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OSI SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward looking statements relate to
expectations concerning matters that are not historical facts. Words such as
"project", "believe", "anticipate", "plan,", "expect", "intend", "may",
"should", "likely to", "could", " will", and "would" and small words and
expressions are intended to identify forward-looking statements. Expectations
described in the forward looking statements may prove to be inaccurate, and
actual results may differ materially from those reflected in such expectations.
Important factors that could cause our actual results to differ materially from
those expectations are described in this Quarterly Report on Form 10-Q, our
Annual Report on Form 10-K and other documents previously filed or hereafter
filed by us from time to time with the Securities and Exchange Commission. Such
factors, of course, do not include all factors that might affect our business
and financial condition. Although we believe that the assumptions upon which our
forward-looking statements are based are reasonable, such assumptions could
prove to be inaccurate and actual results could differ materially from those
expressed in or implied by the forward-looking statements. All forward-looking
statements contained in this Quarterly Report on Form 10-Q are qualified in
their entirety by this statement. We undertake no obligation other than as may
be required under securities laws to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions and select accounting policies that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Our critical accounting policies are detailed in our
Annual Report on Form 10-K for the year ended June 30, 2012.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that, if implemented, would impact
us materially.
Executive Summary
We are a vertically integrated designer and manufacturer of specialized
electronic systems and components for critical applications, and provider of
screening services. We sell our products and provide related services in
diversified markets, including homeland security, healthcare, defense and
aerospace. We have three operating divisions: (i) Security, (ii) Healthcare and
(iii) Optoelectronics and Manufacturing.
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Security Division. Through our Security division, we design, manufacture and
market security and inspection systems worldwide for sale primarily to U.S. and
foreign government agencies, and provide turnkey security screening solutions.
These products and services are used to inspect baggage, cargo, vehicles and
other objects for weapons, explosives, drugs and other contraband as well as to
screen people. Revenues from our Security division accounted for 47% and 46% of
our total consolidated revenues for the six months ended December 31, 2012 and
2011, respectively.
As a result of the terrorist attacks of September 11, 2001, and subsequent
attacks in other locations worldwide, security and inspection products have
increasingly been used at a wide range of facilities other than airports, such
as border crossings, railway stations, seaports, cruise line terminals, freight
forwarding operations, sporting venues, government and military installations
and nuclear facilities. We believe that our wide-ranging product portfolio
together with our ability to provide turnkey screening solutions position us to
competitively pursue security and inspection opportunities as they arise
throughout the world.
During our third quarter of fiscal 2012, our Security division won a six-year
agreement with the Mexican government to provide a turnkey security screening
solution along the country's borders, and in its ports and airports. We have
begun recognizing revenue under this agreement reported as service revenues.
In November 2012, we 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. We reached an agreement with
the TSA under which we have agreed to assist the TSA in redeploying the Secure
1000SP units previously sold to the TSA and cease software development related
to ATR. Our contract with the TSA for AIT systems will continue, though we did
not sell systems to the TSA in fiscal 2012 and fiscal 2013. We recorded a $2.7
million impairment and other charges for the three months ended December 31,
2012 in connection with this agreement. Our 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. We are working to complete the process with DHS.
Healthcare Division. Through our Healthcare division, we design, manufacture,
market and service patient monitoring, diagnostic cardiology and anesthesia
delivery and ventilation systems globally for sale primarily to hospitals and
medical centers. Our products monitor patients in critical, emergency and
perioperative care areas of the hospital and provide such information, through
wired and wireless networks, to physicians and nurses who may be at the
patient's bedside, in another area of the hospital or even outside the
hospital. Revenues from our Healthcare division accounted for 29% and 30% of
our total consolidated revenues for the six month periods ended December 31,
2012 and 2011, respectively.
The healthcare markets in which we operate are highly competitive. We believe
that our customers choose among competing products on the basis of product
performance, functionality, value and service. We also believe that the
worldwide economic slowdown has caused some hospitals and healthcare providers
to delay purchases of our products and services. During this period of
uncertainty, we anticipated lower sales of patient monitoring, diagnostic
cardiology and anesthesia systems products than what we had historically
experienced, which negatively impacted our sales. Although there are indications
that a recovery is underway, we cannot predict when the markets will fully
recover and, therefore, when this period of delayed and diminished purchasing
will end. A prolonged delay could have a material adverse effect on our
business, financial condition and results of operations.
