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 provide security screening, threat detection and non-intrusive inspection products, and services globally to end users under the "Rapiscan Systems"
trade name. Rapiscan Systems products fall into the following categories: baggage and parcel inspection systems; cargo and vehicle inspection systems; hold (checked) baggage screening systems; people
screening systems and radiation
detection systems. In addition to these products, we provide site design, installation, training and technical support services to our customers. 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 primarily 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 2013, revenues from the Security division amounted to $372.2 million, or approximately 46% of our revenues; revenues from the Healthcare division amounted to
$231.3 million, or approximately 29% of our revenues; and third-party revenues from the Optoelectronics and Manufacturing division amounted to $198.5 million, or approximately 25% 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, and provide electronics manufacturing services 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 U.S.
Transportation Security 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.
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.
The
United States Department of Energy (DOE) and other U.S. federal agencies implement the Second Line of Defense Program and Megaports programs to help prevent the proliferation and
trafficking of radioactive and nuclear materials. The DOE has procured and we continue to supply and maintain multiple Rapiscan radiation detection sensors, monitors and communications systems. Our
Security division also directly supplies many countries, nuclear power facilities and industries handling radioactive materials with radiation detection technology.
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.
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 less. Our Healthcare division designs, manufactures and markets products that respond to these economic forces by
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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 printed circuit board assembly, cable and harness assembly, 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, radiation 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 five categories: baggage and parcel inspection, cargo and vehicle inspection, hold (checked) baggage screening, people screening and radiation detection systems. 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, radioactive and nuclear materials 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 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. We also manufacture both active and passive radiation detection devices utilizing gamma, neutron and isotope
specific identification methodologies. 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 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.
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 have also developed 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 Radiation
Detection
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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 HE-50
Rapiscan TSA Radiation Detection
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High energy X-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 Radiation Detection
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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. In December 2012, we introduced 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 Holter 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. This product is
especially helpful in identifying the presence of atrial fibrillation. 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 by physicians around the world and clinical research organizations. 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
January 2013, we introduced 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, industrial and skin care applications that do not utilize optoelectronic devices. We also manufacture LCD displays
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for
medical, industrial and consumer electronics applications. Our electronics manufacturing services are provided primarily under the "OSI Electronics" trade name and are also provided under the
"APlus Products" trade name.
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 InGaAs Photodetectors
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, passive optical components and coatings, test and measurement instrumentation and toll and traffic management systems
|
|
Medical Devices and Accessories
|
|
Oximetry Sensors and Accessories
Blood Pressure Cuffs
Fluid Delivery Unifusors
|
|
Medical devices and instrumentation
|
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 Administración Tributaria in
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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 Shreveport, Louisiana, Schüchtermannklinik in Germany, Universitätsspital Zürich in Switzerland, and Intensive Care Centrum UMC Utrecht,
in the Netherlands 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; barcode scanners; toll and traffic management; and automotive diagnostic systems. Major customers in these segments include Raytheon, Honeywell, Gilardoni,
Covidien, Smiths Medical, Conmed Corporation, Inogen, Beckman Coulter, JDS Uniphase, 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
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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.
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, 2013, we engaged approximately 461
full-time engineers, technicians and support staff. Our research and development expenses were $45.5 million in fiscal 2011, $49.6 million in fiscal 2012 and $48.2 million in
fiscal 2013. 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, Colorado 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, with plans to consolidate the manufacturing services of our Massachusetts location into our other locations in fiscal 2014. 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.
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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.
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 possess rights to 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 2013 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 or enforceability,
or may be found to not be infringed by any third parties. 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.
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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 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 (Healthcare division manufacturing site through July
2013), Snoqualmie, Washington (Healthcare division manufacturing site after July 2013); 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 and Snoqualmie,
Washington facilities are also certified to the
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requirements
of Annex II, section 3 of the Directive 93/42/EEC 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 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 has increased our operating expenses. Because many parts of the 2010 healthcare
law remain subject to implementation in the future, 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.
