C REATI NG SOLUTIONS FOR A S A FE R AN D HE ALTH IE R WOR L D
2017 ANNU AL REPORT
1
OSI S ys te ms, Inc. 2017 A nnual Re por t
D E A R F E L L O W S T O C K H O L D E R S ,
The OSI Systems team worked intently throughout fi scal
We believe our revamped Healthcare leadership team
2017 to create sustainable advantages in the market-
has built a nice foundation for revenue and profi t growth.
place that position us well for fi scal 2018 and beyond. We
had good growth, both organically and through strategic
targeted acquisitions, as we achieved record revenue of
$961 million. We also delivered strong earnings with a
35% increase in non-GAAP EPS** over the prior year. In ad-
dition, we made signifi cant enhancements to our capital
structure during the year.
Moving to our Optoelectronics and Manufacturing divi-
sion, our division sales for fi scal 2017 were $206 million.
Although the revenues were about the same as the prior
year, we were able to achieve higher profi tability largely
as a result of our efforts to selectively shift to a more fa-
vorable product and customer mix, as well as improved
operating effi ciencies. We can now focus on returning
Our Security division sales for fi scal year 2017 were
this division to top line growth in fi scal 2018.
$555 million, an increase of 35%, as compared to fi s-
cal 2016. During the year, we completed the acquisition
of American Science and Engineering, Inc. (AS&E) and
largely completed integrating AS&E within our cargo
business, achieving our target of $18 million in annual-
ized synergies well ahead of schedule. We also entered
into a defi nitive agreement to acquire the former Morpho
global explosive trace detection (ETD) business, which
To bolster our fi nancial capacity for future investments,
growth prospects, and a more optimal capital structure,
during the year, we completed a $287.5 million convert-
ible senior notes offering at a 1.25% interest rate and
increased the size of our revolving credit facility while
simultaneously enhancing many of its key terms. Both
deals were well-received in the marketplace.
was completed shortly after our fi scal year-end. These
Overall, during fi scal 2017, we strengthened each divi-
acquisitions have expanded our cargo and aviation offer-
sion and achieved key strategic initiatives. We believe
ings and enhanced our ability to offer integrated inspec-
we are well-positioned to continue delivering strong re-
tion solutions for airports worldwide.
sults in furtherance of our mission to create a safer and
We continue to see strong demand for our cargo products
healthier world.
and services. Our turnkey service programs in Mexico,
I want to thank you, our stockholders, as well as our
Puerto Rico, and Albania have been performing well and
thousands of employees worldwide for the ongoing sup-
serve as excellent venues to showcase the variety of
port and continued interest in OSI Systems.
our capabilities. We have combined our cargo product
and turnkey service sales teams as our customers are
Sincerely,
increasingly focused on life cycle cost and actively con-
sidering turnkey alternatives to a traditional capital equip-
ment purchase. Going forward, we are excited about our
growth potential in the Security division as we continue
to leverage our expanded technology and installed base.
Our Healthcare division sales for fi scal 2017 were $200
million. During the year, we strengthened our leadership
team with key enhancements in the sales, operations,
supply chain, and engineering functions. We also in-
creased our focus by divesting a non-core product line.
Deepak Chopra
President, Chief Executive Offi cer and Chairman of the Board
OSI SYSTEMS, INC. PROVIDES SPECIALIZED ELECTRONIC SYSTEMS AND COMPONENTS THAT MEET THE CRITICAL
NEEDS OF THE HOMELAND SECURITY, HEALTHCARE, DEFENSE, AND AEROSPACE INDUSTRIES.
1
OSI S ys te ms, Inc. 2017 A nnual Re por t
Innovative
Solutions
G L O B A L F O O T P R I N T
2017 Financial Highlights
S A L E S B Y G E O G R A P H Y *
( R O U N D E D )
S A L E S B Y S E G M E N T
( R O U N D E D )
64%
23%
13%
Americas
$614M
EMEA
$219M
Asia
$128M
Revenue
$961M
Security
$555M
Healthcare
$200M
Optoelectronics
$206M
21%
21%
58%
S A L E S T R E N D
( Y E A R E N D I N G J U N E 3 0 T H )
N O N - G A A P E P S * *
( Y E A R E N D I N G J U N E 3 0 T H )
R E C O N C I L I A T I O N O F G A A P T O N O N - G A A P
( Y E A R E N D I N G J U N E 3 0 T H )
$830
$961
$2.99
$2.21
2016
2017
2016
2017
GAAP BASIS
ADJUSTMENTS TO GAAP BASIS
2016
2017
$1.30
$1.07
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
1.10
2.37
ACQUIRED AMORTIZATION
NON-CASH INTEREST
GAIN FROM DISPOSITION OF BUSINESS
TAX BENEFIT OF ABOVE
0.13
0.43
–
–
0.13
(0.11 )
(0.32 )
(0.78 )
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
–
(0.12 )
NON-GAAP BASIS
$2.21
$2.99
* External revenues are attributed to specific regions based upon the location of the Company’s selling entity.
* *Non-GAAP figures are provided to allow for the comparison of underlying earnings, providing insight into the ongoing operations of OSI Systems,
Inc. For the comparable GAAP figures and a reconciliation of the differences between the GAAP and non-GAAP figures please see the table above.
1000
800
600
400
200
0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1000
800
600
400
200
0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1
OSI S ys te ms, Inc. 2017 A nnual Re por t
D E A R F E L L O W S T O C K H O L D E R S ,
The OSI Systems team worked intently throughout fi scal
We believe our revamped Healthcare leadership team
2017 to create sustainable advantages in the market-
has built a nice foundation for revenue and profi t growth.
place that position us well for fi scal 2018 and beyond. We
had good growth, both organically and through strategic
targeted acquisitions, as we achieved record revenue of
$961 million. We also delivered strong earnings with a
35% increase in non-GAAP EPS** over the prior year. In ad-
dition, we made signifi cant enhancements to our capital
structure during the year.
Moving to our Optoelectronics and Manufacturing divi-
sion, our division sales for fi scal 2017 were $206 million.
Although the revenues were about the same as the prior
year, we were able to achieve higher profi tability largely
as a result of our efforts to selectively shift to a more fa-
vorable product and customer mix, as well as improved
operating effi ciencies. We can now focus on returning
Our Security division sales for fi scal year 2017 were
this division to top line growth in fi scal 2018.
$555 million, an increase of 35%, as compared to fi s-
cal 2016. During the year, we completed the acquisition
of American Science and Engineering, Inc. (AS&E) and
largely completed integrating AS&E within our cargo
business, achieving our target of $18 million in annual-
ized synergies well ahead of schedule. We also entered
into a defi nitive agreement to acquire the former Morpho
global explosive trace detection (ETD) business, which
To bolster our fi nancial capacity for future investments,
growth prospects, and a more optimal capital structure,
during the year, we completed a $287.5 million convert-
ible senior notes offering at a 1.25% interest rate and
increased the size of our revolving credit facility while
simultaneously enhancing many of its key terms. Both
deals were well-received in the marketplace.
was completed shortly after our fi scal year-end. These
Overall, during fi scal 2017, we strengthened each divi-
acquisitions have expanded our cargo and aviation offer-
sion and achieved key strategic initiatives. We believe
ings and enhanced our ability to offer integrated inspec-
we are well-positioned to continue delivering strong re-
tion solutions for airports worldwide.
sults in furtherance of our mission to create a safer and
We continue to see strong demand for our cargo products
healthier world.
and services. Our turnkey service programs in Mexico,
I want to thank you, our stockholders, as well as our
Puerto Rico, and Albania have been performing well and
thousands of employees worldwide for the ongoing sup-
serve as excellent venues to showcase the variety of
port and continued interest in OSI Systems.
our capabilities. We have combined our cargo product
and turnkey service sales teams as our customers are
Sincerely,
increasingly focused on life cycle cost and actively con-
sidering turnkey alternatives to a traditional capital equip-
ment purchase. Going forward, we are excited about our
growth potential in the Security division as we continue
to leverage our expanded technology and installed base.
Our Healthcare division sales for fi scal 2017 were $200
million. During the year, we strengthened our leadership
team with key enhancements in the sales, operations,
supply chain, and engineering functions. We also in-
creased our focus by divesting a non-core product line.
Deepak Chopra
President, Chief Executive Offi cer and Chairman of the Board
OSI SYSTEMS, INC. PROVIDES SPECIALIZED ELECTRONIC SYSTEMS AND COMPONENTS THAT MEET THE CRITICAL
NEEDS OF THE HOMELAND SECURITY, HEALTHCARE, DEFENSE, AND AEROSPACE INDUSTRIES.
1
OSI S ys te ms, Inc. 2017 A nnual Re por t
Innovative
Solutions
G L O B A L F O O T P R I N T
2017 Financial Highlights
S A L E S B Y G E O G R A P H Y *
( R O U N D E D )
S A L E S B Y S E G M E N T
( R O U N D E D )
64%
23%
13%
Americas
$614M
EMEA
$219M
Asia
$128M
Revenue
$961M
Security
$555M
Healthcare
$200M
Optoelectronics
$206M
21%
21%
58%
S A L E S T R E N D
( Y E A R E N D I N G J U N E 3 0 T H )
N O N - G A A P E P S * *
( Y E A R E N D I N G J U N E 3 0 T H )
R E C O N C I L I A T I O N O F G A A P T O N O N - G A A P
( Y E A R E N D I N G J U N E 3 0 T H )
$830
$961
$2.99
$2.21
2016
2017
2016
2017
GAAP BASIS
ADJUSTMENTS TO GAAP BASIS
2016
2017
$1.30
$1.07
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
1.10
2.37
ACQUIRED AMORTIZATION
NON-CASH INTEREST
GAIN FROM DISPOSITION OF BUSINESS
TAX BENEFIT OF ABOVE
0.13
0.43
–
–
0.13
(0.11 )
(0.32 )
(0.78 )
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
–
(0.12 )
NON-GAAP BASIS
$2.21
$2.99
* External revenues are attributed to specific regions based upon the location of the Company’s selling entity.
* *Non-GAAP figures are provided to allow for the comparison of underlying earnings, providing insight into the ongoing operations of OSI Systems,
Inc. For the comparable GAAP figures and a reconciliation of the differences between the GAAP and non-GAAP figures please see the table above.
1000
800
600
400
200
0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1000
800
600
400
200
0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2
OSI S ys te ms, Inc. 2017 A nnual Re por t
O N E C O M P A N Y – T O T A L S E C U R I T Y
Our Security division is a leading supplier of security inspection
solutions utilizing multiple technologies and advanced threat
identifi cation algorithms based on X-ray and high speed comput-
ed tomography imaging, ion mobility spectrometry, and nuclear
detection technologies. Our products and screening solutions
are sold into key government and commercial market areas for
hold baggage screening, cargo and vehicle inspection, baggage
and parcel inspection, people screening, radiation detection, and
explosive and narcotics trace detection. With our vast industry
knowledge and broad product portfolio, which was signifi cantly
enhanced by the acquisitions of AS&E and the former Morpho
global explosive trace detection business, we specialize in solv-
ing complex security needs. We provide products, services, and
solutions that meet demanding security requirements while of-
fering customers outstanding value for their security screening
and inspection operations.
For customs, border security, and tax collection agencies, our S2
Global business has achieved excellent results with inspection
and manifest verifi cation of cargo traveling across borders. We
achieve high speed threat and contraband detection through
CONOPS (Concept of Operations) design, advanced equipment,
integration with information systems, and recurring training of
image analysts. By developing sophisticated screening opera-
tions, we can improve the effi ciency of customers’ trade and in-
frastructure, supporting economic growth and transparency.
3
OSI S ys te ms, Inc. 2017 A nnual Re por t
SecurityHOLD BAGGAGE SCREENING
CARGO AND VEHICLE INSPECTION
BAGGAGE AND PARCEL INSPECTION
PEOPLE SCREENING
RADIATION DETECTION
TRACE DETECTION
TURNKEY SOLUTIONS
We also provide turnkey screening services that offer an effi cient approach by reducing upfront capital requirements
and providing innovative solutions to handling ongoing operations, maintenance, and staffi ng, while rapidly completing
screening. Each turnkey operation uses our proprietary software to manage data integration from a wide array of
agencies and among multiple platforms to propel our customers’ screening processes into the future.
4
OSI S ys te ms, Inc. 2017 A nnual Re por t
e
r
a
c
h
t
l
a
e
H
4 OSI Systems, Inc. 2016 Annual Report
PATIENT MONITORING AND CONNECTIVITY
ANESTHESIA DELIVERY AND VENTILATION
DIAGNOSTIC CARDIOLOGY
SOFTWARE AND SUPPLIES
5
OSI S ys te ms, Inc. 2017 A nnual Re por t
C O N N E C T I N G I N N O V A T I O N
W I T H C A R E
Our Healthcare division designs and manufactures advanced
patient monitoring devices, anesthesia delivery and ventilation
systems, diagnostic cardiology devices, software, and supplies
and accessories.
We are committed to delivering continuous innovation in health-
care technology that enables better clinical and economic out-
comes. Our products provide scalable solutions to caregivers
and clinicians by delivering critical patient data across local and
remote systems, enabling better informed decisions, increasing
effi ciencies, and creating a safer environment for the patient.
In 2017, we expanded our patient monitoring and connectivity
portfolio with the introduction of Qube® Mini transport monitor.
Qube® Mini is designed to deliver high acuity patient informa-
tion to central monitoring stations and the hospital’s electronic
medical record (EMR) system, even during transport. In addition
to the Qube® Mini product launch, we also introduced enhance-
ments to the Intesys® Clinical Suite (ICS), XprezzNet®, Xhibit®,
Qube®, and Xprezzon® product lines.
6
OSI S ys te ms, Inc. 2017 A nnual Re por t
7
OSI S ys te ms, Inc. 2017 A nnual Re por t
L I G H T S E N S I N G S O L U T I O N S
Our Optoelectronics and Manufacturing division designs and
manufactures optoelectronic products and provides electron-
ics manufacturing services for use in a broad range of applica-
tions for commercial, military, aerospace, industrial, healthcare,
and homeland security applications. Our products and services
are widely used in systems for security inspection, training and
simulation, satellite and missile guidance, range fi nders, test and
measurement, and medical imaging and diagnostics, among oth-
ers. In addition, this division is a critical supplier to our Security
and Healthcare divisions. Our vertical integration approach to
manufacturing and supply chain management allows us to bet-
ter serve our global customers.
AEROSPACE AND DEFENSE
LIFE AND HEALTH SCIENCES
OPTICAL COMMUNICATIONS
INDUSTRIAL TEST AND MEASUREMENT
COMMERCIAL AND CONSUMER
X-RAY
Optoelectronics
& Manufacturing
OSI Systems, Inc. 2016 Annual Report 7
8
OSI S ys te ms, Inc. 2017 A nnual Re por t
9
OSI S ys te ms, Inc. 2017 A nnual Re por t
OSI SYSTEMS, INC.
2017 Form 10-K
Creating Solutions for a
Safer and Healthier World
8
OSI S ys te ms, Inc. 2017 A nnual Re por t
9
OSI S ys te ms, Inc. 2017 A nnual Re por t
OSI SYSTEMS, INC.
2017 Form 10-K
Creating Solutions for a
Safer and Healthier World
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
! ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2017
OR
" 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)
Delaware
(State or other jurisdiction
of incorporation or organization)
12525 Chadron Avenue, Hawthorne, California
(Address of principal executive offices)
33-0238801
(I.R.S. Employer
Identification No.)
90250
(Zip Code)
Registrant’s telephone number, including area code: (310) 978-0516
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 par value
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes: ! No "
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes: " No !
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: ! No "
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: ! No "
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. "
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting
company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer !
Accelerated filer "
Non-accelerated filer "
(Do not check if a
smaller reporting company)
Smaller reporting company "
Emerging growth company "
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. "
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: " No !
The aggregate market value of the registrant’s voting and non-voting Common Stock held by non-affiliates computed by reference to
the price at which the Common Stock was last sold on December 31, 2016, the last business day of the registrant’s most recently
completed second fiscal quarter, was $1,397,186,025. The number of shares outstanding of the registrant’s Common Stock as of
September 5, 2017 was 18,776,847.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 2017 annual meeting of stockholders are incorporated by reference into
Part III. The proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the
end of the registrant’s fiscal year.
TABLE OF CONTENTS
PART I
Page
Forward-Looking Statements
Item
Description
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
1
24
47
48
50
50
51
54
55
67
68
68
68
70
71
71
71
71
71
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
II-1
This report 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 (the ‘‘Exchange Act’’). Forward-looking statements relate to current
expectations, beliefs, projections and similar expressions concerning matters that are not historical facts. Words
such as ‘‘project,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘should,’’ ‘‘will,’’ ‘‘would,’’ and
similar words and expressions are intended to identify forward-looking statements. The expectations, beliefs,
projections and similar expressions reflected in the forward-looking statements may prove to be inaccurate, and
actual results may differ materially from those reflected in such forward-looking statements. Important factors that
could cause our actual results to differ materially from those expectations are disclosed in this report, including,
without limitation, those described in Part I, Item 1, ‘‘Business,’’ Part I, Item 1A, ‘‘Risk Factors’’ and Part II, Item 7,
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ as well as elsewhere in
this report and other documents 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. For example, we could be exposed to a variety of negative consequences
as a result of delays related to the award of domestic and international contracts; failure to secure the renewal of key
customer contracts; delays in customer programs; delays in revenue recognition related to the timing of customer
acceptance; unanticipated impacts of sequestration and other U.S. Government budget control provisions; changes
in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses;
global economic uncertainty; impact of volatility in oil prices; unfavorable currency exchange rate fluctuations;
market acceptance of our new and existing technologies, products and services; our ability to win new business and
convert any orders received to sales within the fiscal year in accordance with our operating plan; enforcement
actions in respect of any noncompliance with laws and regulations including export control and environmental
regulations and the matters that are the subject of some or all of our ongoing investigations and compliance reviews,
contract and regulatory compliance matters, and actions, if brought, resulting in judgments, settlements, fines,
injunctions, debarment or penalties; as well as other risks and uncertainties, including but not limited to those
detailed herein and from time to time in our other Securities and Exchange Commission filings, which could have a
material and adverse impact on our business, financial condition and results of operation. All forward-looking
statements contained in this report are qualified in their entirety by this statement. Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events
and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially
and adversely from those anticipated or implied in the forward-looking statements. 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.