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Optoelectronics and Manufacturing Division. Through our Optoelectronics and
Manufacturing division, we design, manufacture and market optoelectronic devices
and provide electronics manufacturing services worldwide for use in a broad
range of applications, including aerospace and defense electronics, security and
inspection systems, medical imaging and diagnostics, telecommunications, office
automation, computer peripherals, industrial automation, automotive diagnostic
systems and renewable energy. We also provide our optoelectronic devices and
value-added manufacturing services to our own Security and Healthcare divisions.
External revenues from our Optoelectronics and Manufacturing division accounted
for 24% of our total consolidated revenues for both the six months ended
December 31, 2012 and 2011.
Results of Operations for the Three Months Ended December 31, 2012 Compared to
Three Months Ended December 31, 2011
Net Revenues
The table below and the discussion that follows are based upon the way in which
we analyze our business. See Note 9 to the condensed consolidated financial
statements for additional information about our business segments.
Q2 % of Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales $ Change % Change
Security division $ 89.0 47 % $ 91.8 47 % $ 2.8 3 %
Healthcare division 59.2 32 % 56.1 29 % (3.1 ) (5 )%
Optoelectronics and
Manufacturing division 39.8 21 % 46.1 24 % 6.3 16 %
Total revenues $ 188.0 100 % $ 194.0 100 % $ 6.0 3 %
Total revenues for the three months ended December 31, 2012, increased $6.0
million, or 3%, to $194.0 million, from $188.0 million for the comparable
prior-year period.
Revenues for the Security division for the three months ended December 31, 2012,
increased $2.8 million, or 3%, to $91.8 million, from $89.0 million for the
comparable prior-year period. The increase was primarily attributable to
increased revenue from turnkey screening services. The increase was primarily
attributable to increased revenue from turnkey screening services, partially
offset by a decrease in equipment sales. The decrease in equipment sales
resulted primarily from the fulfillment of a large contract in the prior year
where we served as a prime contractor and hardware systems integrator.
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Revenues for the Healthcare division for the three months ended December 31,
2012, decreased $3.1 million, or 5%, to $56.1 million, from $59.2 million for
the comparable prior-year period. The decrease was primarily attributable to
decreased sales in our European and Middle Eastern region, which more than
offset growth in our North American region. Among our product lines, the
overall decrease included: (i) a $1.9 million decrease in anesthesia product
revenue and; (ii) a $1.1 million decrease in patient monitoring product
revenues.
Revenues for the Optoelectronics and Manufacturing division for the three months
ended December 31, 2012, increased by $6.3 million, or 16%, to $46.1 million,
from $39.8 million for the comparable prior-year period. This increase was
attributable to an $8.1 million increase in contract manufacturing sales
partially offset by a $1.8 million decrease in commercial optoelectronics sales.
Gross Profit
Q2 % of Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales
Gross profit $ 65.8 35.0 % $ 70.1 36.1 %
Gross profit increased $4.3 million, or 7%, to $70.1 million for the three
months ended December 31, 2012, from $65.8 million for the comparable prior-year
period, primarily attributable to the 3% increase in revenue and favorable
revenue mix. The gross margin increased to 36.1% from 35.0% for the comparable
prior-year period. The increase was attributable to increased revenue from
turnkey screening services within our Security division, which generally provide
higher margins than product sales and more than offset the impact of the reduced
revenue in our Healthcare division, which has historically generated the highest
gross margin across the three divisions.