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During one investigation, we discovered soil and groundwater contamination at our Hawthorne, California facility that we believe was the result of unspecified
historical releases prior to our occupancy. This site had been used by other companies for semiconductor manufacturing similar to our present operations since the mid-1960's and was part of a large
aircraft manufacturing complex during World War II. It is not presently known when the releases occurred or by whom they were caused. The groundwater contamination is a known regional problem, not
limited to our premises or our immediate surroundings. We filed the requisite reports concerning this problem with the appropriate environmental authorities in fiscal 2001. 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. We were recently contacted by the local governing agency with a request to provide additional historical information and further
characterization of the site. Historical reports and site characterization work plans were completed in fiscal 2013 and further site characterization studies, including soil and groundwater
investigations, are scheduled for fiscal 2014. These studies are necessary to determine the extent of the on-site releases and if any remediation of such contamination will be required.
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
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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 First Sensor and Excelitas Technologies. 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 Stellar Microelectronics; 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, 2013, our consolidated backlog totaled approximately $1.0 billion, compared to approximately $1.1 billion as of June 30, 2012 and approximately
$0.3 billion at June 30, 2011. 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, 2013, we employed approximately 5,200 people, of whom 2,659 were employed in manufacturing, 461 were employed in
engineering or research and development, 428 were employed in
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administration,
405 were employed in sales and marketing and 1,239 were employed in service capacities. Of the total employees, 2,231 were employed in the Americas, 2,548 were employed in Asia and 413
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.
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
Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are
descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We
encourage you to carefully consider all such risk factors when making investment decisions regarding our company. If any such risks, or any other risks that we do not currently consider to be
material, or which are not known to us, 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/or the market price of our Common Stock
include, but are not limited to:
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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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public guidance that we provide regarding future financial results based on facts, judgments and assumptions made at the
time of the publication of the guidance, all of which may change after the publication of the guidance;
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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, past performance, 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
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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 and subsequent attacks in other locations worldwide have created increased interest in
our security and inspection systems and service offerings. 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 and services be considered as a part of future security solutions, it is unclear what the level may be and how quickly funding to purchase our products and services
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 or materials 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 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.
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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.
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.
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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, including government agencies that can modify or terminate agreements more easily than other commercial customers with which we
contract, 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. In particular, government contracts typically contain provisions and are subject to laws and
regulations that give the government agencies rights and remedies not typically found in commercial contracts, including providing the government agency with the ability to
unilaterally:
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terminate our existing contracts;
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reduce the value of our existing contracts;
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modify some of the terms and conditions in our existing contracts;
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suspend or permanently prohibit us from doing business with the government or with any specific government agency;
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control and potentially prohibit the export of our products;
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cancel or delay existing multiyear contracts and related orders if the necessary funds for contract performance for any
subsequent year are not appropriated;
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decline to exercise an option to extend an existing multiyear contract; and
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claim rights in technologies and systems invented, developed or produced by us.
Most
U.S. government agencies and some other agencies with which we contract can terminate their contracts with us for convenience, and in that event we generally may recover only our
incurred or committed costs, settlement expenses and profit on the work completed prior to termination. If an agency terminates a contract with us for default, we may be denied any recovery and may be
liable for excess costs incurred by the agency in procuring undelivered items from an alternative source. We may receive notices under such contracts that, if not addressed to the agency's
satisfaction, could give the agency the right to terminate those contracts for default or to cease procuring our services under those contracts. The U.S. government may also initiate administrative
proceedings that, if resulting in an adverse finding against us or our subsidiaries as to our present responsibility to be a U.S. government contractor or subcontractor, could result in our company or
our subsidiaries being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export
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privileges
and, if satisfying the requisite level of seriousness, in or debarment from contracting with the U.S. government for a specified term as well as being subject to other remedies available to
the U.S. government.
For
example, subsidiaries within our Security division received a "show cause" letter in November 2012 from the U.S. Transportation Security Administration (TSA) and a related Notice for
Proposed Debarment from the U.S. Department of Homeland Security in May 2013. Although, with respect to that "show cause" letter and Notice for Proposed Debarment, they were ultimately able to reach
an Administrative Agreement with the U.S. government, which allowed them to continue with their current and future business with U.S. government agencies, there is no assurance that we would be able
to reach a similar outcome with respect to any future proceedings that we may become involved. In addition, if our Security division fails to remain in compliance with its current Administrative
Agreement, the U.S. Department of Homeland Security could initiate debarment proceedings.
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 at various locations throughout the country. 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. The termination or non-renewal of this contract, 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.
