e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission File Number 0-23125
OSI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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California
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33-0238801 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal executive offices)
(310) 978-0516
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
October 28, 2008, there were 17,839,522 shares of the registrants common stock outstanding.
OSI SYSTEMS, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
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June 30, |
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September 30, |
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2008 |
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2008 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
18,232 |
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$ |
21,048 |
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Accounts receivable, net |
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156,781 |
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137,116 |
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Other receivables |
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3,258 |
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3,795 |
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Inventories |
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144,807 |
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148,599 |
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Deferred income taxes |
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19,313 |
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19,183 |
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Prepaid expenses and other current assets |
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14,064 |
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19,052 |
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Total current assets |
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356,455 |
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348,793 |
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Property and equipment, net |
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47,191 |
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45,480 |
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Goodwill |
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60,408 |
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60,624 |
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Intangible assets, net |
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34,495 |
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32,847 |
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Other assets |
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9,092 |
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10,504 |
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Total assets |
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$ |
507,641 |
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$ |
498,248 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities: |
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Bank lines of credit |
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$ |
18,657 |
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$ |
9,000 |
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Current portion of long-term debt |
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6,593 |
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7,094 |
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Accounts payable |
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75,320 |
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71,328 |
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Accrued payroll and employee benefits |
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20,896 |
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19,505 |
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Advances from customers |
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6,746 |
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20,818 |
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Accrued warranties |
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11,597 |
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10,705 |
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Deferred revenue |
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7,414 |
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7,128 |
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Other accrued expenses and current liabilities |
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14,274 |
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11,045 |
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Total current liabilities |
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161,497 |
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156,623 |
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Long-term debt |
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49,091 |
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46,541 |
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Other long-term liabilities |
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17,804 |
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19,095 |
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Total liabilities |
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228,392 |
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222,259 |
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Minority interest |
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1,228 |
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1,198 |
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Commitment and contingencies (Note 7) |
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Shareholders Equity: |
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Preferred stock, no par value-authorized, 10,000,000 shares; no shares issued or outstanding
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Common stock, no par value-authorized, 100,000,000 shares;, 17,740,057 and 17,837,846
shares, issued and outstanding, at June 30, 2008 and September 30, 2008, respectively |
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224,581 |
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227,373 |
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Retained earnings |
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41,972 |
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42,104 |
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Accumulated other comprehensive income |
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11,468 |
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5,314 |
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Total shareholders equity |
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278,021 |
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274,791 |
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Total liabilities and shareholders equity |
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$ |
507,641 |
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$ |
498,248 |
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See accompanying notes to condensed consolidated financial statements.
3
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount data)
(Unaudited)
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For the Three Months Ended |
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September 30, |
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2007 |
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2008 |
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Revenues |
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$ |
131,013 |
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$ |
148,161 |
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Cost of goods sold |
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86,903 |
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98,526 |
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Gross profit |
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44,110 |
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49,635 |
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Operating expenses: |
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Selling, general and administrative expenses |
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36,211 |
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37,571 |
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Research and development |
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9,729 |
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10,213 |
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Impairment, restructuring, and other charges |
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85 |
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801 |
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Total operating expenses |
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46,025 |
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48,585 |
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Income (loss) from operations |
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(1,915 |
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1,050 |
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Interest expense, net |
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(1,089 |
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(895 |
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Income (loss) before benefit for income taxes and minority interest |
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(3,004 |
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155 |
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Provision (benefit) for income taxes |
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(1,055 |
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53 |
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Minority
interest in net earnings (losses) of consolidated subsidiaries |
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118 |
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(30 |
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Net income (loss) |
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$ |
(2,067 |
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$ |
132 |
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Income (loss) per share: |
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Basic |
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$ |
(0.12 |
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$ |
0.01 |
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Diluted |
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$ |
(0.12 |
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$ |
0.01 |
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Shares used in per share calculation: |
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Basic |
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17,171 |
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17,797 |
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Diluted |
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17,171 |
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18,166 |
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See accompanying notes to condensed consolidated financial statements.
4
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
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For the Three Months Ended |
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September 30, |
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2007 |
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2008 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(2,067 |
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$ |
132 |
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Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities: |
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Depreciation and amortization |
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4,547 |
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4,359 |
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Stock based compensation expense |
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1,095 |
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1,193 |
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Provision for losses on accounts receivable |
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145 |
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1,144 |
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Minority
interest in net earnings (losses) of consolidated subsidiaries |
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118 |
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(30 |
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Equity in (earnings) loss of unconsolidated affiliate |
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(81 |
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25 |
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Deferred income taxes |
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(3,490 |
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(294 |
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Other |
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(24 |
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12 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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4,510 |
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14,288 |
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Other receivables |
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876 |
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(1,497 |
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Inventories |
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(14,031 |
) |
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(9,228 |
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Prepaid expenses and other current assets |
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(4,268 |
) |
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(5,528 |
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Accounts payable |
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8,974 |
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(1,643 |
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Accrued payroll and employee benefits |
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(369 |
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(1,054 |
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Advances from customers |
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1,661 |
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14,825 |
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Accrued warranties |
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498 |
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(492 |
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Deferred revenue |
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(789 |
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1,337 |
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Other accrued expenses and current liabilities |
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(949 |
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(2,863 |
) |
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Net cash provided (used) by operating activities |
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(3,644 |
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14,686 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(2,600 |
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(2,186 |
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Proceeds from the sale of property and equipment |
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88 |
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30 |
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Buyback of subsidiary stock |
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(443 |
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Acquisition of intangible and other assets |
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(853 |
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(727 |
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Net cash used in investing activities |
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(3,808 |
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(2,883 |
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Cash flows from financing activities: |
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Net payments on bank lines of credit |
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(16,775 |
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(9,413 |
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Proceeds from long-term debt |
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44,883 |
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Payments on long-term debt |
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(22,488 |
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(1,794 |
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Payments on capital lease obligations |
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(341 |
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(263 |
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Proceeds from exercise of stock options and employee stock purchase plan |
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884 |
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1,599 |
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Net cash provided (used) by financing activities |
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6,163 |
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(9,871 |
) |
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Effect of exchange rate changes on cash |
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(47 |
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884 |
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Net increase (decrease) in cash and cash equivalents |
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(1,336 |
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2,816 |
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Cash and cash equivalents-beginning of period |
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15,980 |
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18,232 |
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Cash and cash equivalents-end of period |
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$ |
14,644 |
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$ |
21,048 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the year for: |
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Interest |
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$ |
1,133 |
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$ |
1,063 |
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Income taxes |
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$ |
1,027 |
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$ |
1,139 |
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See accompanying notes to condensed consolidated financial statements.
5
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Description of Business
OSI
Systems, Inc., together with its subsidiaries (the Company), is a vertically integrated
designer and manufacturer of specialized electronic systems and components for critical
applications. The Company sells its products in diversified markets, including homeland security,
healthcare, defense and aerospace.
The Company has three operating divisions: (i) Security, providing security inspection systems;
(ii) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems; and
(iii) Optoelectronics and Manufacturing, providing specialized electronic components for the
Security and Healthcare divisions as well as for applications in the defense and aerospace markets,
among others.
Through its Security division, the Company designs, manufactures and markets security and
inspection systems worldwide to end users primarily under the Rapiscan Systems trade name.
Rapiscan Systems products are used to inspect baggage, cargo, vehicles and other objects for
weapons, explosives, drugs and other contraband and to screen people. These products are also used
for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing
duties and monitoring the export and import of controlled materials. Rapiscan Systems products fall
into four categories: baggage and parcel inspection, cargo and vehicle inspection, hold (checked)
baggage screening and people screening.
Through its Healthcare division, the Company designs, manufactures and markets patient monitoring,
diagnostic cardiology and anesthesia systems worldwide 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. The Companys Healthcare division also offers centralized cardiac safety core
laboratory services in connection with clinical trials by or on behalf of pharmaceutical companies
and clinical research organizations.
