OSI SYSTEMS INC - Quarter Report: 2012 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2012

 

OR

 

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

 

For the transition period from              to            

 

Commission File Number 000-23125

 

 

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

 

(310) 978-0516

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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.

 

 

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

 

As of January 23, 2013, there were 20,053,898 shares of the registrant’s common stock outstanding.

 

 

Table of Contents

 

OSI SYSTEMS, INC.

 

INDEX

 

			PAGE
PART I — FINANCIAL INFORMATION			3
	Item 1 —	Condensed Consolidated Financial Statements	3
		Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2012	3
		Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2011 and 2012	4
		Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2011 and 2012	5
		Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2011 and 2012	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3 —	Quantitative and Qualitative Disclosures about Market Risk	27
	Item 4 —	Controls and Procedures	29
PART II — OTHER INFORMATION			30
	Item 1 —	Legal Proceedings	30
	Item 1A —	Risk Factors	30
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 3	Defaults Upon Senior Securities	30
	Item 4	Mine Safety Disclosures	30
	Item 5	Other Information	30
	Item 6 —	Exhibits	31
Signatures			32

 

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PART I. FINANCIAL INFORMATION

 

Item 1.                                  Condensed Consolidated Financial Statements

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share amounts)

 

(Unaudited)

 

		June 30,			December 31,
		2012			2012
ASSETS
Current Assets:
Cash and cash equivalents		$	91,452		$	46,850
Accounts receivable, net of allowance for doubtful accounts of $5,054 and $5,425 as of June 30, 2012 and December 31, 2012, respectively		156,867			140,023
Inventories		195,178			204,599
Deferred income taxes		19,205			19,002
Prepaid expenses and other current assets		20,411			36,086
Total current assets		483,113			446,560
Property and equipment, net		111,664			223,057
Goodwill		82,149			84,024
Intangible assets, net		37,742			37,460
Other assets		35,228			22,584
Total assets		$	749,896		$	813,685
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Bank lines of credit		$	—		$	15,000
Current portion of long term debt		215			1,808
Accounts payable		56,422			95,065
Accrued payroll and employee benefits		24,749			19,974
Advances from customers		22,677			21,959
Accrued warranties		17,562			15,012
Deferred revenue		20,194			16,389
Other accrued expenses and current liabilities		18,830			20,128
Total current liabilities		160,649			205,335
Long-term debt		2,467			11,700
Advances from customers		100,000			87,500
Other long-term liabilities		52,661			54,074
Total liabilities		315,777			358,609
Commitments and contingencies (Note 7)
Stockholders’ Equity:
Preferred stock, $0.001 par value—authorized, 10,000,000 shares; no shares issued or outstanding		—			—
Common stock, $0.001 par value—authorized, 100,000,000 shares; issued and outstanding, 19,821,064 at June 30, 2012 and 20,012,872 shares at December 31, 2012		282,756			280,553
Retained earnings		155,651			174,411
Accumulated other comprehensive income (loss)		(4,288		)	112
Total stockholders’ equity		434,119			455,076
Total liabilities and stockholders’ equity		$	749,896		$	813,685

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except per share amounts)

 

(Unaudited)

 

		For the Three Months Ended December 31,						For the Six Months Ended December 31,
		2011			2012			2011			2012
Net revenues:
Products		$	160,892		$	145,086		$	294,798		$	293,950
Services		27,101			48,963			54,512			81,793
Total net revenues		187,993			194,049			349,310			375,743
Cost of goods sold:
Products		103,212			93,900			193,080			192,832
Services		18,957			30,061			37,549			51,468
Total cost of goods sold		122,169			123,961			230,629			244,300
Gross profit		65,824			70,088			118,681			131,443
Operating expenses:
Selling, general and administrative		35,979			36,829			70,346			76,754
Research and development		11,546			11,858			22,426			23,174
Impairment, restructuring and other charges		—			2,723			—			2,723
Total operating expenses		47,525			51,410			92,772			102,651
Income from operations		18,299			18,678			25,909			28,792
Interest expense and other income, net		(721		)	(1,385		)	(1,520		)	(2,482		)
Income before income taxes		17,578			17,293			24,389			26,310
Provision for income taxes		5,277			4,872			7,327			7,550
Net income		$	12,301		$	12,421		$	17,062		$	18,760
Net income per share:
Basic		$	0.62		$	0.62		$	0.87		$	0.94
Diluted		$	0.61		$	0.60		$	0.85		$	0.91
Shares used in per share calculation:
Basic		19,685			19,999			19,630			19,952
Diluted		20,237			20,609			20,161			20,589

