OSI SYSTEMS INC - Quarter Report: 2018 September (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 September 30, 2018

 

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

As of October 22, 2018, there were 18,153,123 shares of the registrant’s common stock outstanding.

 

 

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OSI SYSTEMS, INC.

 

INDEX

 

				PAGE
PART I — FINANCIAL INFORMATION				3
	Item 1 —	Financial Statements (Unaudited)		3
		Condensed Consolidated Balance Sheets at June 30, 2018 and September 30, 2018		3
		Condensed Consolidated Statements of Operations for the three months ended September 30, 2017 and 2018		4
		Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2017 and 2018		5
		Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2017 and 2018		6
		Notes to Condensed Consolidated Financial Statements		7
	Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
	Item 3 —	Quantitative and Qualitative Disclosures about Market Risk		28
	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		30
Signatures				31

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share amounts)

 

		June 30,			September 30,
		2018			2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	84,814		$	86,411
Accounts receivable, net		210,744			222,170
Inventories		313,552			343,974
Prepaid expenses and other current assets		41,587			49,468
Total current assets		650,697			702,023
Property and equipment, net		115,524			119,764
Goodwill		292,213			304,717
Intangible assets, net		142,001			145,230
Other assets		55,256			56,194
Total assets		$	1,255,691		$	1,327,928
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit		$	113,000		$	166,000
Current portion of long-term debt		2,262			2,326
Accounts payable		106,892			116,887
Accrued payroll and related expenses		40,171			30,720
Advances from customers		55,761			74,148
Other accrued expenses and current liabilities		125,236			120,916
Total current liabilities		443,322			510,997
Long-term debt		248,980			250,958
Deferred income taxes		15,002			15,052
Other long-term liabilities		58,951			63,619
Total liabilities		766,255			840,626
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $0.001 par value—10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value—100,000,000 shares authorized; issued and outstanding, 18,032,374 shares at June 30, 2018 and 18,153,123 shares at September 30, 2018		169,475			156,760
Retained earnings		334,745			344,147
Accumulated other comprehensive loss		(14,784		)	(13,605		)
Total stockholders’ equity		489,436			487,302
Total liabilities and stockholders’ equity		$	1,255,691		$	1,327,928

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

		For the Three Months Ended September 30,
		2017			2018
Net revenues:
Products		$	165,653		$	182,480
Services		91,480			83,769
Total net revenues		257,133			266,249
Cost of goods sold:
Products		114,180			125,371
Services		51,682			44,965
Total cost of goods sold		165,862			170,336
Gross profit		91,271			95,913
Operating expenses:
Selling, general and administrative		55,647			61,707
Research and development		15,100			13,753
Restructuring and other charges		1,130			4,196
Total operating expenses		71,877			79,656
Income from operations		19,394			16,257
Interest and other expense, net		(4,249		)	(5,332		)
Income before income taxes		15,145			10,925
Provision for income taxes		(4,988		)	(1,523		)
Net income		$	10,157		$	9,402
Earnings per share:
Basic		$	0.54		$	0.52
Diluted		$	0.52		$	0.50
Shares used in per share calculation:
Basic		18,778			18,090
Diluted		19,591			18,736

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)

 

		For the Three Months Ended September 30,
		2017			2018
Net income		$	10,157		$	9,402
Other comprehensive income:
Foreign currency translation adjustment		1,580			1,173
Other		28			6
Other comprehensive income		$	1,608		$	1,179
Comprehensive income		$	11,765		$	10,581

 

See accompanying notes to condensed consolidated financial statements.

 

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

		For the Three Months Ended September 30,
		2017			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	10,157		$	9,402
Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effects from acquisitions:
Depreciation and amortization		20,375			14,147
Stock based compensation expense		5,487			5,463
Deferred income taxes		5,346			(3,386		)
Amortization of debt discount and issuance costs		2,098			2,220
Other		490			49
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable		16,232			(8,701		)
Inventories		(10,098		)	(28,690		)
Prepaid expenses and other assets		(8,220		)	(9,913		)
Accounts payable		6,586			9,177
Advances from customers		(3,484		)	18,409
Other		(9,862		)	(10,998		)
Net cash provided by (used in) operating activities		35,107			(2,821		)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(23,719		)	(7,875		)
Acquisition of businesses, net of cash acquired		(83,632		)	(18,259		)
Acquisition of intangible and other assets		(1,179		)	(4,393		)
Net cash used in investing activities		(108,530		)	(30,527		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on bank lines of credit		111,000			53,000
Proceeds from long-term debt		118			468
Payments on long-term debt		(670		)	(649		)
Proceeds from exercise of stock options and employee stock purchase plan		3,718			2,289
Repurchase of common shares		—			(7,844		)
Taxes paid related to net share settlement of equity awards		(18,802		)	(12,625		)
Net cash provided by financing activities		95,364			34,639
Effect of exchange rate changes on cash		437			306
Net increase in cash and cash equivalents		22,378			1,597
Cash and cash equivalents—beginning of period		169,650			84,814
Cash and cash equivalents—end of period		$	192,028		$	86,411
Supplemental disclosure of cash flow information:
Cash paid, net during the period for:
Interest		$	2,852		$	3,702
Income taxes		$	4,172		$	13,998