ITEM 1. BUSINESS
General
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 and provide related
services in diversified markets, including homeland security, healthcare, defense and aerospace. Our company was
originally incorporated in 1987 in California. In March 2010, we reincorporated our company in the State of
Delaware. Our principal office is located at 12525 Chadron Avenue, Hawthorne, California 90250.
1
TABLE OF CONTENTS
PART I
Page
Forward-Looking Statements
Item
Description
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
1
24
47
48
50
50
51
54
55
67
68
68
68
70
71
71
71
71
71
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
II-1
This report 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 (the ‘‘Exchange Act’’). Forward-looking statements relate to current
expectations, beliefs, projections and similar expressions concerning matters that are not historical facts. Words
such as ‘‘project,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘should,’’ ‘‘will,’’ ‘‘would,’’ and
similar words and expressions are intended to identify forward-looking statements. The expectations, beliefs,
projections and similar expressions reflected in the forward-looking statements may prove to be inaccurate, and
actual results may differ materially from those reflected in such forward-looking statements. Important factors that
could cause our actual results to differ materially from those expectations are disclosed in this report, including,
without limitation, those described in Part I, Item 1, ‘‘Business,’’ Part I, Item 1A, ‘‘Risk Factors’’ and Part II, Item 7,
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ as well as elsewhere in
this report and other documents 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. For example, we could be exposed to a variety of negative consequences
as a result of delays related to the award of domestic and international contracts; failure to secure the renewal of key
customer contracts; delays in customer programs; delays in revenue recognition related to the timing of customer
acceptance; unanticipated impacts of sequestration and other U.S. Government budget control provisions; changes
in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses;
global economic uncertainty; impact of volatility in oil prices; unfavorable currency exchange rate fluctuations;
market acceptance of our new and existing technologies, products and services; our ability to win new business and
convert any orders received to sales within the fiscal year in accordance with our operating plan; enforcement
actions in respect of any noncompliance with laws and regulations including export control and environmental
regulations and the matters that are the subject of some or all of our ongoing investigations and compliance reviews,
contract and regulatory compliance matters, and actions, if brought, resulting in judgments, settlements, fines,
injunctions, debarment or penalties; as well as other risks and uncertainties, including but not limited to those
detailed herein and from time to time in our other Securities and Exchange Commission filings, which could have a
material and adverse impact on our business, financial condition and results of operation. All forward-looking
statements contained in this report are qualified in their entirety by this statement. Moreover, we operate in a very
competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events
and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially
and adversely from those anticipated or implied in the forward-looking statements. 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.
ITEM 1. BUSINESS
General
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 and provide related
services in diversified markets, including homeland security, healthcare, defense and aerospace. Our company was
originally incorporated in 1987 in California. In March 2010, we reincorporated our company in the State of
Delaware. Our principal office is located at 12525 Chadron Avenue, Hawthorne, California 90250.
1
We have three operating divisions: (a) Security, providing security and inspection systems, turnkey security
screening solutions and related services; (b) Healthcare, providing patient monitoring, diagnostic cardiology, and
anesthesia delivery and ventilation systems; and (c) Optoelectronics and Manufacturing, providing specialized
electronic components and electronic manufacturing services for the Security and Healthcare divisions, as well as
to external original equipment manufacturer (‘‘OEM’’) customers and end users for applications in the defense,
aerospace, medical and industrial markets, among others.
Through our Security division, we provide security screening products and services globally under the
‘‘Rapiscan# Systems’’ and ‘‘AS&E#’’ trade names. Our Security 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 provide site
design, installation, training and technical support services to our customers. We also provide under the ‘‘S2#’’
trade name turnkey security screening solutions, which can include the construction, staffing and long-term
operation of security screening checkpoints, including ports and borders, for our customers.
Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic
cardiology, and anesthesia delivery and ventilation systems globally to end users under the ‘‘Spacelabs#’’ trade
name, and related supplies and accessories under the names ‘‘Spacelabs#’’ and ‘‘Statcorp# Medical.’’ 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 our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic
devices and provide electronics manufacturing services globally for use in a broad range of applications, including
aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics,
telecommunications, office automation, computer peripherals, industrial automation systems, automotive
diagnostic systems and consumer products. We sell our optoelectronic devices primarily under the ‘‘OSI
Optoelectronics’’ trade name and perform our electronics manufacturing services primarily under the ‘‘OSI
Electronics,’’ ‘‘APlus Products,’’ ‘‘Altaflex,’’ and ‘‘Union Four’’ trade names. We provide our optoelectronic devices
and electronics manufacturing services to OEM customers and end users, as well as to our own Security and
Healthcare divisions.
In fiscal 2017, revenues from the Security division were $555.2 million, or approximately 58% of our
revenues; revenues from the Healthcare division amounted to $200.0 million, or approximately 21% of our
revenues; and third-party revenues from the Optoelectronics and Manufacturing division were $205.7 million, or
approximately 21% of our revenues. See note 14 to the consolidated financial statements for additional financial
information concerning reporting segments and geographic areas.
Recent Developments
Acquisition of Explosive Trace Detection Business. Subsequent to our fiscal year end, on July 7, 2017 we
completed the acquisition of the global explosive trace detection business from Smiths Group plc (‘‘Seller’’) that
the Seller had acquired from Morpho USA, Inc. in April 2017. We financed the total estimated purchase price of
$80.5 million with a combination of cash on hand and borrowings under our existing revolving bank line of credit.
We believe this explosive trace detection business is a good strategic fit for us, consistent with our expansion
strategy.
Purchase of Billerica Facility. Subsequent to our fiscal year end, on July 24, 2017 we entered into a
purchase agreement to acquire the facility in Billerica, MA currently leased by our AS&E# subsidiary. The
estimated purchase price of approximately $20 million is expected to be financed with a combination of cash on
hand, borrowings under our existing revolving bank line of credit and/or other third-party financing. We expect the
purchase to be completed during the first quarter of fiscal 2018.
Industry Overview
We sell our security and inspection systems and patient monitoring, diagnostic cardiology and anesthesia
systems primarily to end-users, while we design and manufacture our optoelectronic devices and value-added
subsystems, and provide electronics manufacturing services primarily for OEM customers.
Security. A variety of technologies are currently used globally in security and inspection applications,
including transmission and backscatter X-ray, 3-D and computed tomography, nuclear radiation detection, metal
detection, radar and trace detection. We believe that the market for security and inspection products will continue to
be affected by the threat of terrorist incidents and by new government mandates and appropriations for security and
inspection products in the United States and internationally.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a
wide range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals,
freight forwarding operations, sporting venues, government and military installations and nuclear facilities. The
U.S. Department of Homeland Security has undertaken numerous initiatives to prevent terrorists from entering the
country, hijacking airliners, and obtaining and trafficking in weapons of mass destruction and their components, to
secure sensitive U.S. technologies and to identify and screen high-risk cargo before it is loaded onto airlines and
ships. These initiatives, known, for example, as the Customs-Trade Partnership Against Terrorism, the U.S.
Transportation Security Administration’s Air Cargo Screening Mandate and the U.S. Customs and Border
Protection Container Security Initiative, have resulted in an increased demand for security and inspection products.
Certain of these government sponsored initiatives in the United States have also stimulated security programs
in other areas of the world in part because the U.S. initiatives call on other nations to bolster their port security
strategies, including acquiring or improving their security and inspection equipment and screening operations. The
international market for non-intrusive inspection equipment and related services, therefore, continues to expand as
countries that ship goods directly to the United States participate in such programs and as they choose to procure
and operate equipment in order to secure their own borders, transportation networks, facilities and other venues.
Congress also passed legislation that calls for the inspection of international maritime cargo destined for the
United States, domestic civil aviation cargo, and radiological and nuclear threats in cargo entering the United
States. Certain of our cargo and vehicle inspection systems are already being used internationally and by the U.S.
Government to comply with these standards.
Additionally, the U.S. Department of Homeland Security requires the screening of all cargo carried on
passenger airlines in the United States. Several of our hold (checked) baggage and cargo screening systems have
been approved by the U.S. Department of Homeland Security’s Transportation Security Administration for this
purpose and are being procured and used by freight forwarders, airlines, transportation companies and other
businesses to fulfill their compliance requirements.
Furthermore, the U.S. Department of Homeland Security’s Science and Technology Directorate,
Transportation Security Administration and Domestic Nuclear Detection Office have supported the development of
new security inspection technologies and products. Our Security division participates in a number of such research
and development efforts, including projects to develop new technologies for radiation detection, nuclear materials
detection, border security, and aviation screening. Our Security division is an industrial partner in the DHS Center
of Excellence ALERT (Awareness and Localization of Explosives-Related Threats) and works with academia,
national laboratories, and other vendors on research and development through this and other agreements. The
Science and Technology Directorate has also initiated programs for the development of technologies capable of
protecting highways, railways and waterways from terrorist attack.
In addition, the U.S. Department of Defense has invested heavily in technologies and services that screen
would-be attackers before they are able to harm U.S. and allied forces. These technologies include products that can
2
3
We have three operating divisions: (a) Security, providing security and inspection systems, turnkey security
screening solutions and related services; (b) Healthcare, providing patient monitoring, diagnostic cardiology, and
anesthesia delivery and ventilation systems; and (c) Optoelectronics and Manufacturing, providing specialized
electronic components and electronic manufacturing services for the Security and Healthcare divisions, as well as
to external original equipment manufacturer (‘‘OEM’’) customers and end users for applications in the defense,
aerospace, medical and industrial markets, among others.
Through our Security division, we provide security screening products and services globally under the
‘‘Rapiscan# Systems’’ and ‘‘AS&E#’’ trade names. Our Security 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 provide site
design, installation, training and technical support services to our customers. We also provide under the ‘‘S2#’’
trade name turnkey security screening solutions, which can include the construction, staffing and long-term
operation of security screening checkpoints, including ports and borders, for our customers.
Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic
cardiology, and anesthesia delivery and ventilation systems globally to end users under the ‘‘Spacelabs#’’ trade
name, and related supplies and accessories under the names ‘‘Spacelabs#’’ and ‘‘Statcorp# Medical.’’ 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 our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic
devices and provide electronics manufacturing services globally for use in a broad range of applications, including
aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics,
telecommunications, office automation, computer peripherals, industrial automation systems, automotive
diagnostic systems and consumer products. We sell our optoelectronic devices primarily under the ‘‘OSI
Optoelectronics’’ trade name and perform our electronics manufacturing services primarily under the ‘‘OSI
Electronics,’’ ‘‘APlus Products,’’ ‘‘Altaflex,’’ and ‘‘Union Four’’ trade names. We provide our optoelectronic devices
and electronics manufacturing services to OEM customers and end users, as well as to our own Security and
Healthcare divisions.
In fiscal 2017, revenues from the Security division were $555.2 million, or approximately 58% of our
revenues; revenues from the Healthcare division amounted to $200.0 million, or approximately 21% of our
revenues; and third-party revenues from the Optoelectronics and Manufacturing division were $205.7 million, or
approximately 21% of our revenues. See note 14 to the consolidated financial statements for additional financial
information concerning reporting segments and geographic areas.
Recent Developments
Acquisition of Explosive Trace Detection Business. Subsequent to our fiscal year end, on July 7, 2017 we
completed the acquisition of the global explosive trace detection business from Smiths Group plc (‘‘Seller’’) that
the Seller had acquired from Morpho USA, Inc. in April 2017. We financed the total estimated purchase price of
$80.5 million with a combination of cash on hand and borrowings under our existing revolving bank line of credit.
We believe this explosive trace detection business is a good strategic fit for us, consistent with our expansion
strategy.
Purchase of Billerica Facility. Subsequent to our fiscal year end, on July 24, 2017 we entered into a
purchase agreement to acquire the facility in Billerica, MA currently leased by our AS&E# subsidiary. The
estimated purchase price of approximately $20 million is expected to be financed with a combination of cash on
hand, borrowings under our existing revolving bank line of credit and/or other third-party financing. We expect the
purchase to be completed during the first quarter of fiscal 2018.
Industry Overview
We sell our security and inspection systems and patient monitoring, diagnostic cardiology and anesthesia
systems primarily to end-users, while we design and manufacture our optoelectronic devices and value-added
subsystems, and provide electronics manufacturing services primarily for OEM customers.
Security. A variety of technologies are currently used globally in security and inspection applications,
including transmission and backscatter X-ray, 3-D and computed tomography, nuclear radiation detection, metal
detection, radar and trace detection. We believe that the market for security and inspection products will continue to
be affected by the threat of terrorist incidents and by new government mandates and appropriations for security and
inspection products in the United States and internationally.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a
wide range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals,
freight forwarding operations, sporting venues, government and military installations and nuclear facilities. The
U.S. Department of Homeland Security has undertaken numerous initiatives to prevent terrorists from entering the
country, hijacking airliners, and obtaining and trafficking in weapons of mass destruction and their components, to
secure sensitive U.S. technologies and to identify and screen high-risk cargo before it is loaded onto airlines and
ships. These initiatives, known, for example, as the Customs-Trade Partnership Against Terrorism, the U.S.
Transportation Security Administration’s Air Cargo Screening Mandate and the U.S. Customs and Border
Protection Container Security Initiative, have resulted in an increased demand for security and inspection products.
Certain of these government sponsored initiatives in the United States have also stimulated security programs
in other areas of the world in part because the U.S. initiatives call on other nations to bolster their port security
strategies, including acquiring or improving their security and inspection equipment and screening operations. The
international market for non-intrusive inspection equipment and related services, therefore, continues to expand as
countries that ship goods directly to the United States participate in such programs and as they choose to procure
and operate equipment in order to secure their own borders, transportation networks, facilities and other venues.
Congress also passed legislation that calls for the inspection of international maritime cargo destined for the
United States, domestic civil aviation cargo, and radiological and nuclear threats in cargo entering the United
States. Certain of our cargo and vehicle inspection systems are already being used internationally and by the U.S.
Government to comply with these standards.
Additionally, the U.S. Department of Homeland Security requires the screening of all cargo carried on
passenger airlines in the United States. Several of our hold (checked) baggage and cargo screening systems have
been approved by the U.S. Department of Homeland Security’s Transportation Security Administration for this
purpose and are being procured and used by freight forwarders, airlines, transportation companies and other
businesses to fulfill their compliance requirements.
Furthermore, the U.S. Department of Homeland Security’s Science and Technology Directorate,
Transportation Security Administration and Domestic Nuclear Detection Office have supported the development of
new security inspection technologies and products. Our Security division participates in a number of such research
and development efforts, including projects to develop new technologies for radiation detection, nuclear materials
detection, border security, and aviation screening. Our Security division is an industrial partner in the DHS Center
of Excellence ALERT (Awareness and Localization of Explosives-Related Threats) and works with academia,
national laboratories, and other vendors on research and development through this and other agreements. The
Science and Technology Directorate has also initiated programs for the development of technologies capable of
protecting highways, railways and waterways from terrorist attack.
In addition, the U.S. Department of Defense has invested heavily in technologies and services that screen
would-be attackers before they are able to harm U.S. and allied forces. These technologies include products that can
2
3
screen personnel, vehicles and other containers for the presence of explosives, improvised explosive devices
(IEDs), weapons and other contraband.
specialization, broader expertise and more flexibility to respond to short cycle times and quicker market
expectations.
The U.S. Department of Energy (DOE) and other U.S. federal agencies implemented the Second Line of
Defense Program and Megaports programs to help prevent the proliferation and trafficking of radioactive and
nuclear materials.
Similar initiatives and new regulations promulgated by international organizations have resulted in a growing
global demand for airline, cargo, port and border inspection technologies. For example, the European Commission
has issued uniform performance standards for systems that screen baggage and people at aviation checkpoints and
air cargo, as well as new directives related to maritime security.
Our contracts with the U.S. Government are generally subject to renegotiation of profits and termination for
convenience at the election of the Government. For the fiscal year ended June 30, 2017, our direct sales to the U.S.
Government were approximately $63 million. Additionally, certain of our contracts with foreign governments
contain provisions allowing the government to terminate a contract for convenience. For further discussion, please
refer to ‘‘Item 1A. Risk Factors.’’
Healthcare. Healthcare has been, and we believe will continue to be, a growing economic sector throughout
much of the world. Developing countries in Asia and Latin America are expected to continue to build healthcare
infrastructure to serve expanding middle class populations. In developed areas, including the United States and
Europe, aging populations and extended life expectancy are projected to fuel growth in healthcare for the
foreseeable future.
While we believe that the healthcare industry will continue to grow throughout much of the world, many
factors are forcing healthcare providers to do more with less, including stricter government requirements affecting
staffing and accountability, shrinking reimbursements from health insurance organizations, and uncertainty around
potential U.S. healthcare legislation. Our customers not only expect clinical value from our solutions but also
economic value. Positioning our current healthcare products to demonstrate the competitive value in total cost of
ownership will be increasingly important in this environment. At the same time, recent advances enabling big data
management and analysis, as well as the widespread introduction of mobile devices into the healthcare
environment, are creating an emerging demand for patient data acquisition and distribution. Our Healthcare
division designs, manufactures and markets devices and software that respond to these factors, helping hospitals
reduce costs and more fully utilize resources while maintaining or improving the quality of care their physicians and
nurses are able to deliver.