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(amounts in thousands)

 

(Unaudited)

 

		For the Three Months Ended December 31,						For the Six Months Ended December 31,
		2011			2012			2011			2012
Net income		$	12,301		$	12,421		$	17,062		$	18,760
Other comprehensive income (loss):
Foreign currency translation adjustment		(2,132		)	(571		)	(5,393		)	4,739
Other		(261		)	114			10			(339		)
Other comprehensive income (loss)		(2,393		)	(457		)	(5,383		)	4,400
Comprehensive income		$	9,908		$	11,964		$	11,679		$	23,160

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(amounts in thousands)

 

(Unaudited)

 

		For the Six Months Ended December 31,
		2011			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	17,062		$	18,760
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,741			10,809
Stock based compensation expense		3,462			7,147
Provision for losses on accounts receivable		227			445
Equity in (earnings) loss of unconsolidated affiliates		(119		)	51
Deferred income taxes		(168		)	212
Other		28			131
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable		(10,049		)	17,663
Inventories		(38,112		)	(6,985		)
Prepaid expenses and other current assets		10,537			11,373
Accounts payable		22,415			37,876
Accrued payroll and related expenses		(5,745		)	(4,874		)
Advances from customers		4,175			(13,900		)
Accrued warranties		1,050			(2,728		)
Deferred revenue		(717		)	(3,567		)
Other accrued expenses and current liabilities		(1,303		)	(9,597		)
Net cash provided by operating activities		12,484			62,816
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(9,083		)	(117,616		)
Acquisition of businesses, net of cash acquired		(3,189		)	(5,787		)
Acquisition of intangible and other assets		(1,794		)	(2,039		)
Net cash used in investing activities		(14,066		)	(125,442		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of bank lines of credit		—			15,000
Proceeds from long-term debt		—			11,100
Payments on long-term debt		(108		)	(375		)
Proceeds from exercise of stock options and employee stock purchase plan		2,194			2,974
Repurchase of common shares		(1,770		)	(12,325		)
Net cash provided by financing activities		316			16,374
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(1,485		)	1,650
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,751		)	(44,602		)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		55,619			91,452
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	52,868		$	46,850
Supplemental disclosure of cash flow information:
Interest paid		$	1,559		$	1,858
Income taxes paid		$	1,125		$	5,615

 

See accompanying notes to condensed consolidated financial statements.

 

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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, and a provider of security screening services. The Company sells its products and services in diversified markets, including homeland security, healthcare, defense and aerospace.

 

The Company has three operating divisions: (i) Security, providing security and inspection systems, turnkey security screening solutions and related services; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems, and related services; and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and electronic manufacturing services for the Security and Healthcare divisions, as well as to external original equipment manufacturer clients for applications in the defense, aerospace, medical and industrial markets, among others.

 

Through its Security division, the Company designs, manufactures, markets and services security and inspection systems globally, and provides turnkey security screening solutions. The Security division’s products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband, and to screen people. These products and services are also used for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of controlled materials.

 

Through its Healthcare division, the Company designs, manufactures, markets and services patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems globally. These products are used by care providers in critical care, emergency and perioperative areas within hospitals as well as physicians’ offices, medical clinics and ambulatory surgery centers.

 

Through its Optoelectronics and Manufacturing division, the Company designs, manufactures and markets optoelectronic devices and provides electronics manufacturing services globally for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostic products, telecommunications, test and measurement devices, industrial automation systems, automotive diagnostic products and renewable energy technologies. This division provides products and services to original equipment manufacturers and end users as well as to the Company’s own Security and Healthcare divisions.