 

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 our subsidiaries, is 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 reporting segments: (i) Security, providing security inspection systems, turnkey security screening solutions and related services; (ii) Healthcare, providing patient monitoring, and diagnostic cardiology 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 (“OEM”) customers and end users for applications in the defense, aerospace, medical and industrial markets, among others.

 

Through our Security segment, we provide security screening products and related services globally. These products fall into the following categories: baggage and parcel inspection; cargo and vehicle inspection; hold (checked) baggage screening; people screening; radiation detection; and explosive and narcotics trace detection. In addition to these products, we also provide site design, installation, training and technical support services to our customers. We also provide turnkey security screening solutions, which can include the construction, staffing and long-term operation of security screening checkpoints for our customers.

 

Through our Healthcare segment, we design, manufacture, market and service patient monitoring and diagnostic cardiology systems and related supplies and accessories worldwide. 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, among others.

 

Through our Optoelectronics and Manufacturing segment, we design, manufacture and market optoelectronic devices and flex circuits and provide electronics manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, X-ray security and inspection systems and medical imaging, chemistry analysis and diagnostics instruments, telecommunications, scanners and industrial automations, automotive diagnostic systems, internet of things (IoT) and consumer wearable products. This division provides products and services to OEM customers and end users as well as to our Security and Healthcare divisions.

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The results of operations for the three months ended September 30, 2018 are not necessarily indicative of the operating results to be expected for the full 2019 fiscal year or any future periods.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, profit and loss recognition, fair values of assets acquired and assumed in business combinations, values for inventories reported at lower of cost or net realizable value, stock-based compensation expense, income taxes, accrued warranty costs, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially.

 

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Per Share Computations

 

We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income available to common stockholders by the sum of the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method. During the three months ended September 30, 2018, the number of stock options and stock awards excluded from the calculation because they were antidilutive was de minimis.  During the three months ended September 30, 2017, stock options and stock awards to purchase 0.1 million shares of common stock were excluded from the calculation because to include such options and awards would have been antidilutive. The underlying equity component of the 1.25% convertible senior notes due 2022 (the “Notes”) discussed in Note 6 to the condensed consolidated financial statements will have no impact on diluted earnings per share until the average price of our common stock exceeds the conversion price because the principal amount of the Notes is intended to be settled in cash upon conversion.

 

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

 

		Three Months Ended September 30,
		2017			2018
Net income available to common stockholders		$	10,157		$	9,402
Weighted average shares outstanding—basic		18,778			18,090
Dilutive effect of equity awards		813			646
Weighted average shares outstanding—diluted		19,591			18,736
Basic earnings per share		$	0.54		$	0.52
Diluted earnings per share		$	0.52		$	0.50

 

Cash Equivalents

 

We consider all highly liquid investments with maturities of approximately three months or less as of the acquisition date to be cash equivalents.

 

Our cash and cash equivalents totaled $86.4 million at September 30, 2018. The majority of this amount was held by our subsidiaries primarily in the United Kingdom, Malaysia, India and Singapore, and to a lesser extent in Mexico, Canada, and Germany among others.  We have cash holdings that exceed insured limits for financial institutions; however, we mitigate this risk by utilizing high credit quality financial institutions throughout the world.

 

Fair Value of Financial Instruments

 

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

 

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. “Level 1” category includes assets and liabilities at quoted prices in active markets for identical assets and liabilities. “Level 2” category includes assets and liabilities from observable inputs other than quoted market prices. “Level 3” category includes assets and liabilities for which valuation techniques are unobservable and significant to the fair value measurement. As of June 30, 2018 and September 30, 2018, there were no assets where “Level 3” valuation techniques were used. Our contingent payment obligations related to acquisitions, which are further discussed in Note 9 to the condensed consolidated financial statements, are valued using “Level 3” valuation techniques on a recurring basis.