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
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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.
Additionally,
in August 2011, Congress enacted the Budget Control Act of 2011 ("BCA"), committing the U.S. government to significantly reduce the federal deficit over ten years. The BCA
contains provisions commonly referred to as "sequestration", which call for substantial, unspecified automatic spending cuts split between defense and non-defense programs that may continue for a
period of ten years. In January 2013, Congress enacted the American Taxpayer Relief Act of 2012, which temporarily postponed enactment of the sequestration provisions for approximately two months. The
sequestration cuts went into effect at the beginning of March 2013 and the impact of the spending reductions have only recently begun to spread through the economy. Likewise, various European
governments have implemented or intend to implement austerity measures intended to reduce government spending. Such measures may reduce demand for our products directly by affected governmental
agencies and by our customers who derive revenues from these governmental agencies. We cannot currently predict the impact of governmental spending reductions on us or our customers or whether and to
what extent our business and results of operations may be adversely harmed.
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.
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 turnkey screening solutions business has a limited operating history, we have recently entered into significant
large-scale agreements to provide turnkey security screening solutions to certain customers. For example, in January 2012, we entered into a substantial six-year contract with the Mexican government
to provide a turnkey security screening solution at various sites throughout Mexico. The contract is expected to provide significant revenues over the life of the contract. However, this contract
required substantial management and financial resources for capital equipment and infrastructure in anticipation of future revenues. Under this contract, 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. We anticipate that future contracts for turnkey security screening solutions in other territories will also
require the outlay and management of substantial financial resources for capital equipment and infrastructure.
Turnkey
screening solutions projects, in contrast to the sale and installation of security inspection equipment, also require that we hire and manage large numbers of local personnel in
jurisdictions where we may not have previously operated. They also require that we establish, adhere to, adapt and monitor operating procedures over periods that last much longer than our other
projects. If we are unable to efficiently manage the adaptation and growth of our operations relating to these projects, our operations could be materially and adversely affected.
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
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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' 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' 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.
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.
Inability of service vendors to fulfill contracts.
We contract with third-party vendors to service our equipment in the field. We have made such arrangements because sometimes it is more
efficient to outsource these activities than it is for our own employees to service our equipment. In addition, some of these vendors maintain stocks of spare parts that are more efficiently accessed
in conjunction with a service agreement than would be the case if we were to maintain such spare parts independently. Any material interruption in our the ability of our vendors to fulfill such
service contracts 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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Potential to accumulate excess inventory.
Because of long lead times and specialized product designs, in certain cases we purchase components and manufacture products in
anticipation of customer orders based on customer forecasts. For a variety of reasons, such as decreased end-user demand for our products, inadequate or inaccurate forecasts, or other issues that
might impact production planning, our customers might not purchase all the products that we have manufactured or for which we have purchased components. In any such event, we would attempt to recoup
material and manufacturing costs by means such as returning components to our vendors, disposing of excess inventory through other channels, or requiring our OEM customers to purchase or otherwise
compensate us for such excess inventory. Some of our significant customer agreements do not give us the ability to require our OEM customers to do this. To the extent that we are unsuccessful in
recouping our material and manufacturing costs this 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.
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.
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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 as consideration in an acquisition, current
stockholders 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, operational and other risks associated with international sales and operations could adversely affect our financial performance.
In fiscal 2011, 2012 and 2013 revenues from shipments made to customers outside of the United States accounted for approximately 47%,
47% and 52% of our revenues, respectively. Of the revenues generated during fiscal 2013 from sales made to customers outside of the United States, 18% 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 and services 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 without limitation:
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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;
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difficulty in staffing and managing widespread operations; and
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difficulty in managing distributors and sales agents and their compliance with applicable laws.
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We are facing an increasingly complex international regulatory environment which is constantly changing and if we fail to comply with international regulatory requirements,
or are unable to comply with changes to such requirements, our financial performance may be harmed.
Our international operations and sales subject us to an international regulatory environment which is becoming increasingly complex and
is constantly changing due to factors beyond our
control. Risks associated with our international operations and sales include, without limitation, those arising from the following factors:
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differing legal and court systems and changes to such systems;
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differing labor laws and changes in those laws;
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differing tax laws and changes in those laws;
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differing environmental laws and changes in those laws;
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differing laws governing our distributors and sales agents and changes in those laws;
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differing protection of intellectual property and changes in that protection;
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differing import and export requirements and changes to those requirements; and
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differing regulatory requirements and changes in those requirements.
