,887
|
)
|
$
|
202
|
|
$
|
65,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments assets
|
|
$
|
351,668
|
|
$
|
162,583
|
|
$
|
132,281
|
|
$
|
109,405
|
|
$
|
(6,041
|
)
|
$
|
749,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
56,848
|
|
$
|
5,158
|
|
$
|
4,552
|
|
$
|
1,932
|
|
$
|
|
|
$
|
68,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
7,819
|
|
$
|
7,640
|
|
$
|
3,876
|
|
$
|
864
|
|
$
|
|
|
$
|
20,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present the revenues and identifiable assets by geographical area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Americas
|
|
Europe
|
|
Asia
|
|
Eliminations
|
|
Total
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
418,808
|
|
$
|
126,450
|
|
$
|
49,853
|
|
$
|
|
|
$
|
595,111
|
|
Revenue between product segments
|
|
|
23,204
|
|
|
|
|
|
10,958
|
|
|
(34,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
442,012
|
|
$
|
126,450
|
|
$
|
60,811
|
|
$
|
(34,162
|
)
|
$
|
595,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
$
|
125,485
|
|
$
|
23,555
|
|
$
|
11,289
|
|
|
|
|
$
|
160,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
Americas
|
|
Europe
|
|
Asia
|
|
Eliminations
|
|
Total
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
457,692
|
|
$
|
124,196
|
|
$
|
74,212
|
|
$
|
|
|
$
|
656,100
|
|
Revenue between product segments
|
|
|
26,376
|
|
|
|
|
|
20,133
|
|
|
(46,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
484,068
|
|
$
|
124,196
|
|
$
|
94,345
|
|
$
|
(46,509
|
)
|
$
|
656,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
$
|
132,110
|
|
$
|
34,351
|
|
$
|
13,838
|
|
|
|
|
$
|
180,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
Americas
|
|
Europe
|
|
Asia
|
|
Eliminations
|
|
Total
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customer revenue
|
|
$
|
542,178
|
|
$
|
153,140
|
|
$
|
97,672
|
|
$
|
|
|
$
|
792,990
|
|
Revenue between product segments
|
|
|
10,446
|
|
|
|
|
|
34,723
|
|
|
(45,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
552,624
|
|
$
|
153,140
|
|
$
|
132,395
|
|
$
|
(45,169
|
)
|
$
|
792,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
$
|
220,976
|
|
$
|
32,819
|
|
$
|
14,894
|
|
|
|
|
$
|
268,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* * * * * *
F-32
Table of Contents
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
Description
|
|
Balance at
beginning
of period
|
|
Charged
to costs
and expenses
|
|
Charged
in other
accounts
|
|
Deductions-
Write-offs
|
|
Balance at
end of
period
|
|
Balance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2010
|
|
$
|
6,896
|
|
$
|
522
|
|
$
|
|
|
$
|
1,412
|
|
$
|
6,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2011
|
|
$
|
6,006
|
|
$
|
1,844
|
|
$
|
|
|
$
|
2,057
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2012
|
|
$
|
5,793
|
|
$
|
582
|
|
$
|
|
|
$
|
1,321
|
|
$
|
5,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for warranty reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2010
|
|
$
|
10,106
|
|
$
|
6,653
|
|
$
|
|
|
$
|
5,829
|
|
$
|
10,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2011
|
|
$
|
10,930
|
|
$
|
7,581
|
|
$
|
|
|
$
|
3,981
|
|
$
|
14,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2012
|
|
$
|
14,530
|
|
$
|
8,620
|
|
$
|
|
|
$
|
5,588
|
|
$
|
17,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
OSI SYSTEMS, INC.
(Registrant)
|
Date: August 10, 2012
|
|
By:
|
|
/s/ ALAN EDRICK
Alan Edrick,
Executive Vice President & Chief Financial Officer
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Deepak Chopra,
Alan Edrick and Victor Sze, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below,
the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and
directors to enable OSI Systems, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission in
connection therewith, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments
thereto.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant, and in the capacities and on
the dates indicated.
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ DEEPAK CHOPRA
Deepak Chopra
|
|
Chairman of the Board,
President and Chief Executive Officer (Principal Executive Officer)
|
|
August 10, 2012
|
/s/ ALAN EDRICK
Alan Edrick
|
|
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
|
|
August 10, 2012
|
/s/ AJAY MEHRA
Ajay Mehra
|
|
Executive Vice President, President of
Rapiscan Systems and Director
|
|
August 10, 2012
|
/s/ WILLIAM F. BALLHAUS, JR.