 

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The fair values of the our financial assets and liabilities as of June 30, 2018 and September 30, 2018 are categorized as follows (in thousands):

 

		June 30, 2018												September 30, 2018
		Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
Assets:
Insurance company contracts		$	—		$	31,897		$	—		$	31,897		$	—		$	33,497		$	—		$	33,497
Interest rate contract		—			18			—			18			—			13			—			13
Total assets		$	—		$	31,915		$	—		$	31,915		$	—		$	33,510		$	—		$	33,510
Liabilities—Contingent consideration		$	—		$	—		$	15,713		$	15,713		$	—		$	—		$	21,102		$	21,102

 

Derivative Instruments and Hedging Activity

 

Our use of derivatives consists of an interest rate swap agreement. The 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. The interest rate swap 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 consolidated financial statements and are reclassified as net income when the hedge transaction settles.

 

Goodwill Impairment

 

Goodwill represents the excess purchase price over the estimated fair value of the assets acquired and liabilities assumed in a business combination. Goodwill is allocated to our segments based on the nature of the product line of the acquired business. The carrying value of goodwill is not amortized, but is annually tested for impairment during our second quarter and more frequently if there is an indicator of impairment. We assess qualitative factors of each of our three reporting units to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

 

Revenue Recognition

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 and related amendments (“ASC 606”), which superseded all prior revenue recognition methods and industry-specific guidance. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied (i.e., either over time or at a point in time). ASC 606 further requires that companies disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On July 1, 2018, we adopted ASC 606 using the modified retrospective method, whereby the adoption does not impact any prior periods. We identified contracts not yet completed as of July 1, 2018 and applied the new guidance on a prospective basis.

 

Product Sales. We recognize revenue from sales of products upon shipment or delivery when control of the product transfers to the customer, depending on the terms of each sale, and when collection is probable. In the circumstance where terms of a product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the acceptance criteria unless the customer acceptance criteria are perfunctory or inconsequential. We generally offer customers payment terms of less than one year. In cases when payment terms extend beyond one year, we consider whether the contract has a significant financing component.

 

Service Revenue. Revenue from services includes after-market services, installation and implementation of products and turnkey security screening services. Generally, revenue from services is recognized over time as the services are performed. Revenues from out of warranty service maintenance contracts are recognized ratably over the respective terms of such contracts. Deferred revenue for such services arises from payments received from customers for services not yet performed.

 

Contract Revenue. Sales agreements with customers can be project specific, cover a period of time, and can be renewable periodically. The contracts may contain terms and conditions with respect to payment, delivery, installation, services, warranty and other rights. In certain instances, we consider an accepted customer order, governed by a master sales agreement, to be the contract with the customer when legal rights and obligations exist. Contracts with customers may include the sale of products and services, as discussed in the paragraphs above. In certain instances, contracts can contain multiple performance obligations as discussed in the paragraph below. According to the terms of a sale contract, we may receive consideration from a customer prior to transferring goods to the customer, and we record these prepayments as a contract liability. We also record deferred revenue, typically related to service

 

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contacts, when consideration is received before the services have been performed. We recognize customer deposits and deferred revenue as net sales after all revenue recognition criteria is met.

 

When determining revenue recognition for contracts, we will use judgment based on our understanding of the obligations within each contract. We will determine 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 recognition. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.

 

Multiple Performance Obligations.  Certain agreements with customers include the sale of capital equipment involving multiple elements that may include civil works to prepare a site for the installation of equipment, manufacture and delivery of equipment, installation and integration of equipment, training of customer personnel to operate the equipment and after-market service of the equipment. We generally separate multiple elements in a contract into separate performance obligations if those elements are distinct, both individually and in the context of the contract. If multiple promises comprise a series of distinct services which are substantially the same and have the same pattern of transfer, they are combined and accounted for as a single performance obligation.

 

In cases where obligations in a contract are distinct and thus require separation into multiple performance obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance obligation based on its relative standalone selling price. The value allocated to each performance obligation is then recognized as revenue when the revenue recognition criteria for each distinct promise or bundle of promises has been met.