Operating Expenses
Q2 % of Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales $ Change % Change
Selling, general and
administrative $ 36.0 19.1 % $ 36.8 19.0 % $ 0.8 2 %
Research and development 11.5 6.1 % 11.9 6.1 % 0.4 3 %
Impairment, restructuring
and other charges - - % 2.7 1.4 % 2.7 NA
Total operating expenses $ 47.5 25.2 % $ 51.4 26.5 % $ 3.9 8 %
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses consist primarily of compensation paid to sales,
marketing and administrative personnel, professional service fees and marketing
expenses. For the three months ended December 31, 2012, SG&A expenses increased
by $0.8 million or 2%, to $36.8 million from $36.0 million for the comparable
prior-year period. This $0.8 million increase was primarily attributable to the
cost of supporting the 3% revenue growth. As a percentage of revenues, SG&A
expenses were 19.0% for the three months ended December 31, 2012, compared to
19.1% for the comparable prior-year period.
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Research and development. Research and development (R&D) expenses include
research related to new product development and product enhancement
expenditures. For the three months ended December 31, 2012, such expenses
increased by $0.4 million, or 3%, to $11.9 million, from $11.5 million for the
comparable prior-year period. As a percentage of revenues, R&D expenses were
6.1% for both the three months ended December 31, 2012, and for the comparable
prior-year period.
Impairment, restructuring and other charges. In conjunction with an agreement
reached with the U.S. Transportation Security Administration, we incurred
non-recurring impairment and other charges of $2.7 million in our Security
division during the three months ended December 31, 2012. In the three months
ended December 31, 2011 we did not incur any such charges.
Interest expense and other income, net. For the three months ended December 31,
2012, interest expense and other income, net, amounted to $1.4 million, as
compared to $0.7 million for the same prior-year period. The increase in net
expense was primarily due to higher utilization of the letters-of-credit
facility and the new mortgage debt associated with acquisition of a new
building.
Income taxes. For the three months ended December 31, 2012, our income tax
provision was $4.9 million, compared to $5.3 million for the comparable
prior-year period. Our effective tax rate for the three months ended
December 31, 2012, was 28.2%, compared to 30.0% in the comparable prior-year
period. Our provision for income taxes is dependent on the mix of income from
U.S. and foreign locations due to tax rate differences among such countries as
well as due to the impact of permanent taxable differences.
Results of Operations for the Six Months Ended December 31, 2012 Compared to Six
Months Ended December 31, 2011
Net Revenues
The table below and the discussion that follows are based upon the way in which
we analyze our business. See Note 9 to the condensed consolidated financial
statements for additional information about our business segments.
YTD Q2 % of YTD Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales $ Change % Change
Security division $ 161.6 46 % $ 174.8 47 % $ 13.2 8 %
Healthcare division 105.7 30 % 107.7 29 % 2.0 2 %
Optoelectronics and
Manufacturing division 82.0 24 % 93.2 24 % 11.2 14 %
Total revenues $ 349.3 100 % $ 375.7 100 % $ 26.4 8 %
Net revenues for the six months ended December 31, 2012 increased $26.4 million,
or 8%, to $375.7 million, from $349.3 million for the comparable prior-year
period.
Revenues for the Security division for the six months ended December 31, 2012
increased $13.2 million, or 8%, to $174.8 million, from $161.6 million for the
comparable prior-year period. The increase was primarily attributable to
increased revenues from turnkey screening services, partially offset by a
decrease in equipment sales. The decrease in equipment sales resulted primarily
from the fulfillment in the prior year of a large contract under which we served
as a prime contractor and hardware systems integrator.
Revenues for the Healthcare division for the six months ended December 31, 2012,
increased $2.0 million, or 2%, to $107.7 million, from $105.7 million for the
comparable prior-year period. The increase was primarily attributable to
increased sales in our North American region, partially offset by decreased
sales in our European/Middle East/Africa region. The increase reflected a $3.7
million increase in patient monitoring product revenues and a $1.1 million
decrease in anesthesia product revenues.
Revenues for the Optoelectronics and Manufacturing division for the six months
ended December 31, 2012, increased $11.2 million, or 14%, to $93.2 million, from
$82.0 million for the comparable prior-year period. This increase was
attributable to an $18.0 million increase in contract manufacturing sales
partially offset by a $6.8 million decrease in commercial optoelectronics sales.