William F. Ballhaus, Jr.
|
|
Director
|
|
August 10, 2012
|
/s/ DAVID T. FEINBERG
David T. Feinberg
|
|
Director
|
|
August 10, 2012
|
/s/ STEVEN C. GOOD
Steven C. Good
|
|
Director
|
|
August 10, 2012
|
/s/ MEYER LUSKIN
Meyer Luskin
|
|
Director
|
|
August 10, 2012
|
II-1
Table of Contents
INDEX TO EXHIBITS
|
|
|
No.
|
|
EXHIBIT DESCRIPTION
|
3.1
|
|
Certificate of Incorporation of OSI Systems, Inc. (1)
|
3.2
|
|
Bylaws of OSI Systems, Inc. (1)
|
4.1
|
|
Form of Common Stock Certificate (1)
|
10.1
|
|
OSI Systems, Inc. Deferred Compensation Plan (2)
|
10.2
|
|
OSI Systems, Inc. Nonqualified Defined Benefit Plan (3)
|
10.3
|
|
OSI Systems, Inc. 2008 Employee Stock Purchase Plan (4)
|
10.4
|
|
Form of Indemnification Agreement for Directors and Executive Officers of OSI Systems, Inc. (5)
|
10.5
|
|
Credit Agreement dated October 15, 2010, between Wells Fargo Bank, N.A. and OSI Systems, Inc. (6)
|
10.6
|
|
First Amendment to Credit Agreement dated November 10, 2011, between Wells Fargo Bank, N.A. and OSI Systems, Inc. (7)
|
10.7
|
|
Second Amendment to Credit Agreement dated December 15, 2011, between Wells Fargo Bank, N.A. and OSI Systems, Inc. (8)
|
10.8
|
|
Third Amendment to Credit Agreement dated April 10, 2012, between Wells Fargo Bank, N.A. and OSI Systems, Inc. (9)
|
10.9
|
|
Amended and Restated 2006 Equity Participation Plan of OSI Systems, Inc. (10)
|
10.10
|
|
Employment Agreement effective as of January 1, 2012 between Deepak Chopra and OSI Systems, Inc. (11)
|
10.11
|
|
Employment Agreement effective as of January 1, 2012 between Alan Edrick and OSI Systems, Inc. (11)
|
10.12
|
|
Employment Agreement effective as of January 1, 2012 between Ajay Mehra and OSI Systems, Inc. (11)
|
10.13
|
|
Employment Agreement effective as of January 1, 2012 between Victor Sze and OSI Systems, Inc. (11)
|
10.14
|
|
Employment Agreement effective as of January 1, 2012 between Manoocher Mansouri and OSI Systems, Inc. (11)
|
10.15
|
|
Retirement Benefit Award Agreement effective as of January 1, 2012 between Deepak Chopra and OSI Systems, Inc. (12)
|
14.1
|
|
OSI Systems, Inc. Code of Ethics and Conduct (13)
|
21.1*
|
|
Subsidiaries of the Company
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm
|
24.1*
|
|
Power of Attorney (included on the signature page of this Form 10-K)
|
31.1*
|
|
Certification Pursuant to Section 302
|
31.2*
|
|
Certification Pursuant to Section 302
|
32.1*
|
|
Certification Pursuant to Section 906
|
32.2*
|
|
Certification Pursuant to Section 906
|
101.INS
|
|
XBRL Instance Document (14)
|
Table of Contents
|
|
|
No.
|
|
EXHIBIT DESCRIPTION
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document (14)
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document (14)
|
101.DEF
|
|
XBRL Extension Definition (14)
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document (14)
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document (14)
|
-
*
-
Filed
herewith
-
-
Denotes
a management contract or compensatory plan or arrangement.
-
(1)
-
Previously
filed with our Current Report on Form 8-K filed on March 8, 2010.
-
(2)
-
Previously
filed with our Current Report on Form 8-K filed on June 16, 2008.
-
(3)
-
Previously
filed with our Current Report on Form 8-K filed on October 10, 2008.
-
(4)
-
Previously
filed with our Proxy Statement on Schedule 14A filed on October 14, 2008.
-
(5)
-
Previously
filed with our Annual Report on Form 10-K filed on August 27, 2010.
-
(6)
-
Previously
filed with our Current Report on Form 8-K filed on October 19, 2010.
-
(7)
-
Previously
filed with our Current Report on Form 8-K filed on November 10, 2011.
-
(8)
-
Previously
filed with our Quarterly Report on Form 10-Q filed on January 25, 2012.
-
(9)
-
Previously
filed with our Current Report on Form 8-K filed on April 11, 2012.
-
(10)
-
Previously
filed with our Current Report on Form 8-K filed on December 1, 2010.
-
(11)
-
Previously
filed with our Current Report on Form 8-K filed on April 6, 2012.
-
(12)
-
Previously
filed with our Current Report on Form 8-K filed on May 1, 2012.
-
(13)
-
Previously
filed with our Quarterly Report on Form 10-Q filed on October 26, 2011.
-
(14)
-
XBRL
information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of
the Securities Exchange Act of 1934, as amended, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not
incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.
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