 

The standalone selling price for each performance obligation is an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the good or service.  When there is only one performance obligation associated with a contract, the entire sale value is attributed to that obligation.  When a contract contains multiple performance obligations the transaction value is first allocated using the observable price, which is generally a list price net of applicable discount and/or the price used to sell in similar circumstances. In circumstances when a selling price is not directly observable, we will estimate the standalone selling price using information available to us including our market assessment and expected cost plus margin.

 

The timetable for fulfilment of each of the distinct performance obligations can range from completion in a short amount of time and entirely within a single reporting period to completion over several reporting periods. The general timing of revenue recognition for each performance obligation may be dependent upon several milestones, including physical delivery of equipment, completion of factory acceptance test, completion of site acceptance test, installation and connectivity of equipment, certification of training of personnel and, in the case of after-market service deliverables, the passage of time (typically evenly over the post-warranty period of the service deliverable).

 

We often provide a guarantee to support our performance under multiple-deliverable arrangements. In the event that customers are permitted to terminate such arrangements, the underlying contract typically requires payment for deliverables and reimbursement of costs incurred through the date of termination.

 

Effect of Adopting ASC 606. Adopting ASC 606 did not require any cumulative effect adjustment to retained earnings as of July 1, 2018 because the impact was immaterial. The impact to our condensed consolidated statements of operations and balance sheet are shown below for the three month period ended September 30, 2018.

 

Statement of Operations (in thousands)

 

		Three Months Ended September 30, 2018
		Results as Reported			Results without Adoption of ASC 606			Effect of Change
Revenue		$	266,249		$	262,893		$	3,356
Cost of goods sold		170,336			169,157			1,179
Operating expenses		79,656			77,654			2,002
Operating income		16,257			16,082			175
Interest and other expense, net		(5,332		)	(5,332		)	—
Income tax provision		(1,523		)	(1,474		)	49
Net income		$	9,402		$	9,276		$	126

 

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Balance Sheet (in thousands)

 

		September 30, 2018
		Balances as Reported			Balances without Adoption of ASC 606			Effect of Change
Assets
Accounts receivable, net		$	222,170		$	220,886		$	1,284
Inventories		343,974			345,170			(1,196		)
Other assets		761,784			761,784			—
Liabilities
Current liabilities		510,997			511,034			(37		)
Other liabilities		329,629			329,629			—
Stockholders’ Equity
Retained earnings		344,147			344,021			126

 

We disaggregate revenue by reporting segment (Security, Optoelectronics and Manufacturing, and Healthcare) to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings.  Refer to Note 11 to our condensed consolidated financial statements for additional details of revenues by reporting segment.

 

Contract Assets and Liabilities. We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer. We may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. We record customer deposits as a contract liability. Additionally, we may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, we record a deferred revenue liability.  We recognize these contract liabilities as sales after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of June 30, 2018 and September 30, 2018, including the change between the periods.

 

Contract Assets (in thousands)

 

		June 30, 2018			September 30, 2018			Change			% Change
Unbilled revenue		$	13,087		$	16,158		$	3,071		23	%

 

Contract Liabilities (in thousands)

 

		June 30, 2018			September 30, 2018			Change			% Change
Advances from customers		$	55,761		$	74,148		$	18,387		33	%
Deferred revenue—current		28,899			30,352			1,453			5	%
Deferred revenue—long-term		9,562			8,011			(1,551		)	(16	)%

 

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period.

 

As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $191.2 million. We expect to recognize revenue on approximately 47% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

 

Practical Expedients. In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only consider whether a

 

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customer agreement as having a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

 

Recently Adopted Accounting Pronouncements

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09 and related amendments Revenue from Contracts with Customers (Topic 606), which superseded all prior revenue recognition methods and industry-specific guidance. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. On July 1, 2018, we adopted ASC 606 using the modified retrospective method, whereby the adoption does not impact any prior periods.

 

Cash Flow Statement

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. We adopted this ASU effective July 1, 2018 using the retrospective approach and it had no effect on our financial position, results of operations or liquidity.

 

Income Taxes

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory. The new guidance eliminates the exception for intra-entity transfers other than inventory and requires the recognition of current and deferred income taxes resulting from such a transfer when the transfer occurs. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. We adopted this ASU effective July 1, 2018 using the modified retrospective transition method resulting in a reclassification in the balance sheet of $3 million to decrease prepaid expenses and other assets and increase deferred tax assets.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with terms of more than 12 months. The ASU also will require qualitative and quantitative disclosures designed to give financial statement readers information on the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for us in the first quarter of fiscal 2020 with early adoption permitted. We have not yet adopted this ASU and are currently evaluating the impact it may have on our financial condition and results of operations.