Through its Optoelectronics and Manufacturing division, the Company designs, manufactures and
markets optoelectronic devices and value-added manufacturing services worldwide for use in a broad
range of applications, including aerospace and defense electronics, security and inspection
systems, medical imaging and diagnostics, computed tomography (CT), fiber optics,
telecommunications, gaming, office automation, computer peripherals and industrial automation. The
Company sells optoelectronic devices primarily under the OSI Optoelectronics trade name and
performs value-added manufacturing services primarily under the OSI Electronics trade name. This
division provides products and services to original equipment manufacturers as well as to the
Companys own Security and Healthcare divisions. The Optoelectronics and Manufacturing division
also designs toll and traffic management systems under the OSI LaserScan trade name and systems
for measuring bone density under the Osteometer trade name.
Basis of Presentation
The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. The condensed consolidated financial statements have been prepared by the Company,
without audit, pursuant to Accounting Principles Board Opinion No. 28, Interim Financial
Reporting and the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of the Companys
management, all adjustments, consisting of only normal and recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for the periods presented
have been included. These condensed consolidated financial statements and the accompanying notes
should be read in conjunction with the audited condensed consolidated financial statements and
accompanying notes included in the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2008, filed with the Securities and Exchange Commission on August 28, 2008. The results of
operations for the three months ended September 30, 2008 are not necessarily indicative of the
operating results to be expected for the full fiscal year or any future periods.
6
Per Share Computations
The Company computes basic earnings per share by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during the period. The
Company computes diluted earnings per share by dividing net income available to common shareholders
by the sum of the weighted average number of common and dilutive potential common shares
outstanding. Potential common shares consist of restricted shares and shares issuable upon the
exercise of stock options or warrants under the treasury stock method. Stock options and warrants
to purchase a total of 2.7 million and 1.1 million shares of common stock for the three months
ended September 30, 2007 and 2008, respectively, were not included in diluted earnings per share
calculations because to do so would have been antidilutive. The following table sets forth the
computation of basic and diluted earnings per share (in thousands, except per share amounts):
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Three months Ended |
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September 30, |
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2007 |
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2008 |
|
Net income (loss) |
|
$ |
(2,067 |
) |
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$ |
132 |
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Effect of dilutive interest in subsidiary stock |
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(1 |
) |
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Net income (loss) available to common shareholders |
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$ |
(2,068 |
) |
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$ |
132 |
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Weighted average shares outstanding basic |
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17,171 |
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17,797 |
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Dilutive effect of stock options and warrants |
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|
369 |
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Weighted average shares outstanding diluted |
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17,171 |
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18,166 |
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Basic earnings (loss) per share |
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$ |
(0.12 |
) |
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$ |
0.01 |
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Diluted earnings (loss) per share |
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$ |
(0.12 |
) |
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$ |
0.01 |
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Comprehensive Income
Comprehensive loss is computed as follows (in thousands):
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Three months Ended |
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September 30, |
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|
|
2007 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(2,067 |
) |
|
$ |
132 |
|
Gain on foreign currency forward contract |
|
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|
55 |
|
Foreign currency translation adjustments |
|
|
1,645 |
|
|
|
(6,408 |
) |
Minimum pension liability adjustment |
|
|
(174 |
) |
|
|
199 |
|
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Comprehensive loss |
|
$ |
(596 |
) |
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$ |
(6,022 |
) |
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|
As of September 30, 2008, the Company had an $8.3 million foreign currency forward contract to sell
Polish zloty in anticipation of the sale and settlement in the second quarter of fiscal 2009 of
products denominated in Polish zloty. Pursuant to SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities (as amended) (SFAS 133), the entire amount of this forward
contract is considered a cash flow hedge. As a result, the gain on this foreign currency forward
contract for the three months ended September 30, 2008 of $0.1 million has been reported as a
component of other comprehensive income in the condensed consolidated financial statements.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which
clarifies the definition of fair value whenever another standard requires or permits assets or
liabilities to be measured at fair value. Specifically, the standard clarifies that fair value
should be based on the assumptions market participants would use when pricing the asset or
liability, and establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. SFAS 157 does not expand the use of fair value to
any new circumstances, and must be applied on a prospective basis except in certain cases. The standard
also requires expanded financial statement disclosures about fair value measurements, including
disclosure of the methods used and the effect on earnings.
7
In February 2008, FASB Staff Position (FSP) FAS No. 157-2, Effective Date of FASB Statement No.
157 (FSP 157-2) was issued. FSP 157-2 defers the effective date of SFAS 157 to fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Examples of items within the
scope of FSP 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair
value in a business combination (but not measured at fair value in subsequent periods), and
long-lived assets, such as property, plant and equipment and intangible assets measured at fair
value for an impairment assessment under SFAS 144.
The partial adoption of SFAS 157 on July 1, 2008 with respect to financial assets and financial
liabilities recognized or disclosed at fair value in the financial statements on a recurring basis
did not have a material impact on the Companys condensed consolidated financial statements. The
Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned
July 1, 2009 adoption of the remainder of the standard.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (SFAS 160). The new standard changes the accounting and
reporting of noncontrolling interests, which have historically been referred to as minority
interests. SFAS 160 requires that noncontrolling interests be presented in the consolidated balance
sheets within shareholders equity, but separate from the parents equity, and that the amount of
consolidated net income attributable to the parent and to the noncontrolling interest be clearly
identified and presented in the consolidated statements of income. Any losses in excess of the
noncontrolling interests equity interest will continue to be allocated to the noncontrolling
interest. Purchases or sales of equity interests that do not result in a change of control will be
accounted for as equity transactions. Upon a loss of control, the interest sold, as well as any
interest retained, will be measured at fair value, with any gain or loss recognized in earnings. In
partial acquisitions, when control is obtained, the acquiring company will recognize at fair value,
100% of the assets and liabilities, including goodwill, as if the entire target company had been
acquired. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, with early adoption prohibited. The new standard will be
applied prospectively, except for the presentation and disclosure requirements, which will be
applied retrospectively for all periods presented. The Company has not yet determined the impact,
if any, that this statement will have on its condensed consolidated financial statements and will
adopt the standard at the beginning of fiscal 2010.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS 161). The standard expands the disclosure
requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and
requires qualitative disclosures about the objectives and strategies for using derivatives,
quantitative disclosures about the fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company is in
the process of analyzing this new standard, which will be effective for the Company in the third
quarter of fiscal 2009.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). The new standard changes the accounting for business combinations in a number of
significant respects. The key changes include the expansion of transactions that will qualify as
business combinations, the capitalization of in-process research and development (IPR&D) as an
indefinite-lived asset, the recognition of certain acquired contingent assets and liabilities at
fair value, the expensing of acquisition costs, the expensing of costs associated with
restructuring the acquired company, the recognition of contingent consideration at fair value on
the acquisition date, and the recognition of post-acquisition date changes in deferred tax asset
valuation allowances and acquired income tax uncertainties as income tax expense or benefit. SFAS
141(R) is effective for business combinations that close in years beginning on or after December
15, 2008, with early adoption prohibited. The Company has not yet determined the impact, if any,
that this statement will have on its condensed consolidated financial statements and will adopt the
standard at the beginning of fiscal 2010.
In May 2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). This statement is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in preparing financial
statements of nongovernmental entities that are presented in conformity with GAAP. This statement
will be effective 60 days following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. The Company believes that SFAS 162 will have no effect on its
condensed consolidated financial statements.