Gross Profit
YTD Q2 % of YTD Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales
Gross profit $ 118.7 34.0 % $ 131.4 35.0 %
Gross profit increased $12.7 million, or 11%, to $131.4 million for the six
months ended December 31, 2012, from $118.7 million for the comparable
prior-year period, primarily as a result of an 8% increase in revenue. The gross
margin during the period increased to 35.0% from 34.0% for the comparable
prior-year period. The increase was attributable to increased revenue from
turnkey screening services within our Security division, which generally provide
higher margins than product sales, and more than offset the lower level of
growth in our Healthcare division, which has historically generated the highest
gross margin among our three divisions.
Operating Expenses
YTD Q2 % of YTD Q2 % of
(in millions) 2012 Net Sales 2013 Net Sales $ Change % Change
Selling, general and
administrative $ 70.3 20.1 % $ 76.8 20.4 % $ 6.5 9 %
Research and development 22.5 6.5 % 23.1 6.2 % 0.6 3 %
Impairment, restructuring
and other charges - - % 2.7 0.7 % 2.7 NA
Total operating expenses $ 92.8 26.6 % $ 102.6 27.3 % $ 9.8 11 %
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Selling, general and administrative expenses. For the six months ended
December 31, 2012, SG&A expenses increased by $6.5 million, or 9%, to $76.8
million, from $70.3 million for the comparable prior-year period. This increase
was primarily attributable to the cost of supporting the 8% revenue growth. As a
percentage of revenues, SG&A expenses were 20.4% for the six months ended
December 31, 2012, compared to 20.1% for the comparable prior-year period.
Research and development. R&D expenses include research related to new product
development and product enhancement expenditures. For the six months ended
December 31, 2012, such expenses increased $0.6 million, or 3%, to $23.1
million, from $22.5 million for the comparable prior-year period. As a
percentage of revenues, research and development expenses were 6.2% for the six
months ended December 31, 2012, compared to 6.5% for the comparable prior-year
period. The increase in R&D expenses for the six month period ended December 31,
2012, primarily resulted from an increase in R&D investment mainly in our
Security division in support of multiple new product introductions.
Impairment, restructuring and other charges. In conjunction with our agreement
with the U.S. Transportation Security Administration we incurred non-recurring
impairment and other charges of $2.7 million in our Security division during the
six months ended December 31, 2012. In the six months ended December 31, 2011
we did not incur any such charges.
Interest expense and other income, net. For the six months ended December 31,
2012, interest expense and other income, net, amounted to $2.5 million as
compared to $1.5 million for the same prior-year period. The increase was
primarily due to higher utilization of the letters-of-credit facility.
Income taxes. For the six months ended December 31, 2012, our income tax
provision was $7.5 million, compared to $7.3 million for the comparable
prior-year period. Our effective tax rate for the six months ended December 31,
2012, was 28.7%, compared to 30.0% in the comparable prior-year period. Our
provision for income taxes is dependent on the mix of income from U.S. and
foreign locations due to tax rate differences among such countries as well the
impact of permanent taxable differences.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flow from
operations, proceeds from equity issuances and our credit facilities. Cash and
cash equivalents totaled $46.9 million at December 31, 2012, a decrease of $44.6
million from $91.5 million at June 30, 2012. The changes in our working capital
and cash and cash equivalent balances during the six months ended December 31,
2012 are described below.
June 30, December 31,
(in millions) 2012 2012 % Change
Working capital $ 322.5 $ 241.2 (25 )%
Cash and cash equivalents 91.5 46.9 (49 )%
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Working Capital. During the six months ended December 31, 2012, the Company
utilized significant working capital to acquire a new headquarters and
manufacturing facility for our Healthcare division and to prepare for our
turnkey screening solutions program in Mexico. Specific fluctuations in
components of working capital included: (i) a $44.2 million decrease in cash
and cash equivalents; and (ii) a $38.6 million increase in accounts payable.