 

Comprehensive Income

 

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Act”). The new standard is effective for us beginning on July 1, 2020, with early adoption permitted. We have not yet adopted this ASU and are currently evaluating the impact it may have on our financial condition and results of operations.

 

Retirement Benefit Plans

 

In August 2018, the FASB issued authoritative guidance under ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of the adoption of this standard.

 

Intangibles

 

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term

 

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of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of adoption of this standard on our consolidated financial statements.

 

2.  Business Combinations

 

Under ASU 805, Business Combinations the acquisition method of accounting requires us to record assets acquired less liabilities assumed in an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase price over the estimated fair value of the assets acquired less liabilities assumed should be recorded as goodwill.   Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding adjustments to goodwill, as additional information becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are reflected in reported earnings.

 

Fiscal Year 2019 Business Acquisitions

 

On July 31, 2018, we (through our Optoelectronics and Manufacturing division) acquired an optoelectronics solutions business for $17.5 million, plus up to $1 million in potential earnout consideration. The acquisition was financed with cash on hand and borrowings under our existing revolving bank line of credit. The goodwill recognized for this business is expected to be deductible for income tax purposes. The purchase price is subject to adjustment for final working capital. The final purchase price allocation which is expected to be completed by the fourth quarter of fiscal 2019 will be based on final appraisals and other analysis of fair values of acquired assets and liabilities.

 

In August 2018, we (through our Security division) completed an acquisition of a privately held services company for approximately $0.8 million, plus up to approximately $5 million in contingent consideration which may be earned over a five year period. The acquisition was financed with cash on hand. The goodwill recognized for this business is not expected to be deductible for income tax purposes.

 

These business acquisitions were not material to our consolidated financial statements either individually or in the aggregate. Accordingly, pro-forma historical results of operations related to these businesses have not been presented.

 

Fiscal Year 2018 Business Acquisitions

 

Acquisition of Explosive Trace Detection Business

 

On July 7, 2017, we acquired the global explosive trace detection business (“ETD”) from Smiths Group plc. This acquisition was a carve out from a larger entity. We financed the total purchase price of $80.5 million with a combination of cash on hand and borrowings under our existing revolving bank line of credit. Pro-forma results have not been presented because, based on the date of the acquisition, there was not a material difference between pro-forma and actual results in the condensed consolidated financial statements of operations for the three months ended September 30, 2017 and 2018.

 

The valuation of certain assets and liabilities of ETD were performed by a third party valuation specialist. The final allocation was as follows:

 

Cash and cash equivalents		$	4
Accounts receivable		15,517
Inventories		11,678
Property and equipment		1,599
Intangible assets		30,370
Deferred tax asset		2,738
Other long-term assets		297
Accounts payable		(4,784		)
Accrued payroll and related expenses		(2,116		)
Deferred revenues—current		(924		)
Accrued warranties		(2,068		)
Advances from customers		(670		)
Other accrued expenses and current liabilities		(1,074		)
Deferred revenues—long term		(232		)
Net assets acquired		50,335
Goodwill		30,132
Total consideration		$	80,467

 

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The goodwill is largely attributable to expected growth, intellectual capital and the assembled workforce of the ETD business. Intangible assets are recorded at estimated fair value, as determined by management based on available information, with assistance from a third party. The fair value attributed to the intangible assets acquired was based on estimates, assumptions and other information compiled by management, and valuations that utilized established valuation techniques. The value attributed to goodwill and intangible assets is partially non-deductible for income tax purposes. The following table summarizes the fair value of acquired identifiable intangible assets as of the acquisition date (amounts in thousands):

 

		Weighted
		Average		Fair
		Lives		Value
Amortizable assets:
Developed technology		10 years		$	14,210
Customer relationships/backlog		7 years		16,070
In-process research and development (“IPR&D”)				90
Total intangible assets				$	30,370

 

Other Fiscal Year 2018 Business Acquisitions

 

In July 2017, we (through our Security division) completed an acquisition of a privately held technology company. The acquisition was financed with cash on hand and was in an amount including potential earnout consideration determined to be insignificant by management.

 

In January 2018, we (through our Optoelectronics and Manufacturing division) acquired an electronics component designer and manufacturer for approximately $22 million, plus up to $6 million in contingent consideration which may be earned over a three year period.  The goodwill recognized for this business is not expected to be deductible for income tax purposes. The acquisition was financed with cash on hand and borrowings under our existing revolving bank line of credit.