If
we fail to comply with applicable international regulatory requirements, even if such non-compliance by us is inadvertent, or if we are unable to comply with changes to such
requirements, our financial performance may be harmed.
There are inherent risks associated with operations in Mexico.
We are currently in the process of fulfilling a multi-year agreement to provide a turnkey security scanning solution to the tax and
customs authority of Mexico. This agreement is individually material to our business, financial condition and results of operations. There are certain administrative, legal, governmental and societal
risks to operating in Mexico that could adversely impact our operations. Any one or more of the risks that could adversely affect our ability to fulfill our agreement and therefore ultimately have a
material adverse effect on our business, financial condition and results of operations include, without limitation:
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regional political and economic stability;
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high rate of crime in Mexico where we conduct operations;
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ability of key suppliers and subcontractors to fulfill obligations;
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ability to hire and maintain a significant work force;
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burdensome and evolving government regulations;
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cooperation of various departments of the Mexican government in issuing permits, inspecting our operations on a timely
basis; providing adequate security among other items;
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receipt of payments in a timely manner;
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termination or change in scope of program;
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change in the value of the Mexican peso.
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Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which could adversely impact
our operations.
Although we perform manufacturing in multiple locations, we generally do not have redundant manufacturing capabilities in place for any
particular product or component. As a result, we depend on our current facilities for the continued operation of our business. A natural disaster, pandemic, terrorist act, act of war, or other natural
or manmade disaster affecting any of our facilities could significantly disrupt our operations, or delay or prevent product manufacturing and shipment for the time required to repair, rebuild, or
replace our manufacturing facilities. This delay could be lengthy and we could incur significant expenses to repair or replace the facilities. Any similar natural or manmade disaster that affects a
key supplier or customer could lead to a similar disruption in our business.
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 or service, or improve existing products or services with new features or
components, companies possessing competing technologies, or other companies owning patents or other intellectual property rights, may be motivated to assert infringement claims in order to generate
royalty revenues, delay or diminish potential sales and challenge our right to market such products or services. Even if successful in defending against such claims, patent and other intellectual
property related litigation is costly and time consuming. In addition, we may find it necessary to initiate litigation in order to protect our patent or other intellectual property rights, and even if
the claims are well-founded and ultimately successful such litigation is typically costly and time-consuming and may expose us to counterclaims, including claims for intellectual property
infringement, anti-trust, or other such claims. Third parties could also obtain patents or other intellectual property rights 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, importing, distributing, 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 became effective in 2013 and increased our costs. Although some provisions of the health reform legislation have been implemented, many of the
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legislative
changes contained within the health reform legislation will not be effective or implemented until later this year or in subsequent years. 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 materially and
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.
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 or impose sanctions 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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patient health data protection and medical device security;
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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.
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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 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 and regulatory standards and certifications 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 or regulatory
standards and certifications and frequent new product introductions and enhancements. The emergence of new industry or regulatory standards and certification requirements 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
develop certain of our security inspection technologies to meet the certification requirements of various agencies worldwide, including the U.S. Transportation Safety Administration
and the European Civil Aviation Conference among others. Such standards frequently change and there is a risk now and in the future that we may not ultimately be able to develop technologies, or
develop in a timely way, solutions that are ultimately able to meet the new standards.
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. See "BusinessEnvironmental Regulations". Any failure by us to comply with
present or future regulations could subject us to the imposition of substantial
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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, transmitting data used by our service personnel and by and among our wide-spread 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 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. Government funded research and development also presents risks associated with government contracting in general that are described elsewhere in our risk factors. Government
agencies can generally terminate their contracts for convenience, and if we fail to meet the goals of government funded research and development, there is a risk that the government agency may
terminate our contracts for default. 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:
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incur certain additional indebtedness;
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repay certain indebtedness;
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create liens on assets;
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pay dividends on our Common Stock;
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make certain investments, loans and advances;
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repurchase or redeem capital stock;
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make certain capital expenditures;
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engage in acquisitions, mergers or consolidations; and
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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.
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
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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.