YTD Q2 YTD Q2
(in millions) 2012 2013 $ Change
Cash provided by operating activities $ 12.5 $ 62.8 $ 50.3
Cash used in investing activities (14.1 ) (125.4 ) (111.3 )
Cash provided by financing activities 0.3 16.4 16.1
Cash Provided by Operating Activities. Cash flows from operating activities can
fluctuate significantly from period to period, as net income; tax timing
differences, customer collections, vendor payments and other items can
significantly impact cash flows. Net cash provided by operations for the six
months ended December 31, 2012 was $ 62.8 million, an increase of $50.3 million
from the $12.5 million provided in the comparable prior-year period. This
increase in net cash provided was primarily due to changes in working capital in
the current-year period versus the prior-year period resulting in: (i) a $31.1
million increase in cash from changes in inventory, (ii) a $27.7 million
increase in cash from changes in accounts receivables, (iii) a $15.5 million
increase from changes in accounts payable and (iv) a $7.3 million increase in
net income for the six months ended December 31, 2012, after giving
consideration to non-cash operating items including depreciation and
amortization, stock-based compensation and deferred taxes, among others. These
favorable changes were partially offset by (i) an $18.1 million decrease in cash
from changes in customer advances, (ii) a $8.3 million decrease in cash from
changes in other accrued expenses and other current liabilities and, (iii) a
$3.8 million decrease in cash from changes in accrued warranties.
Cash Used in Investing Activities. Net cash used in investing activities was
$125.4 million for the six months ended December 31, 2012, compared to $14.1
million for the six months ended December 31, 2011. During the six months ended
December 31, 2012, we invested $117.6 million in capital expenditures primarily
in our Security division related to the fulfillment of a large turnkey screening
services program with the Mexican government and the acquisition of a building,
as compared to $9.1 million during the comparable prior-year period. During the
six months ended December 31, 2012, we also used $5.8 million for the
acquisition of businesses, as compared to $3.2 million during the comparable
prior-year period.
Cash Provided by Financing Activities. Net cash provided by financing activities
was $16.4 million for the six months ended December 31, 2012, compared to net
cash provided by financing activities of $0.3 million for the six months ended
December 31, 2011. During the six months ended December 31, 2012, $15 million
in cash was provided from our bank revolving credit facility in support of our
capital spending. During this period, we also financed the acquisition of a
building through an $11.1 million term loan. In addition, during the six months
ended December 31, 2012 we received $3.0 million in net proceeds from the
exercise of stock options and the purchase of stock under our employee stock
purchase plan compared to $2.2 million in proceeds from the exercise of stock
options and the purchase of stock under our employee stock purchase plan in the
prior period. Finally, during the six months ended December 31, 2012, we used
$12.3 million of cash to repurchase shares of our common stock under our stock
repurchase program and settle tax obligations arising out of our stock plans as
compared to using $1.8 million of cash to repurchase shares of our common stock
under our stock repurchase program and settle tax obligations arising out of our
stock plans in the prior-year period.
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Borrowings
Outstanding lines of credit and current and long-term debt totaled $28.5 million
at December 31, 2012, an increase of $25.5 million from $3.0 million at June 30,
2012. See Note 4 to the condensed consolidated financial statements for further
discussion.
Stock Repurchase Program
Our Board of Directors authorized a stock repurchase program in March 1999 for
up to 2,000,000 shares and in September 2004 increased the number of shares
available for repurchase by 1,000,000 shares totaling up to 3,000,000 shares of
our common stock. This program does not have an expiration date.
The following table presents the shares acquired during the period:
Total number of Maximum number
Total number of Average price shares purchased as of shares that may
shares purchased paid per share part of program yet be purchased
October 1, 2012 to October 31,
2012 - -
November 1, 2012 to
November 30, 2012 22,500 $ 69.40 22,500
December 1, 2012 to
December 31, 2012 - -
22,500 $ 69.40 22,500 551,927
Dividend Policy
We have never paid cash dividends on our common stock and have no plans to do so
in the foreseeable future.
Contractual Obligations
We presented our contractual obligations in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2012. See Note 7 to the condensed consolidated
financial statements for further discussion regarding those obligations during
the first six months of fiscal 2013.
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Off Balance Sheet Arrangements
As of December 31, 2012, we did not have any significant off balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K.
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