 

3. Balance Sheet Details

 

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

 

		June 30,			September 30,
		2018			2018
Accounts receivable		$	221,240		$	233,778
Less allowance for doubtful accounts		(10,496		)	(11,608		)
Total		$	210,744		$	222,170

 

		June 30,			September 30,
		2018			2018
Raw materials		$	156,612		$	168,807
Work-in-process		89,468			89,095
Finished goods		67,472			86,072
Total		$	313,552		$	343,974

 

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		June 30,			September 30,
		2018			2018
Land		$	16,569		$	16,569
Buildings, civil works and improvements		56,585			56,533
Leasehold improvements		9,681			9,772
Equipment and tooling		117,294			123,317
Furniture and fixtures		3,331			3,341
Computer equipment		18,759			19,229
Computer software		19,509			19,665
Computer software implementation in process		4,318			5,256
Construction in process		790			1,203
Total		246,836			254,885
Less accumulated depreciation and amortization		(131,312		)	(135,121		)
Property and equipment, net		$	115,524		$	119,764

 

Depreciation expense was $16.2 million and $5.1 million for the three months ended September 30, 2017 and 2018, respectively. The decrease in depreciation is primarily related to a transfer of assets.

 

In January 2018, we entered into a two-year agreement with the Mexican government to continue providing security screening services. Upon inception of the contract, we transferred certain fixed assets with a net book value of $29.5 million to the customer, and this remaining cost to obtain the contract is amortized on a straightline basis over the term of the contract as corresponding revenues are recognized. During the three months ended September 30, 2018, we recognized $3.7 million of amortization expense related to such assets. As of September 30, 2018, $14.7 million and $4.2 million are recorded within Prepaid expenses and other current assets and Other assets, respectively.

 

4. Goodwill and Intangible Assets

 

The changes in the carrying value of goodwill for the three month period ended September 30, 2018 are as follows (in thousands):

 

								Optoelectronics
								and
		Security			Healthcare			Manufacturing
		Division			Division			Division			Consolidated
Balance as of June 30, 2018		$	191,810		$	40,157		$	60,246		$	292,213
Goodwill acquired or adjusted during the period		4,811			—			7,415			12,226
Foreign currency translation adjustment		(11		)	7			282			278
Balance as of September 30, 2018		$	196,610		$	40,164		$	67,943		$	304,717

 

Intangible assets consisted of the following (in thousands):

 

				June 30, 2018									September 30, 2018
		Weighted		Gross									Gross
		Average		Carrying			Accumulated			Intangibles			Carrying			Accumulated			Intangibles
		Lives		Value			Amortization			Net			Value			Amortization			Net
Amortizable assets:
Software development costs		9 years		$	28,174		$	(9,423	)	$	18,751		$	28,621		$	(10,159	)	$	18,462
Patents		19 years		8,401			(1,618		)	6,783			7,866			(1,580		)	6,286
Developed technology		10 years		52,780			(9,706		)	43,074			54,650			(11,091		)	43,559
Customer relationships/backlog		7 years		63,398			(17,891		)	45,507			68,840			(20,723		)	48,117
IPR&D		5 years		2,290			—			2,290			2,290			—			2,290
Total amortizable assets				155,043			(38,638		)	116,405			162,267			(43,553		)	118,714
Non-amortizable assets:
Trademarks and trade names				25,596			—			25,596			26,516			—			26,516
Total intangible assets				$	180,639		$	(38,638	)	$	142,001		$	188,783		$	(43,553	)	$	145,230

 

Amortization expense related to intangible assets was $4.2 million and $5.3 million for the three months ended September 30, 2017 and 2018, respectively. At September 30, 2018, the estimated future amortization expense was as follows (in thousands):

 

2019 (remaining 9 months)		$	15,454
2020		19,628
2021		19,111
2022		14,702
2023		13,559
Thereafter, including assets that have not yet begun to be amortized		36,260
Total		$	118,714

 

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Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product by product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended September 30, 2017 and 2018, we capitalized software development costs in the amount of $0.1 million and $0.4 million, respectively.

 

5. Restructuring and Other Charges

 

Restructuring and Other Charges

 

We endeavor to align our global capacity and infrastructure with demand by our customers and also to integrate acquisitions and thereby improve operational efficiency.

 

In the quarter ended September 30, 2018, we incurred $3.6 million in legal fees in our Corporate division related to class action litigation and government investigations. Additionally, we incurred costs related to acquisitions completed in the quarter and as a result of employee terminations.