We are a global manufacturer and distributor of patient monitoring, diagnostic cardiology and clinical
networking solutions for use in hospitals, medical clinics and physician offices. We design, manufacture and
market patient monitoring solutions for critical, perinatal, sub-acute and perioperative care areas of the hospital,
wired and wireless networks and ambulatory blood pressure monitors, all aimed at providing caregivers with timely
patient information. Our diagnostic cardiology systems include Holter recorders and analyzers, ambulatory blood
pressure monitors, electrocardiography (ECG) devices, stress event data management systems and related software
and services. We also manufacture and distribute anesthesia delivery systems and ventilators, which we sell
primarily to hospitals for use in operating rooms and anesthesia induction areas.
Optoelectronics and Manufacturing. We believe that continued advances in technology and reductions in
the cost of key components of optoelectronic systems, including computer processing power and memory, have
broadened the market by enabling the use of optoelectronic devices in a greater number of applications. In addition,
we see a trend among OEMs to increasingly outsource the design and manufacture of optoelectronic devices as well
as value-added subsystems to fully-integrated, independent manufacturers, like us, that may have greater
Our optoelectronic devices are used in a wide variety of applications for diversified markets including the
aerospace and defense, avionics, medical imaging and diagnostics, biochemistry analysis, pharmaceutical,
nanotechnology, telecommunications, construction and homeland security markets. Medical applications for our
devices include diagnostic and imaging products, patient monitoring equipment, and glucose monitors. Aerospace
and defense applications for our devices include satellite navigation sensors, laser guided munitions systems, range
finders, weapons simulation systems, computer peripherals and other applications that require the conversion of
optical signals into electronic signals. Homeland security applications for our devices include X-ray based and
other detection systems. Our optoelectronic devices and value-added subsystems are also used in a wide variety of
measurement control, monitoring and industrial applications and are key components in telecommunications
technologies. We also offer electronics manufacturing services to our optoelectronics customers, as well as to our
Security and Healthcare divisions. We offer full turnkey and printed circuit board assembly, cable and harness
assembly, liquid crystal displays and box-build manufacturing services, in which we provide product design and
development, supply chain management, and production manufacturing services.
Growth Strategy
We believe that one of our primary competitive strengths is our expertise in the cost-effective design and
manufacture of specialized electronic systems and components for critical applications. As a result, we have
leveraged, and intend to continue to leverage, such expertise and capacity to gain price, performance and agility
advantages over our competitors in the security, healthcare and optoelectronics fields, and to translate such
advantages into profitable growth in those fields. At the same time, we continually seek to identify new markets in
which our core expertise and capacity will provide us with competitive advantages. Key elements of this strategy
include:
Capitalizing on Global Reach. We operate from locations throughout the world. We view our international
operations as providing an important strategic advantage over competitors. First, our international manufacturing
facilities allow us to take advantage of competitive labor rates and favorable tax regulations in order to be a low cost
producer. Second, our international offices strengthen our sales and marketing efforts and our ability to service and
repair our systems by providing direct access to growing markets and to our existing international customer base.
Third, our international manufacturing locations allow us to reduce delivery times to our global customer base. In
the future, we intend to continue to enhance our international manufacturing and sales capabilities.
Capitalizing on Vertical Integration. Our vertical integration provides several advantages in each of our
divisions. These advantages include reduced manufacturing and delivery times, lower costs due to our access to
competitive international labor markets and direct sourcing of raw materials. We also believe that we offer
significant added value to our customers by providing a full range of vertically-integrated services, including
component design and customization, subsystem concept design and application engineering, product prototyping
and development, efficient pre-production and short-run and high volume manufacturing. We believe that our
vertical integration differentiates us from many of our competitors and provides value to our customers who can
rely on us to be an integrated supplier. We intend to continue to leverage our vertical integration to create greater
value for our customers in the design and manufacture of our products.
Capitalizing on the Market for Security and Inspection Systems. Attentiveness to terrorist and other
security threats may continue to drive the market for security and inspection systems in transportation security and
also at ports and border crossings, government installations, military facilities and public event venues. The trend
toward increased screening of goods entering and departing from ports and borders has resulted, and may continue
to result in, the growth in the market for cargo inspection systems and turnkey security screening services that are
capable of screening shipping containers for contraband and assisting customs officials in the verification of
4
5
screen personnel, vehicles and other containers for the presence of explosives, improvised explosive devices
(IEDs), weapons and other contraband.
specialization, broader expertise and more flexibility to respond to short cycle times and quicker market
expectations.
The U.S. Department of Energy (DOE) and other U.S. federal agencies implemented the Second Line of
Defense Program and Megaports programs to help prevent the proliferation and trafficking of radioactive and
nuclear materials.
Similar initiatives and new regulations promulgated by international organizations have resulted in a growing
global demand for airline, cargo, port and border inspection technologies. For example, the European Commission
has issued uniform performance standards for systems that screen baggage and people at aviation checkpoints and
air cargo, as well as new directives related to maritime security.
Our contracts with the U.S. Government are generally subject to renegotiation of profits and termination for
convenience at the election of the Government. For the fiscal year ended June 30, 2017, our direct sales to the U.S.
Government were approximately $63 million. Additionally, certain of our contracts with foreign governments
contain provisions allowing the government to terminate a contract for convenience. For further discussion, please
refer to ‘‘Item 1A. Risk Factors.’’
Healthcare. Healthcare has been, and we believe will continue to be, a growing economic sector throughout
much of the world. Developing countries in Asia and Latin America are expected to continue to build healthcare
infrastructure to serve expanding middle class populations. In developed areas, including the United States and
Europe, aging populations and extended life expectancy are projected to fuel growth in healthcare for the
foreseeable future.
While we believe that the healthcare industry will continue to grow throughout much of the world, many
factors are forcing healthcare providers to do more with less, including stricter government requirements affecting
staffing and accountability, shrinking reimbursements from health insurance organizations, and uncertainty around
potential U.S. healthcare legislation. Our customers not only expect clinical value from our solutions but also
economic value. Positioning our current healthcare products to demonstrate the competitive value in total cost of
ownership will be increasingly important in this environment. At the same time, recent advances enabling big data
management and analysis, as well as the widespread introduction of mobile devices into the healthcare
environment, are creating an emerging demand for patient data acquisition and distribution. Our Healthcare
division designs, manufactures and markets devices and software that respond to these factors, helping hospitals
reduce costs and more fully utilize resources while maintaining or improving the quality of care their physicians and
nurses are able to deliver.
We are a global manufacturer and distributor of patient monitoring, diagnostic cardiology and clinical
networking solutions for use in hospitals, medical clinics and physician offices. We design, manufacture and
market patient monitoring solutions for critical, perinatal, sub-acute and perioperative care areas of the hospital,
wired and wireless networks and ambulatory blood pressure monitors, all aimed at providing caregivers with timely
patient information. Our diagnostic cardiology systems include Holter recorders and analyzers, ambulatory blood
pressure monitors, electrocardiography (ECG) devices, stress event data management systems and related software
and services. We also manufacture and distribute anesthesia delivery systems and ventilators, which we sell
primarily to hospitals for use in operating rooms and anesthesia induction areas.
Optoelectronics and Manufacturing. We believe that continued advances in technology and reductions in
the cost of key components of optoelectronic systems, including computer processing power and memory, have
broadened the market by enabling the use of optoelectronic devices in a greater number of applications. In addition,
we see a trend among OEMs to increasingly outsource the design and manufacture of optoelectronic devices as well
as value-added subsystems to fully-integrated, independent manufacturers, like us, that may have greater
Our optoelectronic devices are used in a wide variety of applications for diversified markets including the
aerospace and defense, avionics, medical imaging and diagnostics, biochemistry analysis, pharmaceutical,
nanotechnology, telecommunications, construction and homeland security markets. Medical applications for our
devices include diagnostic and imaging products, patient monitoring equipment, and glucose monitors. Aerospace
and defense applications for our devices include satellite navigation sensors, laser guided munitions systems, range
finders, weapons simulation systems, computer peripherals and other applications that require the conversion of
optical signals into electronic signals. Homeland security applications for our devices include X-ray based and
other detection systems. Our optoelectronic devices and value-added subsystems are also used in a wide variety of
measurement control, monitoring and industrial applications and are key components in telecommunications
technologies. We also offer electronics manufacturing services to our optoelectronics customers, as well as to our
Security and Healthcare divisions. We offer full turnkey and printed circuit board assembly, cable and harness
assembly, liquid crystal displays and box-build manufacturing services, in which we provide product design and
development, supply chain management, and production manufacturing services.
Growth Strategy
We believe that one of our primary competitive strengths is our expertise in the cost-effective design and
manufacture of specialized electronic systems and components for critical applications. As a result, we have
leveraged, and intend to continue to leverage, such expertise and capacity to gain price, performance and agility
advantages over our competitors in the security, healthcare and optoelectronics fields, and to translate such
advantages into profitable growth in those fields. At the same time, we continually seek to identify new markets in
which our core expertise and capacity will provide us with competitive advantages. Key elements of this strategy
include:
Capitalizing on Global Reach. We operate from locations throughout the world. We view our international
operations as providing an important strategic advantage over competitors. First, our international manufacturing
facilities allow us to take advantage of competitive labor rates and favorable tax regulations in order to be a low cost
producer. Second, our international offices strengthen our sales and marketing efforts and our ability to service and
repair our systems by providing direct access to growing markets and to our existing international customer base.
Third, our international manufacturing locations allow us to reduce delivery times to our global customer base. In
the future, we intend to continue to enhance our international manufacturing and sales capabilities.
Capitalizing on Vertical Integration. Our vertical integration provides several advantages in each of our
divisions. These advantages include reduced manufacturing and delivery times, lower costs due to our access to
competitive international labor markets and direct sourcing of raw materials. We also believe that we offer
significant added value to our customers by providing a full range of vertically-integrated services, including
component design and customization, subsystem concept design and application engineering, product prototyping
and development, efficient pre-production and short-run and high volume manufacturing. We believe that our
vertical integration differentiates us from many of our competitors and provides value to our customers who can
rely on us to be an integrated supplier. We intend to continue to leverage our vertical integration to create greater
value for our customers in the design and manufacture of our products.
Capitalizing on the Market for Security and Inspection Systems. Attentiveness to terrorist and other
security threats may continue to drive the market for security and inspection systems in transportation security and
also at ports and border crossings, government installations, military facilities and public event venues. The trend
toward increased screening of goods entering and departing from ports and borders has resulted, and may continue
to result in, the growth in the market for cargo inspection systems and turnkey security screening services that are
capable of screening shipping containers for contraband and assisting customs officials in the verification of
4
5
shipping manifests. Package and cargo screening by freight forwarders, airlines and air cargo companies represents
a growing sector, as regulations in the United States and Europe require such screening in certain circumstances.
We intend to capitalize on opportunities to replace, service and upgrade existing security installations, and to offer
turnkey security screening solutions in which we may construct, staff and/or operate on a long-term basis security
screening checkpoints for our customers. Finally, we also intend to continue to develop new security and inspection
products and technologies, such as our proprietary real time tomography systems, and to enhance our current
product and service offerings through internal research and development and selective acquisitions.
Improving and Complementing Existing Medical Technologies. We develop and market patient monitoring
systems, diagnostic cardiology products, anesthesia delivery systems, and ventilators, and associated supplies and
accessories. We are able to market and sell many of our product offerings through shared sales channels and
distribution networks. Our efforts to develop new products and improve our existing medical technologies are
focused on the needs of care providers and their patients. Our efforts to improve existing diagnostic cardiology and
anesthesia delivery technologies will also continue to concentrate on providing products that are flexible and
intuitive to use so that clinicians can deliver accurate, precise, reliable and cost-effective care. We focus on enabling
hospitals to leverage their IT infrastructure at a significant financial savings, providing actionable alarms at the
bedside monitor and the central station.
Selectively Entering New Markets. We intend to continue to selectively enter new markets that complement
our existing capabilities in the design, development and manufacture of specialized electronic systems and
components for critical applications such as security inspection and patient monitoring, diagnostic cardiology and
anesthesia systems. We believe that by manufacturing products that rely on our existing technological capabilities,
we will leverage our integrated design and manufacturing infrastructure to build a larger presence in new markets
that present attractive competitive dynamics. We intend to achieve this strategy through internal growth and through
selective acquisitions.
Acquiring New Technologies and Companies. Our success depends in part on our ability to continually
enhance and broaden our product offerings in response to changing technologies, customer demands and
competitive pressures. We have developed expertise in our various lines of business and other areas through internal
research and development efforts, as well as through selective acquisitions. We expect to continue to seek
acquisition opportunities to broaden our technological expertise and capabilities, lower our manufacturing costs
and facilitate our entry into new markets.
Products and Technology
We design, develop, manufacture and sell products ranging from security and inspection systems to patient
monitoring, diagnostic cardiology and anesthesia systems to discrete optoelectronic devices and value-added
subsystems.
Security and Inspection Systems. We design, manufacture and market security and inspection systems
globally to end users under the ‘‘Rapiscan# Systems’’ and ‘‘AS&E#’’ trade names. Our Security products are used
to inspect baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive
and nuclear materials and other contraband. These systems are also used for the safe, accurate and efficient
verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of
controlled materials. Our Security 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. We also offer under the ‘‘S2#’’ trade name turnkey security screening services, including
the staffing and operation of security screening checkpoints.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a
wide range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals,
freight forwarding operations, government and military installations and nuclear facilities. As a result of the use of
security and inspection products at additional facilities, we have diversified our sales channels for security and
inspection products.
Many of our security and inspection systems include dual-energy X-ray technology with computer software
enhanced imaging methods to facilitate the detection of materials such as explosives, weapons, narcotics, bulk
currency or other contraband. While all X-ray systems produce a two-dimensional image of the contents of the
inspected object, the dual-energy X-ray systems also measure the X-ray absorption of the inspected object’s
contents at two different X-ray energies to determine the atomic number, density and other characteristics of the
object’s contents. The various organic and inorganic substances in the inspected object appear to operators of the
inspection systems in various colors, and this visual information can be used to identify and differentiate the
inspected materials. In addition, we offer dual-view X-ray screening systems, now available on many of our systems
that allow operators to examine objects from two directions simultaneously, thereby reducing the need for
re-scanning of objects and improving the operator’s ability to detect threats quickly and effectively. Our baggage
and parcel inspection, cargo and vehicle inspection and hold (checked) baggage screening inspection systems range
in size from compact mobile systems to large systems comprising entire buildings in which trucks, shipping
containers or pallets are inspected. Many of our inspection systems are also designed to be upgradeable to respond
to new customer requirements as they emerge or change.
Our cargo and vehicle inspection applications, in which vehicles, cars, trucks, shipping containers, pallets and
other large objects can be inspected, are designed in various configurations, including gantry, portal and mobile
systems. These products are primarily used to verify the contents of cars, trucks or cargo containers and to detect
the presence of contraband, including narcotics, weapons, explosives, radioactive and nuclear materials and other
smuggled items. They offer significant improvements over past methods of cargo screening, such as manual
searches, as our cargo systems are faster, more thorough and do not subject the cargo to pilferage. Entire shipping
containers or trucks containing densely packed goods can be screened rapidly.
Most of our cargo and vehicle inspection systems employ X-ray imaging to non-intrusively inspect objects and
present images to an inspector, showing shapes, sizes, locations and relative densities of the contents. These
systems utilize transmission imaging technology, backscatter imaging technology, or both technologies. We also
manufacture passive radiation detection devices for detecting nuclear threat material utilizing their gamma and
neutron signatures. Additionally, we have developed isotope-specific identification algorithms. Many of these
systems have been built to meet specific customer inspection requirements.
Our Security division is among the only companies in the market offering inspection systems at energy levels
ranging from 140 Kilo electron Volts (KeV) to 160 KeV, 180 KeV, 200 KeV, 320 KeV, 2.5 Mega electron Volt
(MeV), 4.5 MeV, 6 MeV, and 9MeV. We believe that we offer one of the broadest technology platforms in the
baggage and parcel and cargo and vehicle inspection systems industry. Our broad platform permits us to offer
customers solutions, which optimize flexibility, performance and cost to meet the customer’s unique application
requirements.
Our Security division also offers hold (checked) baggage screening systems that are utilized by airports,
freight forwarders and other parties responsible for screening baggage and cargo before it is placed in the cargo
hold of airplanes. Certain of our currently available systems utilize multiple X-ray beams to provide high-quality
images able to discriminate materials and to enable algorithms that assist operators in the detection of explosives
and narcotics. Other systems utilize a very large number of distributed X-ray emitters that rapidly capture
approximately 1,000 views of a bag and then utilize sophisticated software to reconstruct high resolution images.
These systems are designed to meet the high-speed screening and analysis demands of regulators in the United
States and European Union. They can be operated in stand-alone mode, where a single operator views the images
produced by a single system, or can be networked, allowing operators stationed at a remote computer terminal to
monitor multiple systems.
Our Security division also offers people screening products, such as a line of ‘‘Metor#’’ brand walk-through
metal detector (WTMD) products for use at security checkpoints at airports, amusement parks, banks, courthouses,
government buildings, sports arenas and other venues. We also offer trace detection systems that are designed to
detect trace amounts of explosives as well as narcotics. These systems are designed to be used in screening people,
cargo, baggage and other items for illicit materials and weapons.
6
7
shipping manifests. Package and cargo screening by freight forwarders, airlines and air cargo companies represents
a growing sector, as regulations in the United States and Europe require such screening in certain circumstances.