8
2. Balance Sheet Details
The following tables provide details of selected balance sheet accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Accounts receivable |
|
|
|
|
|
|
|
|
Trade receivables |
|
$ |
158,326 |
|
|
$ |
139,372 |
|
Receivables related to long term contracts unbilled costs and accrued profit on progress completed |
|
|
758 |
|
|
|
880 |
|
|
|
|
|
|
|
|
Total |
|
|
159,084 |
|
|
|
140,252 |
|
Less: allowance for doubtful accounts |
|
|
(2,303 |
) |
|
|
(3,136 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
156,781 |
|
|
$ |
137,116 |
|
|
|
|
|
|
|
|
The Company expects to bill and collect the receivables for unbilled costs and accrued profits at September 30, 2008, during the next twelve
months.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Inventories, net |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
70,339 |
|
|
$ |
71,059 |
|
Work-in-process |
|
|
35,326 |
|
|
|
34,729 |
|
Finished goods |
|
|
39,142 |
|
|
|
42,811 |
|
|
|
|
|
|
|
|
Total |
|
$ |
144,807 |
|
|
$ |
148,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Land |
|
$ |
6,246 |
|
|
$ |
5,877 |
|
Buildings |
|
|
8,233 |
|
|
|
7,921 |
|
Leasehold improvements |
|
|
10,068 |
|
|
|
10,158 |
|
Equipment and tooling |
|
|
51,280 |
|
|
|
50,980 |
|
Furniture and fixtures |
|
|
5,243 |
|
|
|
5,115 |
|
Computer equipment |
|
|
15,856 |
|
|
|
16,807 |
|
ERP software |
|
|
11,500 |
|
|
|
11,260 |
|
|
|
|
|
|
|
|
Total |
|
|
108,426 |
|
|
|
108,118 |
|
Less: accumulated depreciation and amortization |
|
|
(61,235 |
) |
|
|
(62,638 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
47,191 |
|
|
$ |
45,480 |
|
|
|
|
|
|
|
|
3. Goodwill and Intangible Assets
The changes in the carrying value of goodwill for the three month period ended September 30, 2008,
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optoelectronics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
Security |
|
|
Healthcare |
|
|
Manufacturing |
|
|
Consolidated |
|
Balance as of June 30, 2008 |
|
$ |
17,692 |
|
|
$ |
35,569 |
|
|
$ |
7,147 |
|
|
$ |
60,408 |
|
Goodwill acquired or adjusted during the period |
|
|
|
|
|
|
949 |
|
|
|
|
|
|
|
949 |
|
Foreign currency translation adjustment |
|
|
(378 |
) |
|
|
(352 |
) |
|
|
(3 |
) |
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
17,314 |
|
|
$ |
36,166 |
|
|
$ |
7,144 |
|
|
$ |
60,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
In fiscal 2008, the Company repurchased all minority interests in its Spacelabs Healthcare
subsidiary. In conjunction with these repurchases, a preliminary allocation of the purchase price
in excess of the book value of the minority interest was recorded as of June 30, 2008. During the
three months ended September 30, 2008, the Company completed its evaluation, resulting in the
following purchase price allocation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary |
|
|
|
|
|
|
Final |
|
|
|
Allocation |
|
|
Adjustments |
|
|
Allocation |
|
Goodwill |
|
$ |
9,155 |
|
|
|
929 |
|
|
$ |
10,084 |
|
Developed technology |
|
|
2,219 |
|
|
|
355 |
|
|
|
2,574 |
|
Customer relationships |
|
|
1,442 |
|
|
|
11 |
|
|
|
1,453 |
|
Trademarks |
|
|
3,994 |
|
|
|
(1,697 |
) |
|
|
2,297 |
|
Deferred taxes |
|
|
(2,679 |
) |
|
|
402 |
|
|
|
(2,277 |
) |
|
|
|
|
|
|
|
|
|
|
Total excess purchase price |
|
$ |
14,131 |
|
|
|
|
|
|
$ |
14,131 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
September 30, 2008 |
|
|
|
Weighted |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Average |
|
|
Carrying |
|
|
Accumulated |
|
|
Intangibles |
|
|
Carrying |
|
|
Accumulated |
|
|
Intangibles |
|
|
|
Lives |
|
|
Value |
|
|
Amortization |
|
|
Net |
|
|
Value |
|
|
Amortization |
|
|
Net |
|
Amortizable assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs |
|
5 years |
|
$ |
6,265 |
|
|
$ |
2,634 |
|
|
$ |
3,631 |
|
|
$ |
7,181 |
|
|
$ |
2,775 |
|
|
$ |
4,406 |
|
Patents |
|
8 years |
|
|
451 |
|
|
|
298 |
|
|
|
153 |
|
|
|
573 |
|
|
|
306 |
|
|
|
267 |
|
Core technology |
|
10 years |
|
|
2,684 |
|
|
|
911 |
|
|
|
1,773 |
|
|
|
2,477 |
|
|
|
903 |
|
|
|
1,574 |
|
Developed technology |
|
13 years |
|
|
17,276 |
|
|
|
5,430 |
|
|
|
11,846 |
|
|
|
17,509 |
|
|
|
5,851 |
|
|
|
11,658 |
|
Customer relationships/ backlog |
|
7 years |
|
|
9,582 |
|
|
|
3,697 |
|
|
|
5,885 |
|
|
|
9,532 |
|
|
|
4,001 |
|
|
|
5,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable assets |
|
|
|
|
|
|
36,258 |
|
|
|
12,970 |
|
|
|
23,288 |
|
|
|
37,272 |
|
|
|
13,836 |
|
|
|
23,436 |
|
Non-amortizable assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
11,207 |
|
|
|
|
|
|
|
11,207 |
|
|
|
9,411 |
|
|
|
|
|
|
|
9,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
47,465 |
|
|
$ |
12,970 |
|
|
$ |
34,495 |
|
|
$ |
46,683 |
|
|
$ |
13,836 |
|
|
$ |
32,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangibles assets was $0.9 million and $1.0 million for the three
months ended September 30, 2007 and 2008, respectively. At September 30, 2008, the estimated future
amortization expense was as follows (in thousands):
|
|
|
|
|
2009 (remaining 9 months) |
|
$ |
2,905 |
|
2010 |
|
|
3,818 |
|
2011 |
|
|
3,792 |
|
2012 |
|
|
3,693 |
|
2013 |
|
|
2,896 |
|
2014 |
|
|
2,011 |
|
2015 and thereafter |
|
|
4,321 |
|
|
|
|
|
Total |
|
$ |
23,436 |
|
|
|
|
|
4. Borrowings
The Company maintains a credit agreement with certain lenders allowing for borrowings of up to
$124.5 million. The credit agreement consists of a $74.5 million, five-year, revolving credit
facility (including a $45 million sub-limit for letters-of-credit) and a $50 million five-year term
loan. Borrowings under the agreement bear interest at either (i) the London Interbank Offered Rate
(LIBOR) plus between 2.00% and 2.50% or (ii) the banks prime rate plus between 1.00% and 1.50%.
The rates are determined based on the Companys consolidated leverage ratio. As of September 30,
2008, the effective, weighted-average interest rate under the credit agreement was 5.5%. The
Companys borrowings under the credit agreement are guaranteed by substantially all of the
Companys
direct and indirect wholly-owned subsidiaries and are secured by substantially all of the Companys
and its subsidiary guarantors assets. The agreement contains various representations, warranties,
affirmative, negative and financial covenants, and conditions of default customary for financing
agreements of this type. As of September 30, 2008, $46.5 million was outstanding under the term
loan, $9.0 million was outstanding under the revolving credit facility, and $13.8 million was
outstanding under the letter-of-credit facility.
10
Several of the Companys foreign subsidiaries maintain bank lines-of-credit, denominated in local
currencies, to meet short-term working capital requirements and for the issuance of
letters-of-credit. As of September 30, 2008, $22.9 million was outstanding under these
letter-of-credit facilities, while no debt was outstanding. As of September 30, 2008, the total
amount available under these credit facilities was $32.6 million, with a total cash borrowing
sub-limit of $8.1 million. As of September 30, 2008, the weighted average interest rate of these
facilities was 7.1% per annum,
In December 2004, the Company entered into a bank loan of $5.3 million to fund the acquisition of
land and buildings in the U.K. The loan is payable over a 20-year period, with quarterly
installments of £34,500 (approximately $63,000 as of September 30, 2008). The loan bears interest
at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of September 30, 2008,
$4.1 million remained outstanding under this loan at an interest rate of 7.5% per annum.
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Five-year term loan due in fiscal 2013 |
|
$ |
47,763 |
|
|
$ |
46,513 |
|
Twenty-year term loan due in fiscal 2025 |
|
|
4,539 |
|
|
|
4,126 |
|
Capital leases |
|
|
2,193 |
|
|
|
1,938 |
|
Other |
|
|
1,189 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
55,684 |
|
|
|
53,635 |
|
Less current portion of long-term debt |
|
|
6,593 |
|
|
|
7,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of debt |
|
$ |
49,091 |
|
|
$ |
46,541 |
|
|
|
|
|
|
|
|
5. Stock-based Compensation
As of September 30, 2008, the Company maintained the 2006 Equity Participation Plan of OSI Systems.