 

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Basis of Presentation

 

The unaudited 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. These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations as of the dates and for the periods presented. These unaudited quarterly condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the Securities and Exchange Commission on August 13, 2012. The results of operations for the three and six months ended December 31, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

Per Share Computations

 

The Company computes basic earnings per share by dividing net income available to common stockholders 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 stockholders by the sum of the weighted average number of common and dilutive potential common shares outstanding. Potential common shares consist of the shares issuable upon the exercise of stock options under the treasury stock method.  Stock options to purchase a total of 0.2 million shares of common stock for the six months ended December 31, 2011 were not included in diluted earnings per share calculations because to do so would have been antidilutive, while no such shares were excluded from the calculations for the six months ended December 31, 2012 or from the calculations for the three month periods ended December 31, 2012 and 2011, respectively.

 

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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Net income available to common stockholders		$	12,301		$	12,421		$	17,062		$	18,760
Weighted average shares outstanding — basic		19,685			19,999			19,630			19,952
Dilutive effect of stock options		552			610			531			637
Weighted average shares outstanding — diluted		20,237			20,609			20,161			20,589
Basic net income per share		$	0.62		$	0.62		$	0.87		$	0.94
Diluted net income per share		$	0.61		$	0.60		$	0.85		$	0.91

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with maturities of approximately three months or less as of the acquisition date to be cash equivalents.

 

Components of cash and cash equivalents consisted of:

 

		June 30, 2012			December 31, 2012
Cash in bank		$	47,402		$	46,739
Money market		34,063			111
Commercial paper		9,987			—
Total		$	91,452		$	46,850

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash, marketable securities, derivative instruments, accounts receivable, accounts payable and debt instruments. The carrying values of financial instruments, other than debt instruments, are representative of their fair values due to their short-term maturities. The carrying values of the Company’s long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current interest rates available to the Company.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined that all of its marketable securities fall into the “Level 1” category, which values assets and liabilities at the quoted prices in active markets for identical assets and liabilities; while the Company’s derivative instruments fall into the “Level 2” category, which values assets and liabilities from observable inputs other than quoted market prices. There were no assets or liabilities where “Level 3” valuation techniques were used, and there were no assets and liabilities measured at fair value on a non-recurring basis.

 

The fair values of the Company’s assets (liabilities) were:

 

		June 30, 2012			December 31, 2012
Level 1		$	10,955		$	12,794
Level 2		13			(90		)
Total		$	10,968		$	12,704

 

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Derivative Instruments and Hedging Activity

 

The Company’s use of derivatives consists primarily of foreign exchange contracts and interest rate swap agreements. As of December 31, 2012, the Company had outstanding foreign currency forward contracts of approximately $6.2 million.  The foreign exchange contracts do not meet the criteria as effective cash flow hedges.  Therefore, the net gain (loss) from these contracts is reported in Interest expense and other income, net in the condensed consolidated statement of operations.  An interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to variable, LIBOR-based debt for the duration of the term loan.

 

The interest rate swap matures in October 2019.  It is considered an effective cash flow hedge, and, as a result, the net gains or losses on such instrument were reported as a component of other comprehensive income in the condensed consolidated financial statements and are reclassified as net earnings when the hedge transaction settles.

 

Revenue Recognition

 

The Company recognizes revenue from sales of products upon shipment when title and risk of loss passes, and when terms are fixed and collection is probable. Revenue from services includes after-market services, installation and implementation of products, and turnkey security screening services.  The portion of revenue for the sale attributable to installation is deferred and recognized when the installation service is provided. In an instance where terms of sale include subjective customer acceptance criteria, revenue is deferred until the Company has achieved the acceptance criteria. Concurrent with the shipment of the product, the Company accrues estimated product return reserves and warranty expenses. Critical judgments made by management related to revenue recognition include the determination of whether or not customer acceptance criteria are perfunctory or inconsequential. The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of revenue recognized. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.