We intend to capitalize on opportunities to replace, service and upgrade existing security installations, and to offer
turnkey security screening solutions in which we may construct, staff and/or operate on a long-term basis security
screening checkpoints for our customers. Finally, we also intend to continue to develop new security and inspection
products and technologies, such as our proprietary real time tomography systems, and to enhance our current
product and service offerings through internal research and development and selective acquisitions.
Improving and Complementing Existing Medical Technologies. We develop and market patient monitoring
systems, diagnostic cardiology products, anesthesia delivery systems, and ventilators, and associated supplies and
accessories. We are able to market and sell many of our product offerings through shared sales channels and
distribution networks. Our efforts to develop new products and improve our existing medical technologies are
focused on the needs of care providers and their patients. Our efforts to improve existing diagnostic cardiology and
anesthesia delivery technologies will also continue to concentrate on providing products that are flexible and
intuitive to use so that clinicians can deliver accurate, precise, reliable and cost-effective care. We focus on enabling
hospitals to leverage their IT infrastructure at a significant financial savings, providing actionable alarms at the
bedside monitor and the central station.
Selectively Entering New Markets. We intend to continue to selectively enter new markets that complement
our existing capabilities in the design, development and manufacture of specialized electronic systems and
components for critical applications such as security inspection and patient monitoring, diagnostic cardiology and
anesthesia systems. We believe that by manufacturing products that rely on our existing technological capabilities,
we will leverage our integrated design and manufacturing infrastructure to build a larger presence in new markets
that present attractive competitive dynamics. We intend to achieve this strategy through internal growth and through
selective acquisitions.
Acquiring New Technologies and Companies. Our success depends in part on our ability to continually
enhance and broaden our product offerings in response to changing technologies, customer demands and
competitive pressures. We have developed expertise in our various lines of business and other areas through internal
research and development efforts, as well as through selective acquisitions. We expect to continue to seek
acquisition opportunities to broaden our technological expertise and capabilities, lower our manufacturing costs
and facilitate our entry into new markets.
Products and Technology
We design, develop, manufacture and sell products ranging from security and inspection systems to patient
monitoring, diagnostic cardiology and anesthesia systems to discrete optoelectronic devices and value-added
subsystems.
Security and Inspection Systems. We design, manufacture and market security and inspection systems
globally to end users under the ‘‘Rapiscan# Systems’’ and ‘‘AS&E#’’ trade names. Our Security products are used
to inspect baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive
and nuclear materials and other contraband. These systems are also used for the safe, accurate and efficient
verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of
controlled materials. Our Security 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. We also offer under the ‘‘S2#’’ trade name turnkey security screening services, including
the staffing and operation of security screening checkpoints.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a
wide range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals,
freight forwarding operations, government and military installations and nuclear facilities. As a result of the use of
security and inspection products at additional facilities, we have diversified our sales channels for security and
inspection products.
Many of our security and inspection systems include dual-energy X-ray technology with computer software
enhanced imaging methods to facilitate the detection of materials such as explosives, weapons, narcotics, bulk
currency or other contraband. While all X-ray systems produce a two-dimensional image of the contents of the
inspected object, the dual-energy X-ray systems also measure the X-ray absorption of the inspected object’s
contents at two different X-ray energies to determine the atomic number, density and other characteristics of the
object’s contents. The various organic and inorganic substances in the inspected object appear to operators of the
inspection systems in various colors, and this visual information can be used to identify and differentiate the
inspected materials. In addition, we offer dual-view X-ray screening systems, now available on many of our systems
that allow operators to examine objects from two directions simultaneously, thereby reducing the need for
re-scanning of objects and improving the operator’s ability to detect threats quickly and effectively. Our baggage
and parcel inspection, cargo and vehicle inspection and hold (checked) baggage screening inspection systems range
in size from compact mobile systems to large systems comprising entire buildings in which trucks, shipping
containers or pallets are inspected. Many of our inspection systems are also designed to be upgradeable to respond
to new customer requirements as they emerge or change.
Our cargo and vehicle inspection applications, in which vehicles, cars, trucks, shipping containers, pallets and
other large objects can be inspected, are designed in various configurations, including gantry, portal and mobile
systems. These products are primarily used to verify the contents of cars, trucks or cargo containers and to detect
the presence of contraband, including narcotics, weapons, explosives, radioactive and nuclear materials and other
smuggled items. They offer significant improvements over past methods of cargo screening, such as manual
searches, as our cargo systems are faster, more thorough and do not subject the cargo to pilferage. Entire shipping
containers or trucks containing densely packed goods can be screened rapidly.
Most of our cargo and vehicle inspection systems employ X-ray imaging to non-intrusively inspect objects and
present images to an inspector, showing shapes, sizes, locations and relative densities of the contents. These
systems utilize transmission imaging technology, backscatter imaging technology, or both technologies. We also
manufacture passive radiation detection devices for detecting nuclear threat material utilizing their gamma and
neutron signatures. Additionally, we have developed isotope-specific identification algorithms. Many of these
systems have been built to meet specific customer inspection requirements.
Our Security division is among the only companies in the market offering inspection systems at energy levels
ranging from 140 Kilo electron Volts (KeV) to 160 KeV, 180 KeV, 200 KeV, 320 KeV, 2.5 Mega electron Volt
(MeV), 4.5 MeV, 6 MeV, and 9MeV. We believe that we offer one of the broadest technology platforms in the
baggage and parcel and cargo and vehicle inspection systems industry. Our broad platform permits us to offer
customers solutions, which optimize flexibility, performance and cost to meet the customer’s unique application
requirements.
Our Security division also offers hold (checked) baggage screening systems that are utilized by airports,
freight forwarders and other parties responsible for screening baggage and cargo before it is placed in the cargo
hold of airplanes. Certain of our currently available systems utilize multiple X-ray beams to provide high-quality
images able to discriminate materials and to enable algorithms that assist operators in the detection of explosives
and narcotics. Other systems utilize a very large number of distributed X-ray emitters that rapidly capture
approximately 1,000 views of a bag and then utilize sophisticated software to reconstruct high resolution images.
These systems are designed to meet the high-speed screening and analysis demands of regulators in the United
States and European Union. They can be operated in stand-alone mode, where a single operator views the images
produced by a single system, or can be networked, allowing operators stationed at a remote computer terminal to
monitor multiple systems.
Our Security division also offers people screening products, such as a line of ‘‘Metor#’’ brand walk-through
metal detector (WTMD) products for use at security checkpoints at airports, amusement parks, banks, courthouses,
government buildings, sports arenas and other venues. We also offer trace detection systems that are designed to
detect trace amounts of explosives as well as narcotics. These systems are designed to be used in screening people,
cargo, baggage and other items for illicit materials and weapons.
6
7
The following table sets forth certain information related to the standard security and inspection products that
we currently offer. We do, however, also customize our standard products to suit specific applications and customer
requirements.
Patient Monitoring, Diagnostic Cardiology, and Anesthesia Systems. Our Healthcare division designs,
manufactures and markets products globally to end users primarily under the ‘‘Spacelabs#’’ and ‘‘Statcorp#’’ trade
names.
PRODUCT LINE
Baggage and Parcel
Inspection
PRODUCT NAME /
PRODUCT FAMILY
Rapiscan# 600 series
X-ray systems
TECHNOLOGY
Dual-energy X-ray
Single and multi-view
configuration
AS&E# Gemini#
Combined dual energy
transmission and backscatter
Cargo and Vehicle
Inspection
Rapiscan# Eagle#
AS&E# OmniView#
AS&E# Sentry#
AS&E# ZBV#
AS&E# Z Portal#
AS&E# CarView
AS&E# MINI Z#
Hold (Checked) Baggage
Rapiscan# MVXR 5000
Screening
Rapiscan# RTT#
High energy transmission
X-ray
Backscatter X-ray
Multi-view, dual energy X-ray
explosive detection system
(EDS)
High-speed, stationary gantry
computed tomography
explosive detection system
(EDS)
People Screening
Metor# series metal detectors
Electromagnetic induction
Rapiscan# Secure 1000#
Backscatter X-ray
Radiation Detection
Rapiscan# Radiation Monitors Gamma and neutron detection
of radioactive and nuclear
material
IMS based technology
desktop, hand-held and
walk-though portal explosives
and narcotics detection
Trace Detection
Detectra#
Itemiser# DX
Itemiser# 4DX
Itemiser# 3e
MobileTrace#
Hardened MobileTrace#
EntryScan# 4
MARKET SEGMENT
Checkpoint and customs
inspection at airports,
prisons, border crossings,
government buildings, and
postal facilities, critical
infrastructure protection at
power and chemical plants,
water resource sites as well
as air cargo screening
Checkpoint and air cargo
screening at prisons,
government buildings and
other critical infrastructure
protection applications
Inspection of passenger
vehicles, cargo, trucks, and
rail cars at airports, border
crossings, sea ports and high
threat facilities
Baggage inspection with
automatic explosive detection
at airports and freight
forwarding facilities
Checkpoint inspection at
airports, border crossings,
military checkpoints,
stadiums, prisons and
government facilities
Cargo, vehicle, rail car and
people screening at airports,
border crossings, military
checkpoints, stadiums,
prisons and government
facilities
Checkpoint, hold baggage
and cargo inspection at
airports, nuclear plants,
border crossings, military
checkpoints, stadiums,
prisons and government
facilities
Spacelabs# products include patient monitors for use in perioperative, critical care and emergency care
environments with neonatal, pediatric and adult patients. Our patient monitoring systems comprise monitors and
central nursing stations connected by hardwired or wireless networks, as well as stand-alone monitors where the
patient data can be transported physically from one monitor to another as the patient is moved. These systems
enable hospital staff to access patient data where and when it is required. In addition, these products are designed
with an ‘‘open architecture’’ to interact with hospital information systems. Many of these products allow clinicians
to view and control various software applications on the patient monitor’s display, eliminating the need for separate
computer terminals in the patient’s room. Attending nurses can check laboratory results and other reports, enter
orders, review protocols and complete medical charting at the patient’s bedside.
For electrocardiograph monitoring or multiparameter monitoring of ambulatory patients, we offer a digital
telemetry system. The system operates in government-protected bands, which are not used for private land mobile
radio, business radio services or broadcast analog or digital television. Spacelabs# Intesys# Clinical Suite (ICS)
provides a software suite allowing hospitals to leverage their infrastructure to capture all data from the bedside,
compact and telemetry monitors. Retrospective data formerly only found at a central station monitor is made
available at any PC in the hospital.
In the past few years, Spacelabs# has introduced a number of new products, including the XPREZZON#
patient monitor, followed shortly by the Qube# compact monitor. The Qube# can be used in both bedside and
transport applications. We recently introduced a new Qube# Mini monitor, which has enhanced transport
capabilities. We also introduced a new telemetry transmitter, the AriaTele#, with subsequent product additions to
enable the AriaTele# to broadcast on a number of specialized frequency bands that are prescribed for global
healthcare use. Other recent product introduction were the Xhibit# Central Station, a scalable system providing
clinicians the ability to remotely monitor up to 48 patients and the XprezzNetTM, a high resolution data integration
for electronic medical records vendors such as Cerner and EPIC, which provides unique patient to device
association (P2DA). In June 2015, we introduced the XTR telemetry system. XTR provides a proprietary
arrhythmia detection algorithm, which continuously analyzes and displays seven leads of ECG on Xhibit# or in ICS
clinical access.
In 2017, Spacelabs# introduced the Qube# Mini high-acuity physiological monitor. Qube# Mini is optimized
for patient transport, with wireless connectivity, compact size, and a patent-pending design that enables the monitor
to be quickly attached to IV poles, gurneys, and wheelchairs without the need for special clamps or accessories. The
product complements Spacelabs#’ portfolio of patient monitoring and information systems that support clinical
decision-making.
Our Healthcare division also develops cardiac diagnostic systems, including Holter analyzers and recorders.
Our PathfinderSL# analysis tool provides simple, actionable Holter reports to any PC, inside or outside the hospital.
Our EvoTM Holter recorders provide low cost of ownership through, for example, the elimination of disposable
batteries, memory cards with no moving parts to maintain and other advances. Our Lifecard# CF Holter recorders
are worn by patients for up to seven days in order to capture heart arrhythmias that may occur in a patient only a few
times per week. This product is helpful in identifying the presence of atrial fibrillation. Patients that may be
experiencing even less frequent heart arrhythmias wear our CardioCall# product, which stays with the patient over
several weeks and transmits its findings over the phone to a receiving station in the hospital.
We are also a supplier of ambulatory blood pressure (ABP) monitors which are routinely used by physicians
around the world and by clinical research organizations. Many physicians are using ambulatory blood pressure
monitoring to detect ‘‘white coat’’ hypertension, a condition in which people experience elevated blood pressure in
8
9
The following table sets forth certain information related to the standard security and inspection products that
we currently offer. We do, however, also customize our standard products to suit specific applications and customer
requirements.
Patient Monitoring, Diagnostic Cardiology, and Anesthesia Systems. Our Healthcare division designs,
manufactures and markets products globally to end users primarily under the ‘‘Spacelabs#’’ and ‘‘Statcorp#’’ trade
names.
PRODUCT LINE
Baggage and Parcel
Inspection
PRODUCT NAME /
PRODUCT FAMILY
Rapiscan# 600 series
X-ray systems
TECHNOLOGY
Dual-energy X-ray
Single and multi-view
configuration
AS&E# Gemini#
Combined dual energy
transmission and backscatter
Cargo and Vehicle
Inspection
Rapiscan# Eagle#
AS&E# OmniView#
AS&E# Sentry#
AS&E# ZBV#
AS&E# Z Portal#
AS&E# CarView
AS&E# MINI Z#
Hold (Checked) Baggage
Rapiscan# MVXR 5000
Screening
Rapiscan# RTT#
High energy transmission
X-ray
Backscatter X-ray
Multi-view, dual energy X-ray
explosive detection system
(EDS)
High-speed, stationary gantry
computed tomography
explosive detection system
(EDS)
People Screening
Metor# series metal detectors
Electromagnetic induction
Rapiscan# Secure 1000#
Backscatter X-ray
Radiation Detection
Rapiscan# Radiation Monitors Gamma and neutron detection
of radioactive and nuclear
material
IMS based technology
desktop, hand-held and
walk-though portal explosives
and narcotics detection
Trace Detection
Detectra#
Itemiser# DX
Itemiser# 4DX
Itemiser# 3e
MobileTrace#
Hardened MobileTrace#
EntryScan# 4
MARKET SEGMENT
Checkpoint and customs
inspection at airports,
prisons, border crossings,
government buildings, and
postal facilities, critical
infrastructure protection at
power and chemical plants,
water resource sites as well
as air cargo screening
Checkpoint and air cargo
screening at prisons,
government buildings and
other critical infrastructure
protection applications
Inspection of passenger
vehicles, cargo, trucks, and
rail cars at airports, border
crossings, sea ports and high
threat facilities
Baggage inspection with
automatic explosive detection
at airports and freight
forwarding facilities
Checkpoint inspection at
airports, border crossings,
military checkpoints,
stadiums, prisons and
government facilities
Cargo, vehicle, rail car and
people screening at airports,
border crossings, military
checkpoints, stadiums,
prisons and government
facilities
Checkpoint, hold baggage
and cargo inspection at
airports, nuclear plants,
border crossings, military
checkpoints, stadiums,
prisons and government
facilities
Spacelabs# products include patient monitors for use in perioperative, critical care and emergency care
environments with neonatal, pediatric and adult patients. Our patient monitoring systems comprise monitors and
central nursing stations connected by hardwired or wireless networks, as well as stand-alone monitors where the
patient data can be transported physically from one monitor to another as the patient is moved. These systems
enable hospital staff to access patient data where and when it is required. In addition, these products are designed
with an ‘‘open architecture’’ to interact with hospital information systems. Many of these products allow clinicians
to view and control various software applications on the patient monitor’s display, eliminating the need for separate
computer terminals in the patient’s room. Attending nurses can check laboratory results and other reports, enter
orders, review protocols and complete medical charting at the patient’s bedside.
For electrocardiograph monitoring or multiparameter monitoring of ambulatory patients, we offer a digital
telemetry system. The system operates in government-protected bands, which are not used for private land mobile
radio, business radio services or broadcast analog or digital television. Spacelabs# Intesys# Clinical Suite (ICS)
provides a software suite allowing hospitals to leverage their infrastructure to capture all data from the bedside,
compact and telemetry monitors. Retrospective data formerly only found at a central station monitor is made
available at any PC in the hospital.
In the past few years, Spacelabs# has introduced a number of new products, including the XPREZZON#
patient monitor, followed shortly by the Qube# compact monitor. The Qube# can be used in both bedside and
transport applications. We recently introduced a new Qube# Mini monitor, which has enhanced transport
capabilities. We also introduced a new telemetry transmitter, the AriaTele#, with subsequent product additions to
enable the AriaTele# to broadcast on a number of specialized frequency bands that are prescribed for global
healthcare use. Other recent product introduction were the Xhibit# Central Station, a scalable system providing
clinicians the ability to remotely monitor up to 48 patients and the XprezzNetTM, a high resolution data integration
for electronic medical records vendors such as Cerner and EPIC, which provides unique patient to device
association (P2DA). In June 2015, we introduced the XTR telemetry system. XTR provides a proprietary
arrhythmia detection algorithm, which continuously analyzes and displays seven leads of ECG on Xhibit# or in ICS
clinical access.
In 2017, Spacelabs# introduced the Qube# Mini high-acuity physiological monitor. Qube# Mini is optimized
for patient transport, with wireless connectivity, compact size, and a patent-pending design that enables the monitor
to be quickly attached to IV poles, gurneys, and wheelchairs without the need for special clamps or accessories. The
product complements Spacelabs#’ portfolio of patient monitoring and information systems that support clinical
decision-making.