In addition, the Company maintains and administers an employee stock purchase plan.
The Company recorded stock-based-compensation expense in accordance with SFAS No. 123(R)
Share-Based Payment in the condensed consolidated statement of operations as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Cost of goods sold |
|
$ |
52 |
|
|
$ |
60 |
|
Selling, general and administrative |
|
|
984 |
|
|
|
1,065 |
|
Research and development |
|
|
59 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
$ |
1,095 |
|
|
$ |
1,193 |
|
|
|
|
|
|
|
|
As of September 30, 2008, total unrecognized compensation cost related to non-vested, share-based
compensation arrangements granted was approximately $6.7 million. The Company expects to recognize
these costs over a weighted-average period of 2.4 years.
11
6. Retirement Benefit Plans
The Company sponsors a number of qualified and nonqualified defined benefit pension plans for its
employees. The benefits under these plans are based on years of service and an employees highest
twelve months compensation during the last five years of employment. The components of net
periodic pension expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Service cost |
|
$ |
71 |
|
|
$ |
316 |
|
Interest cost |
|
|
120 |
|
|
|
79 |
|
Expected return on plan assets |
|
|
(92 |
) |
|
|
(28 |
) |
Amortization of net loss |
|
|
38 |
|
|
|
26 |
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
137 |
|
|
$ |
393 |
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007 and 2008, the Company made contributions of $0.1
million and $0.4 million, respectively, to these defined benefit plans.
In addition, the Company sponsors several defined contribution pension plans. For the three months
ended September 30, 2007 and 2008, the Company made contributions of $0.6 million and $0.7 million,
respectively, to these defined contribution plans.
7. Commitments and Contingencies
Legal Proceedings
In November 2002, L-3 Communications Corporation brought suit against the Company in the District
Court for the Southern District of New York seeking a declaratory judgment that L-3 Communications
Corporation had not breached its obligations to us concerning the acquisition of PerkinElmers
Security Detection Systems Business. The Company asserted counterclaims against L-3 Communications
Corporation for, among other things, fraud and breach of fiduciary duty. In May 2006, the jury in
the case returned a verdict in the Companys favor and awarded the Company $125 million in damages.
The jury found that L-3 Communications Corporation had breached its fiduciary duty to the Company
and had committed fraud. The jury awarded the Company $33 million in compensatory damages and $92
million in punitive damages. In addition, the jury also found that the Company had breached a
confidentiality agreement and awarded L-3 Communications Corporation nominal damages of one dollar.
On June 27, 2008, the United States Court of Appeals for the Second Circuit issued a summary order
reversing in part, and vacating in part, the judgment of the district court, and remanding the case
to the district court for further proceedings. The Second Circuit held that L-3 did not owe the
Company a fiduciary duty as a matter of law and reversed the judgment of the district court on our
claims for breach of fiduciary duty and constructive fraud. The Second Circuit vacated the judgment
of the district court on the Companys claim for actual fraud, and remanded that claim to the
district court for further proceedings.
The Company is also involved in various other claims and legal proceedings arising out of the
ordinary course of business. In the Companys opinion after consultation with legal counsel, the
ultimate disposition of such proceedings will not have a material adverse effect on its financial
position, future results of operations, or cash flows. In accordance with SFAS No. 5, Accounting
for Contingencies, the Company has not accrued for loss contingencies relating to such matters
because the Company believes that, although unfavorable outcomes in the proceedings may be
possible, they are not considered by management to be probable or reasonably estimable. If one or
more of these matters are resolved in a manner adverse to the Company, the impact on the Companys
results of operations, financial position and/or liquidity could be material.
Contingent Acquisition Obligations
Under the terms and conditions of the purchase agreements associated with the following
acquisitions, the Company may be obligated to make additional payments.
12
In August 2002, the Company purchased a minority equity interest in CXR Limited. In June 2004, the
Company increased its equity interest to approximately 75% and in December 2004, the Company
acquired the remaining 25%. As compensation to the selling shareholders for this remaining
interest, the Company agreed to make certain royalty payments during
the 18 years following the acquisition of its remaining
interest. Royalty payments are based on the license of, or sales of
products containing technology owned by CXR Limited. As of
September 30, 2008, no royalty payments have been earned.
In January 2004, the Company acquired Advanced Research & Applications Corp.. During the seven
years following the acquisition, contingent consideration is payable based on its net revenues,
provided certain requirements are met. The contingent consideration is capped at $30.0 million. As
of September 30, 2008, no contingent consideration has been earned.
In July 2005, the Company acquired certain assets of InnerStep, B.S.E., Inc. During the seven years
following the acquisition, contingent consideration is payable based on its profits before interest
and taxes, provided certain requirements are met. The contingent consideration is capped at $6.0
million. As of September 30, 2008, no contingent consideration has been earned.
In July 2006, the Company completed an acquisition that was not material to its overall Condensed
Consolidated Financial Statements. During the two years following the acquisition, contingent
compensation is payable based upon profitability. Total contingent consideration is capped at $0.6
million. During the second quarter of fiscal 2008, $0.3 million of contingent consideration was
paid. As of September 30, 2008, a final payment of $0.2 million of contingent consideration has
been earned and will be paid in fiscal 2009.
Environmental Contingencies
The Company is subject to various environmental laws. The Companys practice is to ensure that
Phase I environmental site assessments are conducted for each of its properties in the United
States at which the Company manufactures products in order to identify, as of the date of such
report, potential areas of environmental concern related to past and present activities or from
nearby operations. In certain cases, the Company has conducted further environmental assessments
consisting of soil and groundwater testing and other investigations deemed appropriate by
independent environmental consultants.
During one investigation, the Company discovered soil and groundwater contamination at its
Hawthorne, California facility. The Company filed the requisite reports concerning this problem
with the appropriate environmental authorities in fiscal 2001. The Company has not yet received any
response to such reports, and no agency action or litigation is presently pending or threatened.
The Companys site was previously used by other companies for semiconductor manufacturing similar t
that presently conducted on the site by us, and it is not presently known who is responsible for
the contamination or, if required, the remediation. The groundwater contamination is a known
regional problem, not limited to the Companys premises or its immediate surroundings.
The Company has also been informed of soil and groundwater evaluation efforts at a facility that
its Ferson Technologies. subsidiary previously leased in Ocean Springs, Mississippi. Ferson
Technologies occupied the facility until October 2003. The Company believes that the owner and
previous occupants of the facility have primary responsibility for any remediation that may be
required and have an agreement with the facilitys owner under which the owner is responsible for
remediation of pre-existing conditions. However, as site evaluation efforts are still in progress,
and may be for some time, the Company is unable at this time to ascertain whether Ferson
Technologies bears any exposure for remediation costs under applicable environmental regulations.
The Company has not accrued for loss contingencies relating to the above environmental matters
because it believes that, although unfavorable outcomes may be possible, they are not considered by
the Companys management to be probable and reasonably estimable. If one or more of these matters
are resolved in a manner adverse to the Company, the impact on the Companys results of operations,
financial position and/or liquidity could be material.
Product Warranties
The Company offers its customers warranties on many of the products that it sells. These warranties
typically provide for repairs and maintenance of the products if problems arise during a specified
time period after original shipment. Concurrent with the sale of products, the Company records a
provision for estimated warranty expenses with a corresponding increase in cost of goods sold. The
Company periodically adjusts this provision based on historical and anticipated experience. The
Company charges actual expenses of repairs under warranty, including parts and labor, to this
provision when incurred.