 

The following table summarizes restructuring and other charges for the periods set forth below (in thousands):

 

		Three Months Ended September 30, 2017
		Security Division			Healthcare Division			Optoelectronics and Manufacturing Division			Corporate			Total
Acquisition-related costs		$	—		$	—		$	—		$	820		$	820
Employee termination costs		240			—			—			—			240
Facility closures/consolidation		70			—			—			—			70
Total expensed		$	310		$	—		$	—		$	820		$	1,130

 

		Three Months Ended September 30, 2018
		Security Division			Healthcare Division			Optoelectronics and Manufacturing Division			Corporate			Total
Acquisition-related costs		$	—		$	—		$	267		$	—		$	267
Employee termination costs		35			191			107			—			333
Facility closures/consolidation		10			—			—			—			10
Legal costs		—			—			—			3,586			3,586
Total expensed		$	45		$	191		$	374		$	3,586		$	4,196

 

The changes in the accrual for restructuring and other charges for the three-month period ended September 30, 2018 were as follows (in thousands):

 

		Acquisition- related Costs			Employee Termination Costs			Facility Closure/ Consolidation Cost			Legal Costs and Settlements			Total
Balance as of June 30, 2018		$	—		$	837		$	399		$	14,065		$	15,301
Restructuring and other charges		267			333			10			3,586			4,196
Payments and other adjustments		(267		)	(837		)	(37		)	(4,931		)	(6,072		)
Balance as of September 30, 2018		$	—		$	333		$	372		$	12,720		$	13,425

 

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6. Borrowings

 

Revolving Credit Facility

 

In December 2016, we entered into an amendment to our revolving credit facility, which, among other things, increased the aggregate committed amount available to us from $450 million to $525 million and extended the maturity date to December 2021. The credit facility includes a $300 million sub limit for letters of credit. Under certain circumstances, we have the ability to increase the facility by the greater of $250 million or such amount as would not cause our secured leverage ratio to exceed a specified level. Borrowings under this facility bear interest at LIBOR plus a margin of 1.50% as of September 30, 2018, but this margin can range from 1.25% to 2.0% based on our consolidated net leverage ratio as defined in the credit facility. Letters of credit reduce the amount available to borrow by their face value. The unused portion of the facility bears a commitment fee of 0.20% as of September 30, 2018, but this fee can range from 0.20% to 0.30% based on our consolidated net leverage ratio as defined in the credit facility. Our borrowings under the credit agreement are guaranteed by certain of our U.S. based subsidiaries and are secured by substantially all of our assets and the assets of certain of our subsidiaries. The agreement contains various representations and warranties, affirmative, negative and financial covenants and conditions of default. As of September 30, 2018, there was $166.0 million of borrowings outstanding under the revolving credit facility and $59.1 million outstanding under the letters of credit sub-facility. The amount available to borrow under the credit facility as of September 30, 2018 was $299.9 million. Loan amounts under the revolving credit facility may be borrowed, repaid and re- borrowed during the term. Although the principal amount of each revolving loan is due and payable in full on the maturity date, we have the right to repay each revolving loan in whole or in part from time to time without penalty. It is our practice to routinely borrow and repay several times per year under this revolving facility. Therefore, borrowings under the credit facility are included in current liabilities. As of September 30, 2018, we are in compliance with all covenants under this credit facility.

 

1.25% Convertible Senior Notes Due 2022

 

In February 2017, we issued $287.5 million of the Notes in a private offering. The Notes are governed by an indenture dated February 22, 2017. The maturity for the payment of principal is September 1, 2022. The Notes bear interest at the rate of 1.25% and are payable in cash semiannually in arrears on each March 1 and September 1. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries, as well as any of our existing and future indebtedness that may be guaranteed by our subsidiaries to the extent of such guarantees (including the guarantees of certain of our subsidiaries under our existing revolving credit facility).

 

The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and are, thereafter convertible, at any time, in each case at an initial conversion rate of 9.3056 per $1,000 principal amount of the Notes, which is equal to an initial conversion price of approximately $107.46 per share or a 38.5% premium to our stock price at the time of the issuance. The conversion rate is subject to adjustment upon certain events. Upon conversion, the Notes may be settled, at our election, in shares of our common stock, cash or a combination of cash and shares of common stock. We have initially elected a combination settlement method to satisfy the conversion obligation, which allows us to settle the principal amount of the Notes in cash and to settle the excess conversion value, if any, in shares of common stock, as well as cash in lieu of fractional shares.