Our Healthcare division also develops cardiac diagnostic systems, including Holter analyzers and recorders.
Our PathfinderSL# analysis tool provides simple, actionable Holter reports to any PC, inside or outside the hospital.
Our EvoTM Holter recorders provide low cost of ownership through, for example, the elimination of disposable
batteries, memory cards with no moving parts to maintain and other advances. Our Lifecard# CF Holter recorders
are worn by patients for up to seven days in order to capture heart arrhythmias that may occur in a patient only a few
times per week. This product is helpful in identifying the presence of atrial fibrillation. Patients that may be
experiencing even less frequent heart arrhythmias wear our CardioCall# product, which stays with the patient over
several weeks and transmits its findings over the phone to a receiving station in the hospital.
We are also a supplier of ambulatory blood pressure (ABP) monitors which are routinely used by physicians
around the world and by clinical research organizations. Many physicians are using ambulatory blood pressure
monitoring to detect ‘‘white coat’’ hypertension, a condition in which people experience elevated blood pressure in
8
9
the doctor’s office but not in their daily lives. Ambulatory blood pressure monitoring helps improve diagnostic
accuracy and minimize the associated costs of treatment. Spacelabs# OnTrak ambulatory blood pressure system
has been validated for both pediatric and adult patient types and includes the capability to measure activity
correlation with non-invasive blood pressure readings.
Sentinel# 10 represents our latest Cardiology Information Management System, designed to provide an
electronic, enterprise-wide scalable system for diagnostic cardiology. Sentinel# integrates data from Spacelabs#-
branded products into a central enterprise-wide database system that can be accessed by care providers and medical
facility administrators, thereby providing enhanced workflow and efficiencies. The system’s web-based solution
enables the secure transfer of data from multiple remote sites.
Our anesthesia delivery and ventilation group designs and manufactures anesthesia delivery systems and
ventilators. The ARKON# Anesthesia System is a high-performance anesthesia delivery system that offers
functionality, comfort and control. This anesthesia delivery system can be expanded to enable a wide-angle view of
the clinical setting so the clinician can face the patient, as well as other clinical advancements. The ARKON#
complements our BleaseSirius, BleaseFocus and BleaseGenius anesthesia delivery systems. Our portfolio of
anesthesia systems enables us to provide flexible anesthesia solutions for operating room environments, anesthesia
induction areas, day surgery centers, magnetic resonance imaging facilities and other locations where the
administration of anesthesia is required.
In addition, many of the capital-intensive products that Spacelabs# sells have supplies and accessories
associated with them that can represent annuity revenue opportunities.
The following table sets forth a description of the more significant healthcare products that we currently offer:
PRODUCT LINE
Patient Monitoring and
Connectivity
Diagnostic Cardiology
Anesthesia Delivery and
Ventilation
Medical Devices and
Accessories
PRODUCT NAME /
PRODUCT FAMILY
XPREZZON#
Qube#
Qube# Mini
Ultraview# DM3 Dual Monitor
Intesys# Clinical Suite (ICS)
ICS Xprezz
XprezzNet
Flexport#
Xhibit#
Elance#
AriaTele#
Spacelabs# SafeNSound
Ambulatory blood pressure monitors
(various)
OnTrak ABP
Pathfinder# SL
CardioCall#
Lifecard#
EVOTM
CardioExpress# ECG machines
CardioDirect# Stress Testing Systems
Sentinel# Cardiology Data
Management
ARKON#
Blease 700 and 900 series ventilators
BleaseSirius
BleaseSirius EFM
BleaseFocus
UltraCheck#, SoftCheck# and Curve
Blood Pressure Cuffs
Patient Cables and Accessories
Fluid Delivery Unifusors
MARKET SEGMENT
Hospital care areas, outpatient
surgery centers and physician
offices
Hospital cardiology care areas and
physician offices
Ambulatory surgery centers and
operating rooms
All hospital care areas, outpatient
surgery centers and physician
offices
Optoelectronic Devices and Manufacturing Services. Optoelectronic devices generally consist of both
active and passive components. Active components sense light of varying wavelengths and convert the light
detected into electronic signals, whereas passive components amplify, separate or reflect light. The active
components we manufacture consist of silicon, gallium arsenide and indium gallium arsenide photodetectors and
light sources. Passive components include lenses, prisms, filters, mirrors and other precision optical products that
are used by us in the manufacture of our optoelectronic products or are sold to third parties for use in telescopes,
laser printers, copiers, microscopes and other detection and vision equipment. The devices we manufacture are both
standard products and products customized for specific applications and are offered either as components or as
subsystems. Our optoelectronic products and services are provided primarily under the ‘‘OSI Optoelectronics’’
trade name.
In addition to the manufacture of standard and OEM products, we also specialize in designing and
manufacturing customized value-added subsystems for use in a wide range of products and equipment. An
optoelectronic subsystem typically consists of one or more optoelectronic devices that are combined with other
10
11
the doctor’s office but not in their daily lives. Ambulatory blood pressure monitoring helps improve diagnostic
accuracy and minimize the associated costs of treatment. Spacelabs# OnTrak ambulatory blood pressure system
has been validated for both pediatric and adult patient types and includes the capability to measure activity
correlation with non-invasive blood pressure readings.
Sentinel# 10 represents our latest Cardiology Information Management System, designed to provide an
electronic, enterprise-wide scalable system for diagnostic cardiology. Sentinel# integrates data from Spacelabs#-
branded products into a central enterprise-wide database system that can be accessed by care providers and medical
facility administrators, thereby providing enhanced workflow and efficiencies. The system’s web-based solution
enables the secure transfer of data from multiple remote sites.
Our anesthesia delivery and ventilation group designs and manufactures anesthesia delivery systems and
ventilators. The ARKON# Anesthesia System is a high-performance anesthesia delivery system that offers
functionality, comfort and control. This anesthesia delivery system can be expanded to enable a wide-angle view of
the clinical setting so the clinician can face the patient, as well as other clinical advancements. The ARKON#
complements our BleaseSirius, BleaseFocus and BleaseGenius anesthesia delivery systems. Our portfolio of
anesthesia systems enables us to provide flexible anesthesia solutions for operating room environments, anesthesia
induction areas, day surgery centers, magnetic resonance imaging facilities and other locations where the
administration of anesthesia is required.
In addition, many of the capital-intensive products that Spacelabs# sells have supplies and accessories
associated with them that can represent annuity revenue opportunities.
The following table sets forth a description of the more significant healthcare products that we currently offer:
PRODUCT LINE
Patient Monitoring and
Connectivity
Diagnostic Cardiology
Anesthesia Delivery and
Ventilation
Medical Devices and
Accessories
PRODUCT NAME /
PRODUCT FAMILY
XPREZZON#
Qube#
Qube# Mini
Ultraview# DM3 Dual Monitor
Intesys# Clinical Suite (ICS)
ICS Xprezz
XprezzNet
Flexport#
Xhibit#
Elance#
AriaTele#
Spacelabs# SafeNSound
Ambulatory blood pressure monitors
(various)
OnTrak ABP
Pathfinder# SL
CardioCall#
Lifecard#
EVOTM
CardioExpress# ECG machines
CardioDirect# Stress Testing Systems
Sentinel# Cardiology Data
Management
ARKON#
Blease 700 and 900 series ventilators
BleaseSirius
BleaseSirius EFM
BleaseFocus
UltraCheck#, SoftCheck# and Curve
Blood Pressure Cuffs
Patient Cables and Accessories
Fluid Delivery Unifusors
MARKET SEGMENT
Hospital care areas, outpatient
surgery centers and physician
offices
Hospital cardiology care areas and
physician offices
Ambulatory surgery centers and
operating rooms
All hospital care areas, outpatient
surgery centers and physician
offices
Optoelectronic Devices and Manufacturing Services. Optoelectronic devices generally consist of both
active and passive components. Active components sense light of varying wavelengths and convert the light
detected into electronic signals, whereas passive components amplify, separate or reflect light. The active
components we manufacture consist of silicon, gallium arsenide and indium gallium arsenide photodetectors and
light sources. Passive components include lenses, prisms, filters, mirrors and other precision optical products that
are used by us in the manufacture of our optoelectronic products or are sold to third parties for use in telescopes,
laser printers, copiers, microscopes and other detection and vision equipment. The devices we manufacture are both
standard products and products customized for specific applications and are offered either as components or as
subsystems. Our optoelectronic products and services are provided primarily under the ‘‘OSI Optoelectronics’’
trade name.
In addition to the manufacture of standard and OEM products, we also specialize in designing and
manufacturing customized value-added subsystems for use in a wide range of products and equipment. An
optoelectronic subsystem typically consists of one or more optoelectronic devices that are combined with other
10
11
electronic components and packaging for use in an end product. The composition of a subsystem can range from a
simple assembly of various optoelectronic devices that are incorporated into other subsystems (for example, a
printed circuit board containing our optoelectronic devices) to complete end-products (for example, pulse oximetry
equipment).
We also provide electronics design and manufacturing services both in North America, the United Kingdom
and in the Asia Pacific region with enhanced, RoHS-compliant, printed circuit board and cable and harness
assemblies and box-build manufacturing services utilizing state-of-the-art automated surface mount technology
lines. We offer electronics manufacturing services to OEM customers and end users for medical, automotive,
defense, aerospace, industrial and skin care applications that do not utilize optoelectronic devices. We also
manufacture LCD displays for medical, industrial and consumer electronics applications, and flex circuits and
touch panels for OEM customers at the prototype stage. Our electronics manufacturing services are provided
primarily under the ‘‘OSI Electronics,’’ ‘‘APlus Products,’’ ‘‘Briton EMS,’’ ‘‘Union Four’’ and ‘‘Altaflex’’ trade
names.
We develop, manufacture and sell laser-based remote sensing devices that are used to detect and classify
vehicles in toll and traffic management systems under the ‘‘OSI Laserscan’’ and ‘‘Autosense’’ trade names. We
offer solid-state laser products for aerospace, defense, telecommunication and medical applications under the ‘‘OSI
LaserDiode’’ trade name.
The following table sets forth a description of the more significant standard optoelectronics products that we
currently offer. We also customize our standard products to suit specific applications and customer requirements.
PRODUCT LINE
Optoelectronic Components
PRODUCT NAME /
PRODUCT FAMILY
Si and InGaAs Photodiodes and
Avalanche Diodes
UV and XUV
Linear and 2-D Arrays X-Ray
Photodetectors
Position Sensitive Devices
Optical Switches
Silicon and InGaAs Telecom
Devices
Solid State Laser Diodes
Laser Scanners (AS600 through
AS800 Series)
MARKET SEGMENT
Medical diagnostics
instrumentation and analytical
chemistry, oximetry and blood
chemistry, barcode readers,
security scanners and inspection
systems, lidar and laser range
finder, OTDR and test and
measurement instruments, laser
guided munitions, weapon
simulation systems, aircraft gyro
navigation sensors, satellite sun
acquisition sensors, electronic toll
collection (ETC) and toll and
traffic management systems and
laser scanners.
Medical Devices and Accessories
Oximetry Sensors and Accessories Medical devices and
Toll and Traffic Management
Systems, Laser Scanners
Markets, Customers and Applications
instrumentation
Laser based scanners and ETC
hardware and software
Security and Inspection Products. Many security and inspection products were developed in response to
civilian airline hijackings. Consequently, a significant portion of our security and inspection products have been
and continue to be sold for use at airports. Our security and inspection products are also used for security purposes
at locations in addition to airports, such as border crossings, shipping ports, military and other government
installations, freight forwarding facilities, high-profile locations such as U.K. House of Parliament, Buckingham
Palace, the Kremlin and the Vatican and for high-profile events such as the Olympic Games. Furthermore, as
terrorist attacks continue to occur, overall transportation and travel industry demands have increased, resulting in
heightened attention for our security and inspection products. We also provide turnkey security screening solutions,
which can include the construction, staffing and long-term operation of security screening locations for our
customers.
Our customers include, among many others, the U.S. Customs and Border Protection, U.S. Department of
Defense, U.S. Department of State, U.S. Transportation Security Administration and Federal Bureau of Prisons in
the United States, as well as Her Majesty’s Revenue and Customs and Manchester Airport Group in the United
Kingdom, Aeroporto De Paris, Aeroporto De Roma, the Servicio de Administraci´on Tributaria in M´exico, Chek
Lap Kok Airport in Hong Kong, DHL, and United Parcel Service.
Patient Monitoring, Diagnostic Cardiology, and Anesthesia Systems. Our patient monitoring, diagnostic
cardiology and anesthesia systems are manufactured and distributed globally for use in critical care, emergency and
perioperative areas within hospitals as well as physicians’ offices, medical clinics and ambulatory surgery centers.
We also provide wired and wireless networks, clinical information access solutions and ambulatory blood pressure
monitors.
We sell products mainly through integrated delivery networks and group purchasing networks in the U.S., the
NHS Foundation Trust in the United Kingdom, UGAP in France, and to various government funded hospitals in
China, the Middle East and several other parts of Asia.
Optoelectronic Devices and Electronics Manufacturing Services. Our optoelectronic devices and the
electronics we manufacture are used in a broad range of products by a variety of customers. For example, they are
utilized by customers in the following market segments: defense, aerospace and avionics; analytical and medical
imaging; healthcare; telecommunications; homeland security; barcode scanners; toll and traffic management; and
automotive diagnostic systems. Major customers in these segments include Raytheon, Honeywell, UTC Aerospace
Systems, Northrop Grumman, Medtronic, Beckman Coulter, United Technologies, Assa Abloy and Trakka, among
others.
Marketing, Sales and Service
We market and sell our security and inspection products and turnkey security screening solutions globally
through a direct sales and marketing staff located North America, Latin America, Europe, Middle East, Africa, and
Asia, in addition to an expansive global network of independent distributors. This sales staff is supported by a
service organization located in the same regions, as well as a global network of independent distributors. We also
support these sales and customer relations efforts by providing operator training, computerized training and testing
equipment, in-country service support, software upgrades and service training for customer technicians.
We market and sell our patient monitoring, diagnostic cardiology, and anesthesia systems globally through a
direct sales and marketing staff located in North America, Latin America, Europe and Asia, in addition to a global
network of independent distributors. We also support these sales and customer service efforts by providing operator
in-service training, comprehensive interactive eLearning for all monitoring products, software updates and
upgrades and service training for customer biomedical staff and distributors. We also provide IT specialists and
clinical specialists to provide support both before and after product sale.
We market and sell our optoelectronic devices and value-added manufacturing services, through both a direct
sales and marketing staff located in North America, Europe and Asia, and indirectly through a global network of
independent sales representatives and distributors. Our sales staff is supported by an applications engineering group
12
13
electronic components and packaging for use in an end product. The composition of a subsystem can range from a
simple assembly of various optoelectronic devices that are incorporated into other subsystems (for example, a
printed circuit board containing our optoelectronic devices) to complete end-products (for example, pulse oximetry
equipment).
We also provide electronics design and manufacturing services both in North America, the United Kingdom
and in the Asia Pacific region with enhanced, RoHS-compliant, printed circuit board and cable and harness
assemblies and box-build manufacturing services utilizing state-of-the-art automated surface mount technology
lines. We offer electronics manufacturing services to OEM customers and end users for medical, automotive,
defense, aerospace, industrial and skin care applications that do not utilize optoelectronic devices. We also
manufacture LCD displays for medical, industrial and consumer electronics applications, and flex circuits and
touch panels for OEM customers at the prototype stage. Our electronics manufacturing services are provided
primarily under the ‘‘OSI Electronics,’’ ‘‘APlus Products,’’ ‘‘Briton EMS,’’ ‘‘Union Four’’ and ‘‘Altaflex’’ trade
names.
We develop, manufacture and sell laser-based remote sensing devices that are used to detect and classify
vehicles in toll and traffic management systems under the ‘‘OSI Laserscan’’ and ‘‘Autosense’’ trade names. We
offer solid-state laser products for aerospace, defense, telecommunication and medical applications under the ‘‘OSI
LaserDiode’’ trade name.
The following table sets forth a description of the more significant standard optoelectronics products that we
currently offer. We also customize our standard products to suit specific applications and customer requirements.
PRODUCT LINE
Optoelectronic Components
PRODUCT NAME /
PRODUCT FAMILY
Si and InGaAs Photodiodes and
Avalanche Diodes
UV and XUV
Linear and 2-D Arrays X-Ray
Photodetectors
Position Sensitive Devices
Optical Switches
Silicon and InGaAs Telecom
Devices
Solid State Laser Diodes
Laser Scanners (AS600 through
AS800 Series)
MARKET SEGMENT
Medical diagnostics
instrumentation and analytical
chemistry, oximetry and blood
chemistry, barcode readers,
security scanners and inspection
systems, lidar and laser range
finder, OTDR and test and
measurement instruments, laser
guided munitions, weapon
simulation systems, aircraft gyro
navigation sensors, satellite sun
acquisition sensors, electronic toll
collection (ETC) and toll and
traffic management systems and
laser scanners.
Medical Devices and Accessories
Oximetry Sensors and Accessories Medical devices and
Toll and Traffic Management
Systems, Laser Scanners
Markets, Customers and Applications
instrumentation
Laser based scanners and ETC
hardware and software
Security and Inspection Products. Many security and inspection products were developed in response to
civilian airline hijackings. Consequently, a significant portion of our security and inspection products have been
and continue to be sold for use at airports. Our security and inspection products are also used for security purposes
at locations in addition to airports, such as border crossings, shipping ports, military and other government
installations, freight forwarding facilities, high-profile locations such as U.K. House of Parliament, Buckingham
Palace, the Kremlin and the Vatican and for high-profile events such as the Olympic Games. Furthermore, as
terrorist attacks continue to occur, overall transportation and travel industry demands have increased, resulting in
heightened attention for our security and inspection products. We also provide turnkey security screening solutions,
which can include the construction, staffing and long-term operation of security screening locations for our
customers.