13
The following table presents changes in warranty provisions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
|
ended September 30, |
|
|
|
2007 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
7,443 |
|
|
$ |
11,597 |
|
Additions |
|
|
1,332 |
|
|
|
1,016 |
|
Reductions for warranty repair costs |
|
|
(777 |
) |
|
|
(1,908 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
7,998 |
|
|
$ |
10,705 |
|
|
|
|
|
|
|
|
8. Income Taxes
The provision for income taxes is determined using an effective tax rate that is subject to
fluctuations during the year as new information is obtained, which may affect the assumptions used
to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in
the various tax jurisdictions in which the Company operates, valuation allowances against deferred
tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions,
utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions
where the Company conducts business. The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis of its assets and
liabilities along with net operating loss and tax credit carryovers. The Company records a
valuation allowance against its deferred tax assets to reduce the net carrying value to an amount
that it believes is more likely than not to be realized. When the Company establishes or reduces
the valuation allowance against its deferred tax assets, the provision for income taxes will
increase or decrease, respectively, in the period such determination is made.
9. Segment Information
The Company operates in three identifiable industry segments: (i) Security, providing security and
inspection systems; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and
anesthesia systems; and (iii) Optoelectronics and Manufacturing, providing specialized electronic
components for affiliated end-products divisions, as well as for applications in the defense and
aerospace markets, among others. The Company also has a Corporate segment that includes executive
compensation and certain other general and administrative expenses. Interest expense, and certain
expenses related to legal, audit and other professional service fees, are not allocated to industry
segments. Both the Security and Healthcare divisions comprise primarily end-product businesses
whereas the Optoelectronics and Manufacturing division comprises businesses that primarily supply
components and subsystems to original equipment manufacturers, including to the businesses of the
Security and Healthcare divisions. All intersegment sales are eliminated in consolidation.
The following table presents segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Revenues by Segment: |
|
|
|
|
|
|
|
|
Security division |
|
$ |
48,805 |
|
|
$ |
58,685 |
|
Healthcare division |
|
|
56,598 |
|
|
|
54,827 |
|
Optoelectronics and Manufacturing division, including intersegment revenues |
|
|
36,372 |
|
|
|
44,882 |
|
Intersegment revenues elimination |
|
|
(10,762 |
) |
|
|
(10,233 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
131,013 |
|
|
$ |
148,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Geography: |
|
|
|
|
|
|
|
|
North America |
|
$ |
85,740 |
|
|
$ |
106,190 |
|
Europe |
|
|
38,599 |
|
|
|
35,090 |
|
Asia |
|
|
17,436 |
|
|
|
17,114 |
|
Intersegment revenues elimination |
|
|
(10,762 |
) |
|
|
(10,233 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
131,013 |
|
|
$ |
148,161 |
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2008 |
|
Operating income (loss) by Segment: |
|
|
|
|
|
|
|
|
Security division |
|
$ |
(696 |
) |
|
$ |
3,048 |
|
Healthcare division |
|
|
1,051 |
|
|
|
(1,824 |
) |
Optoelectronics and Manufacturing division |
|
|
1,339 |
|
|
|
3,863 |
|
Corporate |
|
|
(3,479 |
) |
|
|
(4,215 |
) |
Eliminations (1) |
|
|
(130 |
) |
|
|
178 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,915 |
) |
|
$ |
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Assets by Segment: |
|
|
|
|
|
|
|
|
Security division |
|
$ |
199,884 |
|
|
$ |
220,775 |
|
Healthcare division |
|
|
172,038 |
|
|
|
162,738 |
|
Optoelectronics and Manufacturing division |
|
|
95,615 |
|
|
|
86,998 |
|
Corporate |
|
|
43,313 |
|
|
|
28,773 |
|
Eliminations (1) |
|
|
(3,209 |
) |
|
|
(1,037 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
507,641 |
|
|
$ |
498,248 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations primarily reflect the elimination of intercompany profit in inventory
not-yet-realized. This profit will be realized when inventory is shipped to the external
customers of the Security and Healthcare divisions. |
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
Certain statements contained in this quarterly report on Form 10-Q that are not related to
historical results, including, without limitation, statements regarding our business strategy,
objectives and future financial position, are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and involve risks and uncertainties. These forward-looking statements may
be identified by the use of forward-looking terms such as anticipate, believe, expect, may,
could, likely to, should, or will, or by discussions of strategy that involve predictions
which are based upon a number of future conditions that ultimately may prove to be inaccurate.
Statements in this quarterly report on Form 10-Q that are forward-looking are based on current
expectations and actual results may differ materially. Forward-looking statements involve numerous
risks and uncertainties described in this quarterly report on Form 10-Q, our Annual Report on Form
10-K and other documents previously filed or hereafter filed by us from time to time with the
Securities and Exchange Commission. Such factors, of course, do not include all factors that might
affect our business and financial condition. Although we believe that the assumptions upon which
our forward-looking statements are based are reasonable, such assumptions could prove to be
inaccurate and actual results could differ materially from those expressed in or implied by the
forward-looking statements. All forward-looking statements contained in this quarterly report on
Form 10-Q are qualified in their entirety by this statement. We undertake no obligation other than
as may be required under securities laws to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and assumptions and select accounting policies
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Our
critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended June
30, 2008.
Recent Accounting Pronouncements
We describe recent accounting pronouncements in Item 1 Condensed Consolidated Financial
Statements Notes to Condensed Consolidated Financial Statements.
Executive Summary
We are a vertically integrated designer and manufacturer of specialized electronic systems and
components for critical applications. We sell our products in diversified markets, including
homeland security, healthcare, defense and aerospace. We have three operating divisions: (i)
Security, providing security and inspection systems; (ii) Healthcare, providing patient monitoring,
diagnostic cardiology and anesthesia systems; and (iii) Optoelectronics and Manufacturing,
providing specialized electronic components for affiliated end-products divisions, as well as for
applications in the defense and aerospace markets, among others.
Security Division. Through our Security division, we design, manufacture and market security and
inspection systems worldwide for sale primarily to U.S. federal, state and local government
agencies as well as to foreign governments. These products are used to inspect baggage, cargo,
vehicles and other objects for weapons, explosives, drugs and other contraband as well as to screen
people. Revenues from our Security division accounted for 40% and 37% of our total consolidated
revenues for the three months ended September 30, 2008 and 2007, respectively.
Following the September 11, 2001 terrorist attacks, U.S. Government spending for the development
and acquisition of security and inspection systems increased in response to the attacks and has
continued at high levels during its global war on terrorism. This spending has had a favorable
impact on our business. However, future levels of such spending could decrease as a result of
changing budgetary priorities or could shift to products that we do not provide. Additionally,
competition for contracts with the U.S. Government has become more intense in recent years as new
competitors and technologies have entered this market.
16
Healthcare Division. Through our Healthcare division, we design, manufacture and market patient
monitoring, diagnostic cardiology and anesthesia systems for sale primarily to hospitals and
medical centers. Our products monitor patients in critical, emergency and perioperative care areas
of the hospital and provide such information, through wired and wireless networks, to physicians
and nurses who may be at the patients bedside, in another area of the hospital or even outside the
hospital. Revenues from our Healthcare division accounted for 37% and 43% of our total consolidated
revenues for the three months ended September 30, 2008 and 2007, respectively.
The healthcare markets in which we operate are highly competitive. We believe that our customers
choose among competing products on the basis of product performance, functionality, value and
service. We also believe that price has become an important factor in hospital purchasing decisions
because of pressures they are facing to cut costs.
Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division,
we design, manufacture and market optoelectronic devices and value-added manufacturing services
worldwide for use in a broad range of applications, including aerospace and defense electronics,
security and inspection systems, medical imaging and diagnostics, computed tomography (CT), fiber
optics, telecommunications, gaming, office automation, computer peripherals and industrial
automation. We also provide our optoelectronic devices and value-added manufacturing services to
our own Security and Healthcare divisions. Revenues from our Optoelectronics and Manufacturing
division accounted for 23% and 20% of our total consolidated revenues for the three months ended
September 30, 2008 and 2007, respectively.
For the three months ended September 30, 2008, we reported an operating profit of $1.1 million, as
compared to an operating loss of $1.9 million for the comparable prior year period, which
represents a $3 million improvement over our prior year
performance. This improvement was driven by a $17.2
million, or 13%, growth in revenue that generated a $5.6 million, or 13%, growth in gross profit.