 

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Revenue from certain fixed-fee turnkey services agreements is recognized based upon proportional performance, measured by the actual number of hours incurred divided by the total estimated number of hours for the project. The impact of changes in the estimated hours to service the agreement is reflected in the period during which the change becomes known.

 

Revenues from out-of-warranty service maintenance contracts are recognized ratably over the term of such contract. For services not derived from specific maintenance contracts, revenues are recognized as the services are performed. Deferred revenue for such services arises from payments received from customers for services not yet performed.

 

Business Combinations

 

During the normal course of business the Company makes acquisitions.  In the event that an individual acquisition (or an aggregate of acquisitions) is material, appropriate disclosure of such acquisition activity is disclosed.

 

2. Balance Sheet Details

 

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

 

		June 30, 2012			December 31, 2012
Inventories, net
Raw materials		$	103,747		$	110,809
Work-in-process		28,096			34,970
Finished goods		63,335			58,820
Total		$	195,178		$	204,599

 

		June 30, 2012			December 31, 2012
Property and equipment
Land		$	5,193		$	8,569
Buildings and improvements		13,597			26,517
Leasehold improvements		12,385			9,644
Equipment and tooling		74,789			129,379
Furniture and fixtures		3,982			4,479
Computer equipment		13,937			16,851
Software		15,245			15,770
Construction in process		52,269			95,988
Total		191,397			307,197
Less: accumulated depreciation and amortization		(79,733		)	(84,140		)
Property and equipment, net		$	111,664		$	223,057

 

Construction in process consists primarily of costs related to infrastructure in Mexico.

 

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3. Goodwill and Intangible Assets

 

The changes in the carrying value of goodwill for the six month period ended December 31, 2012, are as follows (in thousands):

 

		Security			Healthcare			Optoelectronics and Manufacturing			Consolidated
Balance as of June 30, 2012		$	27,583		$	35,887		$	18,679		$	82,149
Goodwill acquired or adjusted during the period		798			—			701			1,499
Foreign currency translation adjustment		247			134			(5		)	376
Balance as of December 31, 2012		$	28,628		$	36,021		$	19,375		$	84,024

 

Intangible assets consisted of the following (in thousands):

 

				June 30, 2012									December 31, 2012
		Weighted Average Lives		Gross Carrying Value			Accumulated Amortization			Intangibles Net			Gross Carrying Value			Accumulated Amortization			Intangibles Net
Amortizable assets:
Software development costs		5 years		$	15,175		$	4,140		$	11,035		$	15,995		$	4,541		$	11,454
Patents		15 years		4,259			526			3,733			4,892			586			4,306
Core technology		10 years		2,093			1,548			545			2,172			1,715			457
Developed technology		12 years		20,022			12,560			7,462			20,067			13,619			6,448
Customer relationships/backlog		8 years		11,955			7,611			4,344			9,178			5,044			4,134
Total amortizable assets				53,504			26,385			27,119			52,304			25,505			26,799
Non-amortizable assets:
Trademarks				10,623			—			10,623			10,661			—			10,661
Total intangible assets				$	64,127		$	26,385		$	37,742		$	62,965		$	25,505		$	37,460

 

Amortization expense related to intangibles assets was $2.3 million for each of the six months ended December 31, 2011 and 2012, and $1.1 million for each of the three months ended December 31, 2011 and 2012.  At December 31, 2012, the estimated future amortization expense was as follows (in thousands):

 

2013 (remaining 6 months)		$	2,262
2014		3,902
2015		2,402
2016		1,742
2017		1,132
2018		1,106
2019 and thereafter		14,253
Total		$	26,799

 

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4. Borrowings

 

The Company has a $425 million credit agreement maturing November 2016. The credit agreement consists of a $425 million revolving credit facility, including a $375 million sub-limit for letters of credit. The Company has the ability to increase the facility by $100 million under certain circumstances. Borrowings under this facility bear interest at the London Interbank Offered Rate (LIBOR) plus a margin of 1.5% as of December 31, 2012. This margin is determined by the Company’s consolidated leverage ratio and may range from 1.5% to 2.0%. Letters of credit reduce the amount available to borrow by their face value. The unused portion of the facility bears a commitment fee of 0.25%. The Company’s borrowings under the credit agreement are guaranteed by the Company’s U.S. based subsidiaries and are secured by substantially all of the Company’s and certain subsidiaries’ assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this type. As of December 31, 2012, $15 million was outstanding under the revolving credit facility and letters-of-credit outstanding totaled $182.2 million.