Our customers include, among many others, the U.S. Customs and Border Protection, U.S. Department of
Defense, U.S. Department of State, U.S. Transportation Security Administration and Federal Bureau of Prisons in
the United States, as well as Her Majesty’s Revenue and Customs and Manchester Airport Group in the United
Kingdom, Aeroporto De Paris, Aeroporto De Roma, the Servicio de Administraci´on Tributaria in M´exico, Chek
Lap Kok Airport in Hong Kong, DHL, and United Parcel Service.
Patient Monitoring, Diagnostic Cardiology, and Anesthesia Systems. Our patient monitoring, diagnostic
cardiology and anesthesia systems are manufactured and distributed globally for use in critical care, emergency and
perioperative areas within hospitals as well as physicians’ offices, medical clinics and ambulatory surgery centers.
We also provide wired and wireless networks, clinical information access solutions and ambulatory blood pressure
monitors.
We sell products mainly through integrated delivery networks and group purchasing networks in the U.S., the
NHS Foundation Trust in the United Kingdom, UGAP in France, and to various government funded hospitals in
China, the Middle East and several other parts of Asia.
Optoelectronic Devices and Electronics Manufacturing Services. Our optoelectronic devices and the
electronics we manufacture are used in a broad range of products by a variety of customers. For example, they are
utilized by customers in the following market segments: defense, aerospace and avionics; analytical and medical
imaging; healthcare; telecommunications; homeland security; barcode scanners; toll and traffic management; and
automotive diagnostic systems. Major customers in these segments include Raytheon, Honeywell, UTC Aerospace
Systems, Northrop Grumman, Medtronic, Beckman Coulter, United Technologies, Assa Abloy and Trakka, among
others.
Marketing, Sales and Service
We market and sell our security and inspection products and turnkey security screening solutions globally
through a direct sales and marketing staff located North America, Latin America, Europe, Middle East, Africa, and
Asia, in addition to an expansive global network of independent distributors. This sales staff is supported by a
service organization located in the same regions, as well as a global network of independent distributors. We also
support these sales and customer relations efforts by providing operator training, computerized training and testing
equipment, in-country service support, software upgrades and service training for customer technicians.
We market and sell our patient monitoring, diagnostic cardiology, and anesthesia systems globally through a
direct sales and marketing staff located in North America, Latin America, Europe and Asia, in addition to a global
network of independent distributors. We also support these sales and customer service efforts by providing operator
in-service training, comprehensive interactive eLearning for all monitoring products, software updates and
upgrades and service training for customer biomedical staff and distributors. We also provide IT specialists and
clinical specialists to provide support both before and after product sale.
We market and sell our optoelectronic devices and value-added manufacturing services, through both a direct
sales and marketing staff located in North America, Europe and Asia, and indirectly through a global network of
independent sales representatives and distributors. Our sales staff is supported by an applications engineering group
12
13
whose members are available to provide technical support, which includes designing applications, providing
custom tooling and process integration and developing products that meet customer defined specifications.
We consider our maintenance service operations to be an important element of our business. After the
expiration of our standard product warranty periods, we are sometimes engaged by our customers to provide
maintenance services for our security and inspection products through annual maintenance contracts. In addition,
we believe that our expertise in installing, maintaining and operating our security inspection products is an
important factor for customers that are considering engaging us to provide turnkey security screening solutions. We
provide a variety of service and support options for our healthcare customers, including complete hospital on-site
repair and maintenance service and telephone support, parts exchange programs for customers with the internal
expertise to perform a portion of their own service needs and a depot repair center at our division headquarters. We
believe that our international maintenance service capabilities allow us to be competitive in selling our security and
inspection systems as well as our patient monitoring, diagnostic cardiology and anesthesia systems. Furthermore,
we believe that as the installed base of both our security and inspection systems and patient monitoring, diagnostic
cardiology and anesthesia systems increases, revenues generated from such annual maintenance service contracts
and from the sale of replacement parts will increase.
Research and Development
Our security and inspection systems are primarily designed at our facilities in the United States and
internationally in the United Kingdom, Finland and India. These products include mechanical, electrical, analog
and digital electronics, software subsystems and algorithms, which are designed by us. In addition to product
design, we provide system integration services to integrate our products into turnkey systems at the customer site.
We support cooperative research projects with government agencies and provide contract research for government
agencies.
Our patient monitoring, diagnostic cardiology, and anesthesia delivery products are primarily designed at our
facilities in the United States and internationally in the United Kingdom. These products include software,
networking, connectivity, mechanical, electronic and software subsystems, most of which are designed by us. We
are also currently involved, both in the United States and internationally, in certain research projects aimed at
improving our medical systems and at expanding our current product lines.
We design and manufacture optoelectronic devices and we provide electronics manufacturing services
primarily in our facilities in the United States and internationally in the United Kingdom, India, Indonesia,
Malaysia and Singapore. We engineer and manufacture subsystems to solve the specific application needs of our
OEM customers. In addition, we offer entire subsystem design and manufacturing solutions. We consider our
engineering personnel to be an important extension of our core sales and marketing efforts.
In addition to close collaboration with our customers in the design and development of our current products,
we maintain an active program for the development and introduction of new products, enhancements and
improvements to our existing products, including the implementation of new applications of our technology. We
seek to further enhance our research and development program and consider such program to be an important
element of our business and operations. As of June 30, 2017, we engaged approximately 402 full-time engineers,
technicians and support staff. Our research and development expenses were $51.6 million in fiscal 2015,
$49.8 million in fiscal 2016 and $51.0 million in fiscal 2017. We intend to continue to invest in our research and
development efforts in the future.
Manufacturing and Materials
We currently manufacture our security and inspection systems domestically in California, Colorado, and
Massachusetts, and internationally in Malaysia and the United Kingdom. We currently manufacture our patient
monitoring, diagnostic cardiology, anesthesia systems, and related supplies and accessories in Washington. We
outsource manufacturing of certain of our supplies and accessories. We currently manufacture our optoelectronic
devices and provide electronics manufacturing services domestically in California and New Jersey, and
internationally in India, Indonesia, Malaysia, the United Kingdom and Singapore. Most of our high volume, labor
intensive manufacturing and assembly activities are performed at our facilities in India, Indonesia and Malaysia.
Since many of our customers are located in the United States, Europe and Asia, our ability to manufacture products
in these markets and provide follow-on service from offices located in these regions is an important component of
our global strategy.
Our global manufacturing organization has expertise in optoelectronic, microelectronic and integrated
electronics for industrial and automation, medical, aerospace and defense industry applications. Our manufacturing
includes silicon wafer processing and fabrication, optoelectronic device assembly and screening, thin and thick film
microelectronic hybrid assemblies, surface mounted and thru-hole printed circuit board electronic assemblies and
electronics services, including complete turnkey and box-build manufacturing, and flex circuitry. We outsource
certain manufacturing operations, including certain sheet metal fabrication and plastic components.
The principal raw materials and subcomponents used in producing our security and inspection systems consist
of X-ray generators, linear accelerators, radioactive isotopes, detectors, data acquisition and computer systems,
conveyance systems and miscellaneous mechanical and electrical components. A large portion of the
optoelectronic devices, subsystems and circuit card assemblies used in our inspection and detection systems are
manufactured in-house. The majority of our X-ray generators, linear accelerators, radioactive isotopes and
conveyance systems used in our cargo and vehicle inspection systems are purchased from unaffiliated third party
providers.
The principal raw materials and subcomponents used in producing our patient monitoring, diagnostic
cardiology and anesthesia systems and related supplies and accessories consist of printed circuit boards, housings,
mechanical assemblies, pneumatic devices, touch screens, medical grade displays, cables, filters, textiles, fabric,
gauges, fittings, tubing and packaging materials. We purchase certain devices, including computers, peripheral
accessories and remote displays, from unaffiliated third party providers.
The principal raw materials and subcomponents used in producing our optoelectronic devices and electronic
subsystems consist of silicon wafers, electronic components, light emitting diodes, scintillation crystals, passive
optical components, printed circuit boards and packaging materials. The silicon- based optoelectronic devices
manufactured by us are critical components in most of our products and subsystems. We purchase silicon wafers
and other electronic components from unaffiliated third party providers.
For cost, quality control and efficiency reasons, at times we purchase raw materials, parts and subcomponents
only from single vendors with whom we have ongoing relationships. We do, however, qualify second sources for
many of our raw materials, parts and critical components. We purchase the materials pursuant to purchase orders
placed from time to time in the ordinary course of business. Although to date none of our divisions has experienced
any significant shortages or material delays in obtaining any of its raw materials or subcomponents, it is possible
that we may face such shortages or delays in one or more materials in the future.
Trademarks and Tradenames, Patents, and Licenses
Trademarks and Tradenames. We have used, registered and applied to register certain trademarks and
service marks to distinguish our products, technologies and services from those of our competitors in the United
14
15
whose members are available to provide technical support, which includes designing applications, providing
custom tooling and process integration and developing products that meet customer defined specifications.
We consider our maintenance service operations to be an important element of our business. After the
expiration of our standard product warranty periods, we are sometimes engaged by our customers to provide
maintenance services for our security and inspection products through annual maintenance contracts. In addition,
we believe that our expertise in installing, maintaining and operating our security inspection products is an
important factor for customers that are considering engaging us to provide turnkey security screening solutions. We
provide a variety of service and support options for our healthcare customers, including complete hospital on-site
repair and maintenance service and telephone support, parts exchange programs for customers with the internal
expertise to perform a portion of their own service needs and a depot repair center at our division headquarters. We
believe that our international maintenance service capabilities allow us to be competitive in selling our security and
inspection systems as well as our patient monitoring, diagnostic cardiology and anesthesia systems. Furthermore,
we believe that as the installed base of both our security and inspection systems and patient monitoring, diagnostic
cardiology and anesthesia systems increases, revenues generated from such annual maintenance service contracts
and from the sale of replacement parts will increase.
Research and Development
Our security and inspection systems are primarily designed at our facilities in the United States and
internationally in the United Kingdom, Finland and India. These products include mechanical, electrical, analog
and digital electronics, software subsystems and algorithms, which are designed by us. In addition to product
design, we provide system integration services to integrate our products into turnkey systems at the customer site.
We support cooperative research projects with government agencies and provide contract research for government
agencies.
Our patient monitoring, diagnostic cardiology, and anesthesia delivery products are primarily designed at our
facilities in the United States and internationally in the United Kingdom. These products include software,
networking, connectivity, mechanical, electronic and software subsystems, most of which are designed by us. We
are also currently involved, both in the United States and internationally, in certain research projects aimed at
improving our medical systems and at expanding our current product lines.
We design and manufacture optoelectronic devices and we provide electronics manufacturing services
primarily in our facilities in the United States and internationally in the United Kingdom, India, Indonesia,
Malaysia and Singapore. We engineer and manufacture subsystems to solve the specific application needs of our
OEM customers. In addition, we offer entire subsystem design and manufacturing solutions. We consider our
engineering personnel to be an important extension of our core sales and marketing efforts.
In addition to close collaboration with our customers in the design and development of our current products,
we maintain an active program for the development and introduction of new products, enhancements and
improvements to our existing products, including the implementation of new applications of our technology. We
seek to further enhance our research and development program and consider such program to be an important
element of our business and operations. As of June 30, 2017, we engaged approximately 402 full-time engineers,
technicians and support staff. Our research and development expenses were $51.6 million in fiscal 2015,
$49.8 million in fiscal 2016 and $51.0 million in fiscal 2017. We intend to continue to invest in our research and
development efforts in the future.
Manufacturing and Materials
We currently manufacture our security and inspection systems domestically in California, Colorado, and
Massachusetts, and internationally in Malaysia and the United Kingdom. We currently manufacture our patient
monitoring, diagnostic cardiology, anesthesia systems, and related supplies and accessories in Washington. We
outsource manufacturing of certain of our supplies and accessories. We currently manufacture our optoelectronic
devices and provide electronics manufacturing services domestically in California and New Jersey, and
internationally in India, Indonesia, Malaysia, the United Kingdom and Singapore. Most of our high volume, labor
intensive manufacturing and assembly activities are performed at our facilities in India, Indonesia and Malaysia.
Since many of our customers are located in the United States, Europe and Asia, our ability to manufacture products
in these markets and provide follow-on service from offices located in these regions is an important component of
our global strategy.
Our global manufacturing organization has expertise in optoelectronic, microelectronic and integrated
electronics for industrial and automation, medical, aerospace and defense industry applications. Our manufacturing
includes silicon wafer processing and fabrication, optoelectronic device assembly and screening, thin and thick film
microelectronic hybrid assemblies, surface mounted and thru-hole printed circuit board electronic assemblies and
electronics services, including complete turnkey and box-build manufacturing, and flex circuitry. We outsource
certain manufacturing operations, including certain sheet metal fabrication and plastic components.
The principal raw materials and subcomponents used in producing our security and inspection systems consist
of X-ray generators, linear accelerators, radioactive isotopes, detectors, data acquisition and computer systems,
conveyance systems and miscellaneous mechanical and electrical components. A large portion of the
optoelectronic devices, subsystems and circuit card assemblies used in our inspection and detection systems are
manufactured in-house. The majority of our X-ray generators, linear accelerators, radioactive isotopes and
conveyance systems used in our cargo and vehicle inspection systems are purchased from unaffiliated third party
providers.
The principal raw materials and subcomponents used in producing our patient monitoring, diagnostic
cardiology and anesthesia systems and related supplies and accessories consist of printed circuit boards, housings,
mechanical assemblies, pneumatic devices, touch screens, medical grade displays, cables, filters, textiles, fabric,
gauges, fittings, tubing and packaging materials. We purchase certain devices, including computers, peripheral
accessories and remote displays, from unaffiliated third party providers.
The principal raw materials and subcomponents used in producing our optoelectronic devices and electronic
subsystems consist of silicon wafers, electronic components, light emitting diodes, scintillation crystals, passive
optical components, printed circuit boards and packaging materials. The silicon- based optoelectronic devices
manufactured by us are critical components in most of our products and subsystems. We purchase silicon wafers
and other electronic components from unaffiliated third party providers.
For cost, quality control and efficiency reasons, at times we purchase raw materials, parts and subcomponents
only from single vendors with whom we have ongoing relationships. We do, however, qualify second sources for
many of our raw materials, parts and critical components. We purchase the materials pursuant to purchase orders
placed from time to time in the ordinary course of business. Although to date none of our divisions has experienced
any significant shortages or material delays in obtaining any of its raw materials or subcomponents, it is possible
that we may face such shortages or delays in one or more materials in the future.
Trademarks and Tradenames, Patents, and Licenses
Trademarks and Tradenames. We have used, registered and applied to register certain trademarks and
service marks to distinguish our products, technologies and services from those of our competitors in the United
14
15
States and in foreign countries. We enforce our trademark, service mark and trade name rights in the United States
and abroad.
Patents. We possess rights to a number of U.S. and foreign patents relating to various aspects of our security
and inspection products, healthcare products and optoelectronic devices and subsystems. Our current patents will
expire at various times between 2017 and 2064. However, it remains possible that pending patent applications or
other applications that may be filed may not result in issued patents. In addition, issued patents may not survive
challenges to their validity or enforceability, or may be found to not be infringed by any third parties. Although we
believe that our patents have value, our patents, or any additional patents that may be issued in the future, may not be
able to provide meaningful protection from competition.
Licenses. Our Security, Healthcare and Optoelectronics and Manufacturing divisions have each entered into
a variety of license arrangements under which certain third parties are permitted to manufacture, market, and/or sell
a limited number of the products that we offer and/or to service various types of software, data, equipment,
components and enhancements to our own proprietary technology.
We believe that our trademarks and tradenames, patents and licenses are important to our business. The loss of
some of our trademarks, patents or licenses might have a negative impact on our financial results and operations.
Nevertheless, with the exception of the loss of either the Spacelabs#, Rapiscan#, or AS&E# trademarks, the impact
of the loss of any single trademark, patent or license would not likely have a material adverse effect on our business.
As of June 30, 2017, the Spacelabs# brand is protected by both pending and registered trademarks in 27 countries;
the Rapiscan# brand is protected by both pending and registered trademarks in 15 countries, and the AS&E# brand
is protected by both pending and registered trademarks in seven countries.
Regulation of Medical Devices
The patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and market are subject
to regulation by numerous government agencies, principally the U.S. Food and Drug Administration (FDA), and by
other federal, state, local and foreign authorities. These systems are also subject to various U.S. and foreign
electrical safety standards. Our medical device product candidates must undergo an extensive government
regulatory clearance or approval process prior to sale in the United States and other countries, and the lengthy
process of clinical development and submissions for approvals, as well as the continuing need for compliance with
applicable laws and regulations, require the expenditure of substantial resources.
United States.
In the United States, the FDA has broad regulatory powers with respect to pre-clinical and
clinical testing of new medical devices and the designing, manufacturing, labeling, storage, record keeping,
marketing, advertising, promotion, distribution, post-approval monitoring and reporting and import and export of
medical devices. Unless an exemption applies, federal law and FDA regulations require that all new or significantly
modified medical devices introduced into the market be preceded either by a pre-market notification clearance
order under section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA), or an approved pre-market
approval (PMA) application. Under the FDCA, medical devices are classified into one of three classes—Class I,
Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control
needed to provide reasonable assurances with respect to safety and effectiveness. Class I devices are those for which
safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General
Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation (QSR)
facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and
non-misleading labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also
require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most
Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can
include performance standards, guidelines and post-market surveillance. Most Class II devices are subject to
premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is
accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must
submit to the FDA a premarket notification, demonstrating that the product for which clearance has been sought is
substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before
May 28, 1976 for which the FDA had not yet called for the submission of pre-market approval applications. To be
substantially equivalent, the proposed device must have the same intended use as the predicate device, and either
have the same technological characteristics as the predicate device or have different technological characteristics
and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes
required to support substantial equivalence.