 

We may not redeem the Notes prior to March 6, 2020. Thereafter, we may redeem the Notes if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days. If we undergo a fundamental change, as defined in the indenture for the Notes, subject to certain conditions, holders of the Notes may require us to repurchase all or part of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The occurrence of a fundamental change will also result in the Notes becoming immediately convertible.

 

Pursuant to ASC 470-20, we allocated the $287.5 million gross proceeds of the Notes between liability and equity components. The initial $242.4 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature for similar terms and priced on the same day the Notes were issued. The initial $45.1 million equity component represents the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes. Issuance costs of $7.7 million were allocated between debt ($6.5 million) and equity ($1.2 million) components with the portion allocated to the debt presented as an offset against long term debt in the consolidated balance sheet and is amortized as interest expense over the life of the Notes using the effective interest method. The total interest expense recognized for the three months ended September 30, 2018 was $3.1 million, which consists of $0.9 million of contractual interest expense, $1.9 million of debt discount amortization and $0.3 million of amortization of debt issuance costs. By comparison, the total interest expense recognized for three months ended

 

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September 30, 2017 was $3.0 million, which consisted of $0.9 million of contractual interest expense, $1.8 million of amortization of the debt discount and $0.3 million of amortization of debt issuance costs. As of September 30, 2018, the unamortized debt discount was $33.2 million and is being amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.50%. The unamortized debt issuance cost of $4.6 million as of September 30, 2018 is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes. Based on our September 30, 2018 stock price of $76.31 per share, the “if-converted” value of the Notes did not exceed the principal amount.

 

Other Borrowings

 

Several of our foreign subsidiaries maintain bank lines of credit, denominated in local currencies and U.S. dollars, primarily for the issuance of letters of credit. As of September 30, 2018, $60.4 million was outstanding under these credit facilities. As of September 30, 2018, the total amount available under these credit facilities was $7.9 million.

 

In September 2012, we entered into a seven year term loan agreement for $11.1 million to fund the acquisition of land and a building in the state of Washington. The loan, which bears interest at LIBOR plus 1.25%, is payable on a monthly basis over seven years. Concurrent with entering into the floating rate loan, we 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.

 

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

 

		June 30, 2018			September 30, 2018
1.25% convertible notes due 2022:
Principal amount		$	287,500		$	287,500
Unamortized discount		(35,133		)	(33,206		)
Unamortized debt issuance costs		(4,897		)	(4,604		)
1.25% convertible notes due 2022, net of unamortized discount and debt issuance costs		247,470			249,690
Term loans		2,114			1,718
Other long-term debt		1,658			1,876
		251,242			253,284
Less current portion of long-term debt		(2,262		)	(2,326		)
Long-term portion of debt		$	248,980		$	250,958

 

7. Stockholders’ Equity

 

Stock-based Compensation

 

On December 11, 2017, our stockholders approved our Amended and Restated 2012 Incentive Award Plan (the “2012 Plan”). As of September 30, 2018, we maintained the 2012 Plan and the Amended and Restated 2006 Equity Participation Plan (“2006 Plan”) as share-based employee compensation plans. No further grants may be made under the 2006 Plan. In addition, pursuant to the acquisition of American Science and Engineering, Inc. (“AS&E”), we assumed two share based employee compensation plans: the AS&E 2005 Equity and Incentive Plan (“2005 AS&E Plan”) and the AS&E 2014 Equity and Incentive Plan (“2014 AS&E Plan”). No new RSU grants will be made under the 2005 AS&E Plan or the 2014 AS&E Plan. The 2012 Plan, the 2006 Plan, the 2005 AS&E Plan and the 2014 AS&E Plan are collectively referred to as the “OSI Plans”.

 

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

 

		Three Months Ended September 30,
		2017			2018
Cost of goods sold		$	241		$	207
Selling, general and administrative		5,111			5,111
Research and development		135			145
Stock-based compensation expense, before taxes		5,487			5,463
Less: related income tax benefit		(1,693		)	(1,341		)
Stock-based compensation expense, net of estimated taxes		$	3,794		$	4,122

 

As of September 30, 2018, total unrecognized compensation cost related to share-based compensation grants under the OSI Plans were estimated at $0.5 million for stock options and $29.0 million for RSUs. We expect to recognize these costs over a weighted average period of 1.8 years with respect to the stock options and 1.7 years for grants of RSUs.

 

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