 

Several of the Company’s foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies, to meet short-term working capital requirements and for the issuance of letters-of-credit. As of December 31, 2012, $10.1 million was outstanding under these letter-of-credit facilities, while no debt was outstanding. As of December 31, 2012, the total amount available under these credit facilities was $34.7 million, with a total cash borrowing sub-limit of $4.2 million.

 

In September 2012, the Company entered into a term loan agreement for $11.1 million to fund the acquisition of land and a building in the state of Washington.  The loan is payable over seven years and bears interest at LIBOR plus 1.25%, which is payable on a monthly basis.  Concurrent with entering into the floating rate loan, the Company entered into an interest rate swap agreement that effectively locks the interest rate of the loan to 2.2% per annum for the term of the loan. As of December 31, 2012, $10.8 million remained outstanding under this loan.

 

Long-term debt consisted of the following (in thousands):

 

		June 30, 2012			December 31, 2012
Term loans		$	2,682		$	13,508
Less current portion of long-term debt		215			1,808
Long-term portion of debt		$	2,467		$	11,700

 

5. Stock-based Compensation

 

The Company maintains two share-based employee compensation plans: the 2012 Incentive Award Plan (2012 Plan) and the 2006 Equity Incentive Plan (2006 Plan). In September 2012, the Company’s board of directors approved the 2012 Plan, and in December 2012 the stockholders adopted the 2012 Plan, effective on December 12, 2012, which serves as the successor to the 2006 Plan and provides for the issuance of incentive and non-statutory stock options, restricted stock awards, stock appreciation rights, restricted stock units (RSUs), performance shares and stock bonuses to qualified employees, directors and consultants, amongst other forms of equity. No new awards will be issued under the 2006 Plan as of the effective date of the 2012 Plan. Outstanding awards under the 2006 Plan continue to be subject to the terms and conditions of the 2006 Plan.

 

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The Company recorded stock-based-compensation expense in the condensed consolidated statement of operations as follows (in thousands):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Cost of goods sold		$	111		$	129		$	229		$	267
Selling, general and administrative		1,779			3,431			3,109			6,764
Research and development		60			54			124			116
Stock-based compensation expense		$	1,950		$	3,614		3,462			$	7,147
Less: related income tax benefit		709			1,372			1,243			2,209
Stock-based compensation expense, net		$	1,241		$	2,242		$	2,219		$	4,938

 

As of December 31, 2012, total unrecognized compensation cost related to non-vested, share-based compensation grants was approximately $20.8 million. The Company expects to recognize these costs over a weighted-average period of 2.2 years.

 

The following summarizes stock option activity during the six months ended December 31, 2012:

 

		Number of Options		Weighted- Average Exercise Price			Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2012		1,059,397		$	23.01
Granted		10,000		$	61.99
Exercised		(109,566	)	$	14.59
Expired or forfeited		(1,158	)	$	16.72
Outstanding at December 31, 2012		958,673		$	24.38		6.9 years		$	38,018
Exercisable at December 31, 2012		721,268		$	20.20		6.3 years		$	31,617

 

A summary of restricted stock award activity during the six months ended December 31, 2012:

 

		Shares		Weighted- Average Fair Value
Nonvested at June 30, 2012		580,468		$	28.93
Granted		236,972		57.81
Vested		(208,413	)	25.42
Forfeited		(5,862	)	32.59
Nonvested at June 30, 2012		603,165		$	41.45

 

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As of December 31, 2012, there were 3,855,406 shares available for grant under the 2012 Plan.  Under the terms of the 2012 Plan, RSU’s and restricted stock granted from the pool of shares available for grant on or after December 12, 2012 reduce the pool by 1.87 shares for each share granted.  RSU’s and restricted stock forfeited and returned to the pool of shares available for grant increase the pool by 1.87 shares for each share forfeited.