After a 510(k) notice is submitted, the FDA determines whether to accept it for substantive review. If it lacks
necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted
for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k)
notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer,
and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the
FDA may require further information, including clinical data, to make a determination regarding substantial
equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially
equivalent, it will grant clearance to commercially market the device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k)
clearance or, depending on the modification, could require a PMA application. The FDA requires each
manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with
a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination regarding whether a new
premarket submission is required for the modification of an existing device, the FDA can require the manufacturer
to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is
obtained. If the FDA requires us to seek 510(k) clearance or approval of a PMA application for any modifications to
a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain
this clearance or approval. In addition, in these circumstances, we may be subject to significant regulatory fines or
penalties for failure to submit the requisite PMA application(s). In addition, the FDA is currently evaluating the
510(k) process and may make substantial changes to industry requirements.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or
life-sustaining devices, or implantable devices, in addition to those deemed not substantially equivalent following
the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the
General Controls and Special Controls described above. Therefore, these devices are subject to the PMA
application process, which is generally more costly and time consuming than the 510(k) process. To date, all of the
patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and sell in the United States have
required only 510(k) pre-market notification clearance.
FDA clearance or approval, when granted, may entail limitations on the indicated uses for which a product may
be marketed, and such product approvals, once granted, may be withdrawn if problems occur after initial marketing.
Manufacturers of FDA-regulated products are subject to pervasive and continuing governmental regulation,
including, but not limited to, the registration and listing regulation, which requires manufacturers to register all
manufacturing facilities and list all medical devices placed into commercial distribution; the QSR, which requires
manufacturers, including third party manufacturers, to follow elaborate design, testing, production, control,
supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during
the manufacturing process; labeling regulations and unique device identification requirements; advertising and
promotion requirements; restrictions on sale, distribution or use of a device; PMA annual reporting requirements;
16
17
States and in foreign countries. We enforce our trademark, service mark and trade name rights in the United States
and abroad.
Patents. We possess rights to a number of U.S. and foreign patents relating to various aspects of our security
and inspection products, healthcare products and optoelectronic devices and subsystems. Our current patents will
expire at various times between 2017 and 2064. However, it remains possible that pending patent applications or
other applications that may be filed may not result in issued patents. In addition, issued patents may not survive
challenges to their validity or enforceability, or may be found to not be infringed by any third parties. Although we
believe that our patents have value, our patents, or any additional patents that may be issued in the future, may not be
able to provide meaningful protection from competition.
Licenses. Our Security, Healthcare and Optoelectronics and Manufacturing divisions have each entered into
a variety of license arrangements under which certain third parties are permitted to manufacture, market, and/or sell
a limited number of the products that we offer and/or to service various types of software, data, equipment,
components and enhancements to our own proprietary technology.
We believe that our trademarks and tradenames, patents and licenses are important to our business. The loss of
some of our trademarks, patents or licenses might have a negative impact on our financial results and operations.
Nevertheless, with the exception of the loss of either the Spacelabs#, Rapiscan#, or AS&E# trademarks, the impact
of the loss of any single trademark, patent or license would not likely have a material adverse effect on our business.
As of June 30, 2017, the Spacelabs# brand is protected by both pending and registered trademarks in 27 countries;
the Rapiscan# brand is protected by both pending and registered trademarks in 15 countries, and the AS&E# brand
is protected by both pending and registered trademarks in seven countries.
Regulation of Medical Devices
The patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and market are subject
to regulation by numerous government agencies, principally the U.S. Food and Drug Administration (FDA), and by
other federal, state, local and foreign authorities. These systems are also subject to various U.S. and foreign
electrical safety standards. Our medical device product candidates must undergo an extensive government
regulatory clearance or approval process prior to sale in the United States and other countries, and the lengthy
process of clinical development and submissions for approvals, as well as the continuing need for compliance with
applicable laws and regulations, require the expenditure of substantial resources.
United States.
In the United States, the FDA has broad regulatory powers with respect to pre-clinical and
clinical testing of new medical devices and the designing, manufacturing, labeling, storage, record keeping,
marketing, advertising, promotion, distribution, post-approval monitoring and reporting and import and export of
medical devices. Unless an exemption applies, federal law and FDA regulations require that all new or significantly
modified medical devices introduced into the market be preceded either by a pre-market notification clearance
order under section 510(k) of the Federal Food, Drug and Cosmetic Act (FDCA), or an approved pre-market
approval (PMA) application. Under the FDCA, medical devices are classified into one of three classes—Class I,
Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control
needed to provide reasonable assurances with respect to safety and effectiveness. Class I devices are those for which
safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General
Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation (QSR)
facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and
non-misleading labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also
require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most
Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls, which can
include performance standards, guidelines and post-market surveillance. Most Class II devices are subject to
premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is
accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must
submit to the FDA a premarket notification, demonstrating that the product for which clearance has been sought is
substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before
May 28, 1976 for which the FDA had not yet called for the submission of pre-market approval applications. To be
substantially equivalent, the proposed device must have the same intended use as the predicate device, and either
have the same technological characteristics as the predicate device or have different technological characteristics
and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes
required to support substantial equivalence.
After a 510(k) notice is submitted, the FDA determines whether to accept it for substantive review. If it lacks
necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted
for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k)
notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer,
and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the
FDA may require further information, including clinical data, to make a determination regarding substantial
equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially
equivalent, it will grant clearance to commercially market the device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k)
clearance or, depending on the modification, could require a PMA application. The FDA requires each
manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with
a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination regarding whether a new
premarket submission is required for the modification of an existing device, the FDA can require the manufacturer
to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is
obtained. If the FDA requires us to seek 510(k) clearance or approval of a PMA application for any modifications to
a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain
this clearance or approval. In addition, in these circumstances, we may be subject to significant regulatory fines or
penalties for failure to submit the requisite PMA application(s). In addition, the FDA is currently evaluating the
510(k) process and may make substantial changes to industry requirements.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or
life-sustaining devices, or implantable devices, in addition to those deemed not substantially equivalent following
the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the
General Controls and Special Controls described above. Therefore, these devices are subject to the PMA
application process, which is generally more costly and time consuming than the 510(k) process. To date, all of the
patient monitoring, diagnostic cardiology and anesthesia systems we manufacture and sell in the United States have
required only 510(k) pre-market notification clearance.
FDA clearance or approval, when granted, may entail limitations on the indicated uses for which a product may
be marketed, and such product approvals, once granted, may be withdrawn if problems occur after initial marketing.
Manufacturers of FDA-regulated products are subject to pervasive and continuing governmental regulation,
including, but not limited to, the registration and listing regulation, which requires manufacturers to register all
manufacturing facilities and list all medical devices placed into commercial distribution; the QSR, which requires
manufacturers, including third party manufacturers, to follow elaborate design, testing, production, control,
supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during
the manufacturing process; labeling regulations and unique device identification requirements; advertising and
promotion requirements; restrictions on sale, distribution or use of a device; PMA annual reporting requirements;
16
17
the FDA’s general prohibition against promoting products for unapproved or ‘‘off-label’’ uses; the Medical Device
Reporting (MDR) regulation, which requires that manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death
or serious injury if it were to reoccur; medical device correction and removal reporting regulations, which require
that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk
to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; recall
requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious
adverse health consequences or death; an order of repair, replacement or refund; device tracking requirements; and
post-approval study and post-market surveillance requirements. The FDA has also established a Unique Device
Identification (‘‘UDI’’) system that will be phased in over several years. The UDI system requires manufacturers to
mark certain medical devices distributed in the United States with unique device identifiers.
The FDA recently finalized its guidance for managing post-market cybersecurity for connected medical
devices. This guidance places additional expectations on our Healthcare division to build in cybersecurity controls
when it designs and develops its devices to assure safe performance in the face of cyber threats. It is also incumbent
on us to monitor third party software for new vulnerabilities, and verify and validate any software updates or
patches meant to address vulnerabilities.
Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the
FDA. Failure to comply with the applicable United States medical device regulatory requirements could result in,
among other things, warning letters, untitled letters, fines, injunctions, consent decrees, civil penalties,
unanticipated expenditures, repairs, replacements, refunds, recalls or seizures of products, operating restrictions,
total or partial suspension of production, the FDA’s refusal to issue certificates to foreign governments needed to
export products for sale in other countries, the FDA’s refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product clearances or approvals and criminal prosecution.
Coverage and Reimbursement. Government and private sector initiatives to limit the growth of healthcare
costs, including price regulation and competitive pricing, coverage and payment policies, comparative effectiveness
therapies, technology assessments and managed care arrangements, are continuing in many countries where we do
business, including the United States, Europe and Asia. As a result of these changes, the marketplace has placed
increased emphasis on the delivery of more cost-effective medical therapies. In addition, because there is generally
no separate reimbursement from third-party payers to our customers for many of our products, the additional costs
associated with the use of our products can impact the profit margin of our customers. Accordingly, these various
initiatives have created increased price sensitivity over healthcare products generally and may impact demand for
our products and technologies.
Healthcare cost containment efforts have also prompted domestic hospitals and other customers of medical
devices to consolidate into larger purchasing groups to enhance purchasing power, and this trend is expected to
continue. The medical device industry has also experienced some consolidation, partly in order to offer a broader
range of products to large purchasers. As a result, transactions with customers are larger, more complex and tend to
involve more long-term contracts than in the past. These larger customers, due to their enhanced purchasing power,
may attempt to increase the pressure on product pricing.
Significant healthcare reforms have had an impact on medical device manufacturer and hospital revenues. For
example, the Affordable Care Act requires the medical device industry to subsidize healthcare reform in the form of
a 2.3% excise tax on United States sales of most medical devices, which went into effect in 2013. The Consolidated
Appropriations Act, 2016, signed into law in December 2015, includes a two-year moratorium (January 1, 2016 -
December 31, 2017) on the excise tax. Other legislative actions have resulted in reductions in Medicare payments to
hospital providers.
The Patient Protection and Affordable Care Act as amended by the Health Care and Education and
Reconciliation Act of 2010, collectively referred to as the Affordable Care Act, is a sweeping measure designed to
expand access to affordable health insurance, control healthcare spending and improve healthcare quality. Many
states have also adopted or are considering changes in healthcare policies, in part due to state budgetary pressures.
Because implementation of some provisions of the Affordable Care Act remains unsettled, it is uncertain what
effect that law and state law changes or proposed changes may have on our business. Since the 2016 election of
President Trump and Republican majorities in both houses of Congress, there have been numerous efforts to repeal,
replace, modify or delay implementation of the Affordable Care Act (although these efforts are uncertain in light of
the failed efforts in the Senate to pass repeal-and-replace legislation). In January 2017, President Trump signed an
executive order waiving various provisions under the Affrodable Care Act and it is not known how the Trump
Administration will proceed if repeal-and-replace legislation is not passed by Congress. This has created
uncertainty in the market, which could result in reduced demand for our products, additional pricing pressure, and
increased demand for new and more flexible payment structures.
Other Healthcare Laws.
In addition to FDA restrictions on marketing and promotion of drugs and devices,
other federal and state laws restrict our business practices. These laws include, without limitation, data privacy and
security laws, anti-kickback and false claims laws, and transparency laws regarding payments or other items of
value provided to healthcare providers.
As a participant in the healthcare industry, we are subject to extensive regulations protecting the privacy and
security of patient health information that we receive, including the Health Insurance Portability and Accountability
Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of
2009 (HITECH), which was enacted as part of the American Recovery and Reinvestment Act of 2009. Among
other things, these regulations impose extensive requirements for maintaining the privacy and security of
individually identifiable health information, known as ‘‘protected health information.’’ The HIPAA privacy
regulations do not preempt state laws and regulations relating to personal information that may also apply to us. Our
failure to comply with these regulations could expose us to civil and criminal sanctions.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, to induce or in return for the purchasing, leasing, ordering, or arranging for or recommending the
purchase, lease or order of items or services for which payment may be made, in whole or in part, under Medicare,
Medicaid or other federal healthcare programs. The term ‘‘remuneration’’ has been broadly interpreted to include
anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some
common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Further, a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal civil False Claims Act.
The federal False Claims Act prohibits, among other things, any person or entity from knowingly presenting,
or causing to be presented, a false or fraudulent claim for payment or approval to the federal government, or
knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent
claim to the federal government. A claim includes ‘‘any request or demand’’ for money or property presented to the
U.S. Government. Medical device manufacturers have been held liable under these laws if they are deemed to cause
the submission of false or fraudulent claims by, for example, providing customers with inaccurate billing or coding
information.
The HIPAA provisions also created federal criminal statutes that prohibit among other actions, knowingly and
willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private
third-party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the
18
19
the FDA’s general prohibition against promoting products for unapproved or ‘‘off-label’’ uses; the Medical Device
Reporting (MDR) regulation, which requires that manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death
or serious injury if it were to reoccur; medical device correction and removal reporting regulations, which require
that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk
to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; recall
requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious
adverse health consequences or death; an order of repair, replacement or refund; device tracking requirements; and
post-approval study and post-market surveillance requirements. The FDA has also established a Unique Device
Identification (‘‘UDI’’) system that will be phased in over several years. The UDI system requires manufacturers to
mark certain medical devices distributed in the United States with unique device identifiers.
The FDA recently finalized its guidance for managing post-market cybersecurity for connected medical
devices. This guidance places additional expectations on our Healthcare division to build in cybersecurity controls
when it designs and develops its devices to assure safe performance in the face of cyber threats. It is also incumbent
on us to monitor third party software for new vulnerabilities, and verify and validate any software updates or
patches meant to address vulnerabilities.
Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the
FDA. Failure to comply with the applicable United States medical device regulatory requirements could result in,
among other things, warning letters, untitled letters, fines, injunctions, consent decrees, civil penalties,
unanticipated expenditures, repairs, replacements, refunds, recalls or seizures of products, operating restrictions,
total or partial suspension of production, the FDA’s refusal to issue certificates to foreign governments needed to
export products for sale in other countries, the FDA’s refusal to grant future premarket clearances or approvals,
withdrawals or suspensions of current product clearances or approvals and criminal prosecution.
Coverage and Reimbursement. Government and private sector initiatives to limit the growth of healthcare
costs, including price regulation and competitive pricing, coverage and payment policies, comparative effectiveness
therapies, technology assessments and managed care arrangements, are continuing in many countries where we do
business, including the United States, Europe and Asia. As a result of these changes, the marketplace has placed
increased emphasis on the delivery of more cost-effective medical therapies. In addition, because there is generally
no separate reimbursement from third-party payers to our customers for many of our products, the additional costs
associated with the use of our products can impact the profit margin of our customers. Accordingly, these various
initiatives have created increased price sensitivity over healthcare products generally and may impact demand for
our products and technologies.
Healthcare cost containment efforts have also prompted domestic hospitals and other customers of medical
devices to consolidate into larger purchasing groups to enhance purchasing power, and this trend is expected to
continue. The medical device industry has also experienced some consolidation, partly in order to offer a broader
range of products to large purchasers. As a result, transactions with customers are larger, more complex and tend to
involve more long-term contracts than in the past. These larger customers, due to their enhanced purchasing power,
may attempt to increase the pressure on product pricing.
Significant healthcare reforms have had an impact on medical device manufacturer and hospital revenues. For
example, the Affordable Care Act requires the medical device industry to subsidize healthcare reform in the form of
a 2.3% excise tax on United States sales of most medical devices, which went into effect in 2013. The Consolidated
Appropriations Act, 2016, signed into law in December 2015, includes a two-year moratorium (January 1, 2016 -
December 31, 2017) on the excise tax. Other legislative actions have resulted in reductions in Medicare payments to
hospital providers.
The Patient Protection and Affordable Care Act as amended by the Health Care and Education and
Reconciliation Act of 2010, collectively referred to as the Affordable Care Act, is a sweeping measure designed to
expand access to affordable health insurance, control healthcare spending and improve healthcare quality. Many
states have also adopted or are considering changes in healthcare policies, in part due to state budgetary pressures.
Because implementation of some provisions of the Affordable Care Act remains unsettled, it is uncertain what
effect that law and state law changes or proposed changes may have on our business. Since the 2016 election of
President Trump and Republican majorities in both houses of Congress, there have been numerous efforts to repeal,
replace, modify or delay implementation of the Affordable Care Act (although these efforts are uncertain in light of
the failed efforts in the Senate to pass repeal-and-replace legislation). In January 2017, President Trump signed an
executive order waiving various provisions under the Affrodable Care Act and it is not known how the Trump
Administration will proceed if repeal-and-replace legislation is not passed by Congress. This has created
uncertainty in the market, which could result in reduced demand for our products, additional pricing pressure, and
increased demand for new and more flexible payment structures.
Other Healthcare Laws.
In addition to FDA restrictions on marketing and promotion of drugs and devices,
other federal and state laws restrict our business practices. These laws include, without limitation, data privacy and
security laws, anti-kickback and false claims laws, and transparency laws regarding payments or other items of
value provided to healthcare providers.