Our operating expenses increased by $1.9 million, or 4%, in support of the 13% growth in revenues
as well as in support of next generation products in our Security and Healthcare divisions. In
addition, we incurred non-recurring restructuring charges of $0.8 million in the current year as
compared to $0.1 million in the prior year. Overall, our increased profitability is a result of
our continuing efforts to leverage our sales and administrative infrastructure as we grow our
businesses.
Results of Operations for the Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
Net Revenues
The table below and the discussion that follows are based upon the way in which we analyze our
business. See Note 9 to the condensed consolidated financial statements for additional information
about our business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
% of |
|
|
Q1 |
|
|
% of |
|
|
|
|
|
|
|
(in millions) |
|
2008 |
|
|
Net Sales |
|
|
2009 |
|
|
Net Sales |
|
|
$ Change |
|
|
% Change |
|
Security division |
|
$ |
48.8 |
|
|
|
37 |
% |
|
$ |
58.7 |
|
|
|
40 |
% |
|
$ |
9.9 |
|
|
|
20 |
% |
Healthcare division |
|
|
56.6 |
|
|
|
43 |
% |
|
|
54.8 |
|
|
|
37 |
% |
|
|
(1.8 |
) |
|
|
(3 |
)% |
Optoelectronics and Manufacturing division |
|
|
36.4 |
|
|
|
28 |
% |
|
|
44.9 |
|
|
|
30 |
% |
|
|
8.5 |
|
|
|
23 |
% |
Intersegment revenues |
|
|
(10.8 |
) |
|
|
(8 |
)% |
|
|
(10.2 |
) |
|
|
(7 |
)% |
|
|
0.6 |
|
|
|
(6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
131.0 |
|
|
|
|
|
|
$ |
148.2 |
|
|
|
|
|
|
$ |
17.2 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues for the three months ended September 30, 2008, increased $17.2 million, or 13%, to
$148.2 million from $131.0 million for the comparable prior year period.
Revenues for the Security division for the three months ended September 30, 2008, increased $9.9
million, or 20%, to $58.7 million, from $48.8 million for the comparable prior year period. The
increase was attributable to a $0.9 million, or 5%, increase in sales of cargo and vehicle
inspection systems and a $9.0 million, or 31%, increase in all other Security division products
primarily due to growth in sales of baggage and parcel inspections systems in both the U.S. and in
Europe and due to higher service maintenance revenue.
Revenues for the Healthcare division for the three months ended September 30, 2008, decreased $1.8
million, or 3%, to $54.8 million, from $56.6 million for the comparable prior year period. The
decrease was primarily attributable to decreased patient monitoring
17
equipment sales of $2.4 million, primarily in North America, which we believe is due in part to
recent downturn in U.S. economic conditions causing delays in capital
spending, and to a decrease
in clinical trials services revenue of $1.2 million. These decreases were partially offset by an
increase in diagnostic cardiology equipment sales of $1.1 million and an increase in supplies and
accessories sales of $0.9 million.
Revenues for the Optoelectronics and Manufacturing division for the three months ended September
30, 2008, increased $8.5 million, or 23%, to $44.9 million, from $36.4 million for the comparable
prior year period. The change in revenues was attributable to an increase in contract manufacturing
sales of $8.8 million, including new orders under an existing defense-industry related contract as
well as new customer contracts. The change was also due to an increase in commercial
optoelectronic sales of $2.2 million as a result of strong order bookings in the three months ended
September 30, 2008. This increase was partially offset by a planned decrease in weapon simulation
sales of $2.3 million, a product line we elected to wind down in fiscal 2008.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
% of Net |
|
Q1 |
|
% of Net |
(in millions) |
|
2008 |
|
Sales |
|
2009 |
|
Sales |
Gross profit |
|
$ |
44.1 |
|
|
|
33.7 |
% |
|
$ |
49.7 |
|
|
|
33.5 |
% |
Gross profit increased $5.6 million, or 13%, to $49.7 million for the three months ended September
30, 2008, from $44.1 million for the comparable prior year period, primarily as a result of the
increased revenues discussed above. The gross profit margin decreased slightly to 33.5%, from 33.7%
over the comparable prior year period. Although we experienced marked gross profit improvement in
our Security and Optoelectronics and Manufacturing divisions, these improvements were offset by a
decrease in sales of products by our Healthcare division, which generally carry a higher gross
margin than the products of our other divisions. The favorable change in gross margin in our
Security division was attributable to gross margin improvement in cargo and vehicle inspection
products resulting from additional efficiencies achieved through improved supply chain management.
The favorable change in gross margin in our Optoelectronics and Manufacturing division was
attributable to: (i) sales growth in our contract manufacturing business, which allows us to
better leverage our fixed manufacturing costs and (ii) a planned decrease in our weapon simulation
sales, which historically carried much lower gross margins than the products and services of our
other businesses.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
% of Net |
|
|
Q1 |
|
|
% of Net |
|
|
|
|
|
|
% |
|
(in millions) |
|
2008 |
|
|
Sales |
|
|
2009 |
|
|
Sales |
|
|
$ Change |
|
|
Change |
|
Selling, general and administrative |
|
$ |
36.2 |
|
|
|
27.6 |
% |
|
$ |
37.6 |
|
|
|
25.4 |
% |
|
$ |
1.4 |
|
|
|
4 |
% |
Research and development |
|
|
9.7 |
|
|
|
7.4 |
% |
|
|
10.2 |
|
|
|
6.9 |
% |
|
|
0.5 |
|
|
|
5 |
% |
Impairment, restructuring, and other charges |
|
|
0.1 |
|
|
|
0.1 |
% |
|
|
0.8 |
|
|
|
0.5 |
% |
|
|
0.7 |
|
|
NM |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
46.0 |
|
|
|
35.1 |
% |
|
$ |
48.6 |
|
|
|
32.8 |
% |
|
$ |
2.6 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses
consist primarily of compensation paid to sales, marketing and administrative personnel,
professional service fees and marketing expenses. For the three months ended September 30, 2008,
SG&A expenses increased by $1.4 million, or 4%, to $37.6 million, from $36.2 million for the
comparable prior year period. As a percentage of revenues, SG&A expenses for the three months ended
September 30, 2008 decreased to 25.4%, from 27.6% for the comparable prior year period. The
increase in SG&A expenses during the three months ended September 30, 2008, was primarily
attributable to: (i) an increase of $1.2 million in general and administrative costs to support
sales growth in the Security division, (ii) an increase of approximately $0.5 million in the
Corporate segment, mainly due to increased administrative support and stock-based compensation
expense, partially offset by reduced legal and audit expenses, and (iii) an increase of $0.2
million in general and administrative costs to support sales growth in the Optoelectronics
division. As a percentage of sales, SG&A has continued to decrease as we continued to leverage our
sales and administrative infrastructure and realized the benefits of restructuring activities
undertaken during fiscal 2008.
Research and development. Research and development expenses include research related to new product
development and product enhancement expenditures. For the three months ended September 30, 2008,
such expenses increased $0.5 million, or 5%, to $10.2
18
million, from $9.7 million for the comparable prior year period. As a percentage of revenues,
research and development expenses were 6.9% for the three months ended September 30, 2008, compared
to 7.4% for the comparable prior year period. The increase in research and development expenses for
the three month period ended September 30, 2008 was primarily attributable to: (i) an increase in
spending in the Healthcare division of $0.3 million in support of next generation products and (ii)
an increase in spending within our Security division of $0.2 million to support new hold (checked)
baggage screening products.
Impairment, restructuring, and other charges. In fiscal 2007, we initiated a series of
restructuring activities that were intended to align our global capacity and infrastructure with
demand by our customers and thereby improve our operating efficiencies. During the three months
ended September 30, 2008, we continued this initiative to further increase our efficiencies. As a
result, we recorded restructuring charges of $0.8 million. These charges included $0.5 million in
our Healthcare division and $0.3 million in our Corporate segment, related to facility closure
costs and employee severance. During the three months ended September 30, 2007, we recorded
restructuring charges of $0.1 million in our Security division related to employee severance.