 

6. Retirement Benefit Plans

 

The Company sponsors various retirement benefit plans including qualified and nonqualified defined benefit pension plans for its employees. The components of net periodic pension expense are as follows (in thousands):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Service cost		$	198		$	306		$	355		$	584
Amortization of prior service cost		112			230			224			460
Net periodic pension expense		$	310		$	536		$	579		$	1,044

 

For each of the three and six months ended December 31, 2011 and 2012, the Company made contributions of $0.1 million to these defined benefit plans.

 

In addition, the Company maintains various defined contribution plans. For the three months ended December 31, 2011 and 2012, the Company made contributions of $1.2 million and $0.8 million to these defined contribution plans. For the six months ended December 31, 2011 and 2012, the Company made contributions of $2.4 million and $1.8 million, respectively, to these defined contribution plans.

 

7. Commitments and Contingencies

 

Legal Proceedings

 

The Company is involved in various claims and legal proceedings arising in the ordinary course of business. In the Company’s opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on its business, financial condition or results of operations.  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 and reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company’s business, financial condition or results of operations could be material.

 

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Contingent Acquisition Obligations

 

Under the terms and conditions of the purchase agreements associated with certain acquisitions, the Company may be obligated to make additional payments based on the achievement of certain sales or profitability milestones from the acquired operations. The maximum amount of such payments under arrangements with contingent consideration caps is $63 million. In addition, one of the purchase agreements the Company entered into requires royalty payments through 2022 based on the license of, or sales of products containing the technology of a company acquired in 2004.  The Company accounts for such contingent payments as an addition to the purchase price of the acquired business for acquisitions that occurred prior to fiscal year 2010 under Statement of Financial Accounting Standards 141, “Business Combinations”.  For acquisitions from and after the 2010 fiscal year and accounted for under Accounting Standards Codification 805, “Business Combinations” (“ASC 805”), the estimated fair value of these obligations is recorded as a liability in the condensed consolidated balance sheets with subsequent revisions reflected in the condensed consolidated statements of operations. As of December 31, 2012, pursuant to ASC 805, $18.8 million of contingent payment obligations are included in Other long-term liabilities in the accompanying condensed consolidated balance sheet.

 

Advances from Customers

 

The Company receives advances from customers associated with certain projects.  In fiscal 2012, the Company entered into an agreement with the Mexican government to provide a turnkey security screening solution along the country’s borders, and in its ports and airports.  Associated with the agreement, the Company was provided an advance totaling $100 million.  The Company is obligated to provide a guarantee until the advance has been earned.

 

Environmental Contingencies

 

The Company is subject to various environmental laws. The Company’s practice is to conduct appropriate environmental investigations for each of its properties in the United States at which the Company manufactures products in order to identify, as of the date of such report, potential areas of environmental concern related to past and present activities or from nearby operations. In certain cases, the Company has conducted further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate by independent environmental consultants.

 

During one investigation, the Company discovered soil and groundwater contamination at its Hawthorne, California facility. The Company filed the requisite reports concerning this problem with the appropriate environmental authorities in fiscal 2001.  The Company has not received any response to such reports, and no agency action or litigation is presently pending nor has the Company received threats of any such action. The Company’s site was previously used by other companies for semiconductor manufacturing similar to that presently conducted on the site by the Company, and it is not presently known who is responsible for the contamination or, if required, the remediation. The groundwater contamination is a known regional problem, not limited to the Company’s premises or its immediate surroundings.  The Company has not accrued for loss contingencies relating to the above environmental matter because it believes that, although an unfavorable outcome may be possible, it is not considered by the Company’s management to be probable and reasonably estimable.  If this matter is resolved in a manner adverse to the Company, the impact on the Company’s business, financial condition and results of operations could be material.

 

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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 experience and anticipated expenses. The Company charges actual expenses of repairs under warranty, including parts and labor, to this provision when incurred.

 

The following table presents changes in warranty provisions (in thousands):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Balance at beginning of period		$	14,438		$	16,919		$	14,530		$	17,562
Additions		1,816			58			2,650			690
Reductions for warranty repair costs and adjustments		(872		)	(1,965		)	(1,798		)	(3,240		)
Balance at end of period		$	15,382		$	15,012		15,382			$	15,012

 

Other Matters

 

In November 2012, the Company received a “show cause” letter from the U.S. Transportation Safety Administration (TSA) regarding the Rapiscan Secure 1000SP Advanced Imaging Technology system and related Automated Target Recognition (ATR) software that were undergoing operational testing.  The Company and the TSA reached an agreement under which the Company has agreed to assist the TSA in redeploying the Secure 1000SP units previously sold to the TSA and cease software development related to ATR. The Company’s contract with the TSA for AIT systems will continue, though the Company did not sell systems to the TSA in fiscal 2012 and fiscal 2013.  The Company recorded a $2.7 million impairment and other charges for the three months ended December 31, 2012 in connection with this agreement.  The Company’s agreement with the TSA regarding the issues raised in the show cause letter does not constitute final resolution of the matter, as the issues are also subject to U.S. Department of Homeland Security (DHS) disposition.  The Company is working to complete the process with the DHS.

 

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.  The assumptions used to estimate the annual effective tax rate includes 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, increases or decreases in uncertain tax positions, utilization of research and development 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.

 

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9. Segment Information

 

The Company has determined that it operates in three identifiable industry segments, (a) security and inspection systems (Security division), (b) medical monitoring and anesthesia systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division). The Company also has a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses; expenses related to stock issuances; and legal and audit and other professional service fees not allocated to product segments. Both the Security and Healthcare divisions comprise primarily end-product businesses whereas the businesses of the Optoelectronics and Manufacturing division primarily supplies components and subsystems to original equipment manufacturers, including to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values.  All other accounting policies of the segments are the same as described in Note 1, Summary of Significant Accounting Policies of the Form 10-K for the fiscal year ended June 30, 2012.

 

The following table presents segment and enterprise-wide information (in thousands):

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Revenues — by Segment:
Security division		$	88,977		$	91,863		$	161,574		$	174,779
Healthcare division		59,193			56,114			105,713			107,695
Optoelectronics and Manufacturing division, including intersegment revenues		51,359			57,277			104,450			114,424
Intersegment revenues elimination		(11,536		)	(11,205		)	(22,427		)	(21,155		)
Total		$	187,993		$	194,049		$	349,310		$	375,743
Revenues — by Geography:
Americas		$	128,387		$	130,779		$	236,209		$	249,259
Europe		38,468			41,986			73,808			85,804
Asia		32,674			32,489			61,720			61,835
Intersegment revenues elimination		(11,536		)	(11,205		)	(22,427		)	(21,155		)
Total		$	187,993		$	194,049		$	349,310		$	375,743
		Three Months Ended December 31,						Six Months Ended December 31,
		2011			2012			2011			2012
Operating income (loss) — by Segment:
Security division		$	8,001		$	8,607		$	11,846		$	13,072
Healthcare division		8,325			6,915			10,723			10,796
Optoelectronics and Manufacturing division		4,451			5,457			9,389			10,290
Corporate		(2,599		)	(2,438		)	(5,906		)	(5,687		)
Eliminations (1)		121			137			(143		)	321
Total		$	18,299		$	18,678		$	25,909		$	28,792
								June 30, 2012			December 31, 2012
Assets — by Segment:
Security division								$	351,668		$	454,817
Healthcare division								162,583			161,030
Optoelectronics and Manufacturing division								132,281			146,808
Corporate								109,405			56,750
Eliminations (1)								(6,041		)	(5,720		)
Total								$	749,896		$	813,685

 

(1)        Eliminations within operating income primarily reflect the change in the elimination of intercompany profit in inventory not-yet-realized. Eliminations in assets reflect the amount of intercompany profit in inventory as of the balance sheet date. Such intercompany profit is to be realized upon shipment of inventory to the external customers of the Security and Healthcare divisions.

 

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