Other Income and Expenses
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
% of Net |
|
|
Q1 |
|
|
% of Net |
|
|
|
|
|
|
% |
|
(in millions) |
|
2008 |
|
|
Sales |
|
|
2009 |
|
|
Sales |
|
|
$ Change |
|
|
Change |
|
Interest expense |
|
$ |
1.2 |
|
|
|
0.9 |
% |
|
$ |
1.0 |
|
|
|
0.7 |
% |
|
$ |
(0.2 |
) |
|
|
(18 |
)% |
Interest income |
|
|
(0.1 |
) |
|
|
(0.1 |
)% |
|
|
(0.1 |
) |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
$ |
1.1 |
|
|
|
0.8 |
% |
|
$ |
0.9 |
|
|
|
0.6 |
% |
|
$ |
(0.2 |
) |
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense. For the three months ended September 30, 2008, we incurred interest expense of
$1.0 million, compared to $1.2 million for the comparable prior year period. The decrease in
interest expense was due to a lower cost of borrowing which was partially offset by higher levels
of debt as a result of the repurchase of all outstanding shares of Spacelabs Healthcare previously
owned by minority shareholders.
Income taxes. For the three months ended September 30, 2008, our income tax provision was $0.1
million, compared to a benefit of $1.1 million for the comparable prior year period. Our effective
tax rate for the three months ended September 30, 2008 was 34.5%, compared to 35.1% in the
comparable prior year period. Our provision for income taxes is dependent on the mix of income from
U.S. and foreign locations due to tax rate differences among countries as well as due to the impact
of permanent taxable differences.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flow from operations, proceeds from
equity issuances and our credit facilities. Cash and cash equivalents totaled $21.0 million at
September 30, 2008, an increase of $2.8 million from $18.2 million at June 30, 2008. The changes in
our working capital and cash and cash equivalent balances during the three months ended September
30, 2008 are described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
September 30, 2008 |
|
% Change |
Working capital |
|
$ |
195.0 |
|
|
$ |
192.2 |
|
|
|
(1 |
)% |
Cash and cash equivalents |
|
|
18.2 |
|
|
|
21.0 |
|
|
|
15 |
% |
Working Capital. The decrease in working capital is primarily due to decreases in accounts
receivables of $19.7 million, due to collection on strong sales in the fourth quarter of fiscal
2008 and increases in advances from customers of $14.1 million due to several large sales in our
Security division. These decreases were partially offset by (i) a corresponding decrease in our
bank lines of credit of $9.7 million; (ii) increases in prepayments to vendors, primarily
associated with the advances from customers described above; (iii) a $4.0 million decrease in
accounts payable; (iv) a $3.9 million increases in inventory, mainly in support of Security
division revenue growth; (v) a $3.2 million reduction in accrued liabilities; and (vi) a $2.8
million increase in cash.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
Q1 |
|
|
|
|
2008 |
|
2009 |
|
% Change |
Cash provided (used) by operating activities |
|
$ |
(3.6 |
) |
|
$ |
14.7 |
|
|
|
505 |
% |
Cash used in investing activities |
|
|
(3.8 |
) |
|
|
(2.9 |
) |
|
|
24 |
% |
Cash provided (used) by financing activities |
|
|
6.2 |
|
|
|
(9.9 |
) |
|
|
(260 |
)% |
Cash Used in Operating Activities. Cash flows from operating activities can fluctuate significantly
from period to period, as net income (loss), tax timing differences, and other items can
significantly impact cash flows. Net cash provided by operations for the three months ended
September 30, 2008 was $14.7 million, an $18.3 million improvement as compared to the $3.6 million
used in the comparable prior year period. This improvement was partly due to an increase in our net
income of $6.3 million during the three months ended September 30, 2008, after giving consideration
to various adjustments to net income for non-operating cash items, including depreciation and
amortization, stock-based compensation, deferred taxes and provision for losses on accounts
receivable, among others, for both periods. The improvement was also due to better working capital
management in the current-year period versus the prior year period, resulting in: (i) a $13.2
million improvement in advances from customers, (ii) a $9.8 million improvement in accounts
receivable and (iii) a net $4.8 million improvement in inventory. These efforts were partially
offset by changes in accounts payables of $10.6 million and other operating asset and liability
accounts of $5.0 million.
Cash Used in Investing Activities. Net cash used in investing activities was $2.9 million for the
three months ended September 30, 2008, compared to $3.8 million for the three months ended
September 30, 2007. During the three months ended September 30, 2008, we invested $2.2 million in
capital expenditures, compared to $2.6 million in capital expenditures during the comparable prior
year period. In addition, during the comparable prior year period, we repurchased shares of
Spacelabs Healthcare stock for $0.4 million.
Cash Provided by Financing Activities. Net cash used in financing activities was $9.9 million for
the three months ended September 30, 2008, compared to net cash provided by financing activities of
$6.2 million for the three months ended September 30, 2007. During the three months ended
September 30, 2008, we paid down our revolving lines of credit by $9.4 million and we also paid
down our ongoing scheduled debt and capital leases by an additional $2.1 million. In the prior
year period, we received net proceeds from our credit facilities and other debt obligations of $5.3
million to fund working capital requirement and to repurchase Spacelabs Healthcare stock. In
addition, we received cash of $1.6 million from proceeds from equity instruments for the three
months ended September 30, 2008 as compared to $0.9 million for the comparable prior year period.
Borrowings
Outstanding lines of credit and current and long-term debt totaled $62.6 million at September 30,
2008, a decrease of $11.7 million from $74.3 million at June 30, 2008.
We maintain a credit agreement with certain lenders allowing for borrowings up to $124.5 million.
The credit agreement consists of a $74.5 million, five-year, revolving credit facility (including a
$45 million sub-limit for letters-of-credit) and a $50 million five-year term loan. Borrowings
under this agreement bear interest at either (i) the London Interbank Offered Rate (LIBOR) plus
between 2.00% and 2.50% or (ii) the banks prime rate plus between 1.00% and 1.50%. The rates are
determined based on the our consolidated leverage ratio. As of September 30, 2008, the effective,
weighted-average interest rate under the credit agreement was 5.5%. Our borrowings under the credit
agreement are guaranteed by substantially all of our direct and indirect wholly-owned subsidiaries
and are secured by substantially all of our assets and the assets of our subsidiary guarantors. The
agreement contains various representations, warranties, affirmative, negative and financial
covenants, and conditions of default customary for financing agreements of this type. As of
September 30, 2008, $46.5 million was outstanding under the term loan, no amount was outstanding
under the revolving credit facility, and $13.8 million was outstanding under the letter-of-credit
facility.
Several of our foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies,
to meet short-term working capital requirements and for the issuance of letters-of-credit. As of
September 30, 2008, $22.9 million was outstanding under the letter-of-credit facilities, while no
debt was outstanding. As of September 30, 2008, the total amount available under these credit
facilities was $32.6 million, with a total cash borrowing sub-limit of $8.1 million. As of
September 30, 2008, the weighted average interest rate of these facilities was 7.1% per annum.
20
In December 2004, we entered into a bank loan of $5.3 million to fund the acquisition of land and
buildings in the U.K. The loan is payable over a 20-year period, with quarterly installments of
£34,500 (approximately $63,000 as of September 30, 2008). The loan
bears interest at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of
September 30, 2008, $4.1 million remained outstanding under this loan at an interest rate of 7.5%
per annum.
Our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
Five-year term loan due in fiscal 2013 |
|
$ |
47,763 |
|
|
$ |
46,513 |
|
Twenty-year term loan due in fiscal 2025 |
|
|
4,539 |
|
|
|
4,126 |
|
Capital leases |
|
|
2,193 |
|
|
|
1,938 |
|
Other |
|
|
1,189 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
55,684 |
|
|
|
53,635 |
|
Less current portion of long-term debt |
|
|
6,593 |
|
|
|
7,094 |
|
|
|
|
|
|
|
|
Long-term portion of debt |
|
$ |
49,091 |
|
|
$ |
46,541 |
|
|
|
|
|
|
|
|
We anticipate that existing cash borrowing arrangements and future access to capital markets should
be sufficient to meet our cash requirements for the foreseeable future. However, our future capital
requirements will depend on many factors, including future business acquisitions, litigation, stock
repurchases and levels of research and development spending, among other factors and the adequacy
of available funds will depend on many factors, including the success of our businesses in
generating cash, continued compliance with financial covenants contained in our credit facility,
and the capital markets in general, among other factors.
Stock Repurchase Program
Our Board of Directors has authorized a stock repurchase program under which we can repurchase up
to 3,000,000 shares of our common stock. During the three months ended September 30, 2008, we did
not repurchase any shares under this program and 1,330,973 shares were available for additional
repurchase under the program as of September 30, 2008. We retire the treasury shares as they are
repurchased and record them as a reduction in the number of shares of common stock issued and
outstanding in our condensed consolidated financial statements.
Dividend Policy
We have never paid cash dividends on our common stock and have no plans to do so in the foreseeable
future.
Contractual Obligations
Under the terms and conditions of the purchase agreements associated with the following
acquisitions, we may be obligated to make additional payments:
In August 2002, we purchased a minority equity interest in CXR Limited. In June 2004, we increased
our equity interest to approximately 75% and in December 2004, we acquired the remaining 25%. As
compensation to the selling shareholders for this remaining interest, we agreed to make certain
royalty payments during
the 18 years following the acquisition of its remaining
interest. Royalty payments are based on the license of, or sales of
products containing technology owned by CXR Limited. As of September 30, 2008, no royalty payments have
been earned.
In January 2004, we acquired Advanced Research & Applications Corp. During the seven years
following the acquisition, contingent consideration is payable based on its net revenues, provided
certain requirements are met. The contingent consideration is capped at $30.0 million. As of
September 30, 2008, no contingent consideration has been earned.
In July 2005, we acquired certain assets of InnerStep, B.S.E., Inc. During the seven years
following the acquisition, contingent consideration is payable based on its profits before interest
and taxes, provided certain requirements are met. The contingent consideration is capped at $6.0
million. As of September 30, 2008, no contingent consideration has been earned.
21
In July 2006, we completed another acquisition that was not material to our overall Condensed
Consolidated Financial Statements. During the two years following the acquisition, contingent
compensation is payable based upon profitability. Total contingent consideration is capped at $0.6
million. During the second of fiscal 2008, $0.3 million of contingent consideration was paid. As
of September 30, 2008, a final payment of $0.2 million of contingent consideration has been earned
and is expected to be paid in fiscal 2009.
Off Balance Sheet Arrangements
As of September 30, 2008, we did not have any significant off balance sheet arrangements as defined
in Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For the three months ended September 30, 2008, no material changes occurred with respect to market
risk as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
Market Risk
We are exposed to certain market risks, which are inherent in our financial instruments and arise
from transactions entered into in the normal course of business. We may enter into derivative
financial instrument transactions in order to manage or reduce market risk in connection with
specific foreign-currency-denominated transactions. We do not enter into derivative financial
instrument transactions for speculative purposes.
We are subject to interest rate risk on our short-term borrowings under our bank lines of credit.
Borrowings under these lines of credit do not give rise to significant interest rate risk because
these borrowings have short maturities and are borrowed at variable interest rates. Historically,
we have not experienced material gains or losses due to interest rate changes.
Foreign Currency
We maintain the accounts of our operations in each of the following countries in the following
currencies: Finland, France, Germany, Italy and Greece (Euros), Singapore (Singapore dollars and
U.S. dollars), Malaysia (Malaysian ringgits), United Kingdom (U.K. pounds), Norway (Norwegian
kroners), India (Indian rupees), Indonesia (Indonesian rupiah), Hong Kong (Hong Kong dollars),
China (Chinese renminbi), Canada (Canadian dollars), Australia (Australian dollars) and Cyprus
(Cypriot pounds). Foreign currency financial statements are translated into U.S. dollars at
period-end rates, with the exception of revenues, costs and expenses, which are translated at
average rates during the reporting period. We include gains and losses resulting from foreign
currency transactions in income, while we exclude those resulting from translation of financial
statements from income and include them as a component of accumulated other comprehensive income
(AOCI). Transaction gains and losses, which were included in our condensed consolidated statement
of operations, amounted to a gain of approximately $0.8 million during the three months ended
September 30, 2008, as compared to a gain of $0.1 million for the comparable prior year period.
Furthermore, a 10% appreciation of the U.S. dollar relative to the local currency exchange rates
would have resulted in a net increase in our operating income of approximately $2 million in first
quarter of fiscal 2008. Conversely, a 10% depreciation of the U.S. dollar relative to the local
currency exchange rates would have resulted in a net decrease in our operating income of
approximately $2 million in first quarter of fiscal 2008.
Use of Derivatives
We may, from time to time, purchase foreign exchange contracts, in order to attempt to reduce
foreign exchange transaction gains and losses, or enter into interest rate swaps. As of September
30, 2008, we had an $8.3 million foreign currency forward contract to sell Polish zloty in
anticipation of the sale and settlement in the second quarter of fiscal 2009 of products
denominated in Polish zloty. Pursuant to SFAS 133, the entire amount of this forward contract is
considered a cash flow hedge. As a result, the gain on this forward contract for the three months
ended September 30, 2008 of $0.1 million has been reported as a component of other comprehensive
income in the condensed consolidated financial statements. Such amount will be reclassified into
earnings in the same period that the related transaction is completed, which we anticipate to occur
in the second quarter of fiscal 2009.
.
22
Importance of International Markets
International markets provide us with significant growth opportunities. However, the following
events, among others, could adversely affect our financial results in subsequent periods: periodic
economic downturns in different regions of the world, changes in trade policies or tariffs, wars
and other forms of political instability. We continue to perform ongoing credit evaluations of our
customers financial condition and, if deemed necessary, we require advance payments for sales. We
monitor economic and currency conditions around the world to evaluate whether there may be any
significant effect on our international sales in the future. Due to our overseas investments and
the necessity of dealing in local currencies in many foreign business transactions, we are at risk
with respect to foreign currency fluctuations.
Inflation
We do not believe that inflation had a material impact on our results of operations during the
three months ended September 30, 2008.
Interest Rate Risk
We classify all highly liquid investments with maturity of three months or less as cash equivalents
and record them in the balance sheet at fair value. Short-term investments comprise high-quality
marketable securities.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2008, the end of the period covered by this report, our management, including
our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended). Such disclosure controls and
procedures are designed to ensure that material information we must disclose in this report is
recorded, processed, summarized and filed or submitted on a timely basis. Based upon that
evaluation our management, Chief Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures were effective as of September 30, 2008.
(b) Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
23
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various claims and legal proceedings which have been previously disclosed in our
quarterly and annual reports. The results of such legal proceedings cannot be predicted with
certainty. Should we fail to prevail in any of these legal matters or should several of these legal
matters be resolved against us in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected.
We are also involved in various other claims and legal proceedings arising out of the ordinary
course of business which have not been previously disclosed in our quarterly and annual reports. In
our opinion, after consultation with legal counsel, the ultimate disposition of such proceedings
will not likely have a material adverse effect on our financial position, future results of
operations or cash flows.
Item 1A. Risk Factors
The discussion of our business and operations in this Quarterly Report on form 10-Q should be read
together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008, filed with the Securities and Exchange Commission, which describe various
risks and uncertainties to which we are or may become subject. Additionally, as a result of the
current instability of the worlds financial markets, some of our suppliers and customers who rely
on the credit or equity markets for access to capital may be negatively impacted. This risk and
the risks and uncertainties described in our Annual Report have the potential to affect our
business, financial condition, results of operations, cash flows, strategies or prospects in a
material and adverse manner.
Item 6. Exhibits
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
24
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of
Hawthorne, State of California on the 30th day of
October 2008.
|
|
|
|
|
|
OSI SYSTEMS, INC.
|
|
|
By: |
/s/ Deepak Chopra
|
|
|
|
Deepak Chopra |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ Alan Edrick
|
|
|
|
Alan Edrick |
|
|
|
Executive Vice President and
Chief Financial Officer |
|
25