As a participant in the healthcare industry, we are subject to extensive regulations protecting the privacy and
security of patient health information that we receive, including the Health Insurance Portability and Accountability
Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of
2009 (HITECH), which was enacted as part of the American Recovery and Reinvestment Act of 2009. Among
other things, these regulations impose extensive requirements for maintaining the privacy and security of
individually identifiable health information, known as ‘‘protected health information.’’ The HIPAA privacy
regulations do not preempt state laws and regulations relating to personal information that may also apply to us. Our
failure to comply with these regulations could expose us to civil and criminal sanctions.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, to induce or in return for the purchasing, leasing, ordering, or arranging for or recommending the
purchase, lease or order of items or services for which payment may be made, in whole or in part, under Medicare,
Medicaid or other federal healthcare programs. The term ‘‘remuneration’’ has been broadly interpreted to include
anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some
common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Further, a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal civil False Claims Act.
The federal False Claims Act prohibits, among other things, any person or entity from knowingly presenting,
or causing to be presented, a false or fraudulent claim for payment or approval to the federal government, or
knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent
claim to the federal government. A claim includes ‘‘any request or demand’’ for money or property presented to the
U.S. Government. Medical device manufacturers have been held liable under these laws if they are deemed to cause
the submission of false or fraudulent claims by, for example, providing customers with inaccurate billing or coding
information.
The HIPAA provisions also created federal criminal statutes that prohibit among other actions, knowingly and
willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private
third-party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the
18
19
delivery of or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, a person or entity
does not need to have actual knowledge of the statutes or specific intent to violate them in order to have committed a
violation. Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and
may apply regardless of payer, in addition to items and services reimbursed under Medicaid and other state
programs.
These laws impact the kinds of financial arrangements we may have with hospitals or other potential
purchasers of our products. They particularly impact how we structure our sales offerings, including discount
practices, customer support, education and training programs, physician consulting, research grants and other
service arrangements. If our operations are found to be in violation of any of the health regulatory laws described
above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal
and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation
in government healthcare programs, contractual damages, reputational harm, and the curtailment or restructuring of
our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Additionally, there has been a recent trend of increased federal and state regulation of payments and other
transfers of value provided to healthcare professionals or entities. The federal Physician Payment Sunshine Act
requires that certain device manufacturers track and report to the government information regarding payments and
other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held by
physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the
required information for all payments, transfers of value or ownership or investment interests may result in civil
monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for
‘‘knowing failures.’’ Certain states also mandate implementation of compliance programs, impose restrictions on
device manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other
remuneration to healthcare professionals and entities.
We are subject to similar laws in foreign countries where we conduct business. For example, within the
European Union, the control of unlawful marketing activities is a matter of national law in each of the member
states. The member states of the European Union closely monitor perceived unlawful marketing activity by
companies. We could face civil, criminal and administrative sanctions if any member state determines that we have
breached our obligations under its national laws. Industry associations also closely monitor the activities of member
companies. If these organizations or authorities name us as having breached our obligations under their regulations,
rules or standards, our reputation would suffer and our business and financial condition could be adversely affected.
Foreign Regulations
We are also subject to regulation in the foreign countries in which we manufacture and market our products.
For example, the commercialization of certain products, including medical devices, in the European Union is
regulated under a system that presently requires all such products sold in the European Union to bear the CE
mark—an international symbol of adherence to quality assurance standards. Our manufacturing facilities in
Hawthorne, California; Snoqualmie, Washington; Johor Bahru, Malaysia; Batam, Indonesia; Hyderabad, India; and
Suzhou, China are all certified to the International Organization for Standardization’s ISO 13485 standard for
quality management. Our Hawthorne, California and Snoqualmie, Washington facilities are also certified to the
requirements of Annex II, section 3 of the Directive 93/42/EEC on Medical Devices, which allows them to
self-certify that manufactured products can bear the CE mark. Further, the implementation of the Restriction of
Hazardous Substance Directive (‘‘ROHS’’) requires that certain products, including medical devices, shipped into
the European Union eliminate targeted ROHS substances.
Environmental Regulations
We are subject to various environmental laws, directives, and regulations pertaining to the use, storage,
handling and disposal of hazardous substances used, and hazardous wastes generated, in the manufacture of our
products. Such laws mandate the use of controls and practices designed to mitigate the impact of our operations on
the environment, and under such laws we may be held liable for the costs associated with the remediation and
removal of any unintended or previously unknown releases of hazardous substances on, beneath or from our
property and associated operations, including the remediation of hazardous waste disposed off-site. Such laws may
impose liability without regard to whether we knew of, or caused, the release of such hazardous substances. Any
failure by us to comply with present or future regulations could subject us to the imposition of substantial fines,
suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have
a material adverse effect on our business, financial condition and results of operations.
We believe that, except to an extent that would not have a material adverse effect on our business, financial
condition or results of operations, we are currently in compliance with all environmental regulations in connection
with our manufacturing operations, and that we have obtained all environmental permits necessary to conduct our
business. The amount of hazardous substances used, and hazardous wastes generated, by us may increase in the
future depending on changes in our operations. To ensure compliance and practice proper due diligence, we
conduct appropriate environmental audits and investigations at our manufacturing facilities in North America, Asia
Pacific, and Europe, and, to the extent practicable, on all new properties. Our manufacturing facilities conduct
regular internal audits to ensure proper environmental permits and controls are in place to meet changes in
operations. Third-party investigations address matters related to current and former occupants and operations,
historical land use, and regulatory oversight and status of associated properties and/or operations (including
surrounding properties). The purpose of these studies is to identify, as of the date of such report, potential areas of
environmental concern related to past and present activities or from nearby operations. The scope and extent of each
investigation is dependent upon the size and complexity of the property and/or operation and on recommendations
by independent environmental consultants.
We continue to investigate contamination of the soil and groundwater beneath our Hawthorne, California
facility that we believe resulted from unspecified on- and off-site releases occurring prior to our occupancy. The
groundwater contamination is a known regional issue, not limited to our premises or our immediate surroundings.
We continue to take voluntary actions, in cooperation with the local governing agency, to fully investigate the site in
order to develop appropriate remedial actions.
Competition
The markets in which we operate are highly competitive and characterized by evolving customer needs and
rapid technological change. We compete with a number of other manufacturers, some of which have significantly
greater financial, technical and marketing resources than we have. In addition, these competitors may have the
ability to respond more quickly to new or emerging technologies, adapt more quickly to changes in customer
requirements, have stronger customer relationships, have greater name recognition and devote greater resources to
the development, promotion and sale of their products than we do. As a result, we may not be able to compete
successfully against designers and manufacturers of specialized electronic systems and components or within the
markets for security and inspection systems, patient monitoring, diagnostic cardiology, anesthesia systems or
optoelectronic devices. Future competitive pressures may materially and adversely affect our business, financial
condition and results of operations.
In the security and inspection market, competition is based primarily on factors such as product performance,
functionality and quality, government regulatory approvals and qualifications, the overall cost effectiveness of the
system, prior customer relationships, technological capabilities of the products, price, local market presence and
breadth of sales and service organization. We believe that our principal competitors in the market for security and
inspection products are Smiths Detection, L-3 Communications—Security and Detection Systems division, Leidos,
20
21
delivery of or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, a person or entity
does not need to have actual knowledge of the statutes or specific intent to violate them in order to have committed a
violation. Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and
may apply regardless of payer, in addition to items and services reimbursed under Medicaid and other state
programs.
These laws impact the kinds of financial arrangements we may have with hospitals or other potential
purchasers of our products. They particularly impact how we structure our sales offerings, including discount
practices, customer support, education and training programs, physician consulting, research grants and other
service arrangements. If our operations are found to be in violation of any of the health regulatory laws described
above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal
and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation
in government healthcare programs, contractual damages, reputational harm, and the curtailment or restructuring of
our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Additionally, there has been a recent trend of increased federal and state regulation of payments and other
transfers of value provided to healthcare professionals or entities. The federal Physician Payment Sunshine Act
requires that certain device manufacturers track and report to the government information regarding payments and
other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held by
physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the
required information for all payments, transfers of value or ownership or investment interests may result in civil
monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for
‘‘knowing failures.’’ Certain states also mandate implementation of compliance programs, impose restrictions on
device manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other
remuneration to healthcare professionals and entities.
We are subject to similar laws in foreign countries where we conduct business. For example, within the
European Union, the control of unlawful marketing activities is a matter of national law in each of the member
states. The member states of the European Union closely monitor perceived unlawful marketing activity by
companies. We could face civil, criminal and administrative sanctions if any member state determines that we have
breached our obligations under its national laws. Industry associations also closely monitor the activities of member
companies. If these organizations or authorities name us as having breached our obligations under their regulations,
rules or standards, our reputation would suffer and our business and financial condition could be adversely affected.
Foreign Regulations
We are also subject to regulation in the foreign countries in which we manufacture and market our products.
For example, the commercialization of certain products, including medical devices, in the European Union is
regulated under a system that presently requires all such products sold in the European Union to bear the CE
mark—an international symbol of adherence to quality assurance standards. Our manufacturing facilities in
Hawthorne, California; Snoqualmie, Washington; Johor Bahru, Malaysia; Batam, Indonesia; Hyderabad, India; and
Suzhou, China are all certified to the International Organization for Standardization’s ISO 13485 standard for
quality management. Our Hawthorne, California and Snoqualmie, Washington facilities are also certified to the
requirements of Annex II, section 3 of the Directive 93/42/EEC on Medical Devices, which allows them to
self-certify that manufactured products can bear the CE mark. Further, the implementation of the Restriction of
Hazardous Substance Directive (‘‘ROHS’’) requires that certain products, including medical devices, shipped into
the European Union eliminate targeted ROHS substances.
Environmental Regulations
We are subject to various environmental laws, directives, and regulations pertaining to the use, storage,
handling and disposal of hazardous substances used, and hazardous wastes generated, in the manufacture of our
products. Such laws mandate the use of controls and practices designed to mitigate the impact of our operations on
the environment, and under such laws we may be held liable for the costs associated with the remediation and
removal of any unintended or previously unknown releases of hazardous substances on, beneath or from our
property and associated operations, including the remediation of hazardous waste disposed off-site. Such laws may
impose liability without regard to whether we knew of, or caused, the release of such hazardous substances. Any
failure by us to comply with present or future regulations could subject us to the imposition of substantial fines,
suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have
a material adverse effect on our business, financial condition and results of operations.
We believe that, except to an extent that would not have a material adverse effect on our business, financial
condition or results of operations, we are currently in compliance with all environmental regulations in connection
with our manufacturing operations, and that we have obtained all environmental permits necessary to conduct our
business. The amount of hazardous substances used, and hazardous wastes generated, by us may increase in the
future depending on changes in our operations. To ensure compliance and practice proper due diligence, we
conduct appropriate environmental audits and investigations at our manufacturing facilities in North America, Asia
Pacific, and Europe, and, to the extent practicable, on all new properties. Our manufacturing facilities conduct
regular internal audits to ensure proper environmental permits and controls are in place to meet changes in
operations. Third-party investigations address matters related to current and former occupants and operations,
historical land use, and regulatory oversight and status of associated properties and/or operations (including
surrounding properties). The purpose of these studies is to identify, as of the date of such report, potential areas of
environmental concern related to past and present activities or from nearby operations. The scope and extent of each
investigation is dependent upon the size and complexity of the property and/or operation and on recommendations
by independent environmental consultants.
We continue to investigate contamination of the soil and groundwater beneath our Hawthorne, California
facility that we believe resulted from unspecified on- and off-site releases occurring prior to our occupancy. The
groundwater contamination is a known regional issue, not limited to our premises or our immediate surroundings.
We continue to take voluntary actions, in cooperation with the local governing agency, to fully investigate the site in
order to develop appropriate remedial actions.
Competition
The markets in which we operate are highly competitive and characterized by evolving customer needs and
rapid technological change. We compete with a number of other manufacturers, some of which have significantly
greater financial, technical and marketing resources than we have. In addition, these competitors may have the
ability to respond more quickly to new or emerging technologies, adapt more quickly to changes in customer
requirements, have stronger customer relationships, have greater name recognition and devote greater resources to
the development, promotion and sale of their products than we do. As a result, we may not be able to compete
successfully against designers and manufacturers of specialized electronic systems and components or within the
markets for security and inspection systems, patient monitoring, diagnostic cardiology, anesthesia systems or
optoelectronic devices. Future competitive pressures may materially and adversely affect our business, financial
condition and results of operations.
In the security and inspection market, competition is based primarily on factors such as product performance,
functionality and quality, government regulatory approvals and qualifications, the overall cost effectiveness of the
system, prior customer relationships, technological capabilities of the products, price, local market presence and
breadth of sales and service organization. We believe that our principal competitors in the market for security and
inspection products are Smiths Detection, L-3 Communications—Security and Detection Systems division, Leidos,
20
21
CEIA, Nuctech, Analogic, IDSS and Astrophysics. Competition could result in price reductions, reduced margins
and loss of market share. Although our competitors offer products in competition with one or more of our products,
we can supply a variety of system types and offer among the widest array of solutions available from a single
supplier. This variety of technologies also permits us to offer unique hybrid systems to our customers that utilize
two or more of these technologies, thereby optimizing flexibility, performance and cost to meet the customer’s
unique application requirements.
In the patient monitoring, diagnostic cardiology, and anesthesia systems delivery markets, competition is also
based on a variety of factors including product performance, functionality, value and breadth of sales and service
organization. We believe that our principal competitors in the market for patient monitoring, diagnostic cardiology,
anesthesia systems and related supplies are Philips Healthcare, GE Healthcare, Mindray Medical, Mortara
Instrument, Dr¨ager Medical, Nihon Kohden, Penlon, Maquet, iRhythym and Welch Allyn. Competition could result
in price reductions, reduced margins and loss of our market share. We believe that our patient monitoring products
are easier to use than the products of many of our competitors because we offer a consistent user interface
throughout many of our product lines. We also believe that the capability of our monitoring systems to connect
together, and to the hospital IT infrastructure, is a key competitive advantage. Further, while some of our
competitors are also beginning to introduce portal technology, which allows remote access to data from the bedside
monitor, central station or other point of care, we believe that our competing technologies bring valuable, instant
access to labs, radiology and charting at the point of care.
In the markets in which we compete to provide optoelectronic devices and electronics manufacturing services,
competition is based primarily on such factors as expertise in the design and development of optoelectronic devices,
product quality, timeliness of delivery, price, customer technical support and the ability to provide fully integrated
services from application development and design through production. We believe that our major competitors in the
optoelectronic device markets where we provide products and services are Hamamatsu Photonics, First Sensor and
Excelitas Technologies. Because we specialize in custom subsystems requiring a high degree of engineering
expertise, we believe that we generally do not compete to any significant degree with any other large United States,
European or Asian manufacturers of standard optoelectronic components. Competition in the extensive electronic
manufacturing services market ranges from multinational corporations with sales in excess of several billions of
dollars, to large regional competitors and to small local assembly companies. In our experience, the OEM
customers to whom we provide such services prefer to engage companies that offer both local and lower-cost
off-shore facilities. We believe that our primary domestic competitors for these services are Flextronics,
Benchmark Electronics, Plexus, Qual Pro, ESC and Express Manufacturing Inc. In the United Kingdom, our
primary competitors are STI Limited, AsteelFlash and other regional companies. In addition, our high-volume,
low-cost contract manufacturing locations in Southeast Asia compete with other manufacturers in the same region.
Backlog
We currently measure our backlog as quantifiable purchase orders or contracts that have been signed, for
which revenues are expected to be recognized within the next five years. In instances where we are not able to
estimate the value of a purchase order or contract they are not included in backlog.
We ship most of our baggage and parcel inspection, people screening, patient monitoring, diagnostic
cardiology and anesthesia systems and optoelectronic devices and value-added subsystems within one to several
months after receiving an order. However, such shipments may be delayed for a variety of reasons, including any
special design or requirements of the customer. In addition, large orders of security and inspection products
typically require greater lead-times. Fulfillment of orders of our Rapiscan# RTT# hold (checked) baggage
screening equipment generally requires longer lead times. Further, we provide turnkey screening services to certain
customers for which we may recognize revenue over multi-year periods.
Certain of our cargo and vehicle inspection systems may require up to a year of lead-time. We have
experienced some significant shipping delays associated with our cargo and vehicle inspection systems. Such
delays can occur for many reasons, including: (i) additional time necessary to coordinate and conduct factory
inspections with the customer before shipment; (ii) a customer’s need to engage in time-consuming special site
preparation to accommodate the system, over which we have no control or responsibility; (iii) additional fine tuning
of such systems once they are installed; (iv) design or specification changes by the customer; (v) time needed to
obtain export licenses and/or letters of credit; and (vi) delays originating from other contractors on the project.
As of June 30, 2017, our consolidated backlog totaled approximately $738 million, compared to
approximately $623 million as of June 30, 2016. Approximately $227 million of our backlog as of June 30, 2017 is
not reasonably expected to be fulfilled in fiscal year 2018. The backlog includes the large turnkey security
screening program in Mexico that we were awarded in fiscal 2012. As the revenue generated from this program is
recognized, the corresponding backlog decreases. Sales orders underlying our backlog are firm orders; although,
from time to time we may agree to permit a customer to cancel an order or an order may be cancelled for other
reasons. Variations in the size of orders, product mix, or delivery requirements, among other factors, may result in
substantial fluctuations in backlog from period to period. Backlog as of any particular date should not be relied
upon as indicative of our revenues for any future period and cannot be considered a meaningful indicator of our
performance on an annual or quarterly basis.
Employees
As of June 30, 2017, we employed 5,763 people, of whom 3,098 were employed in manufacturing, 402 were
employed in engineering or research and development, 544 were employed in administration, 394 were employed in
sales and marketing and 1,325 were employed in service capacities. Of the total employees, 2,269 were employed in
the Americas, 2,717 were employed in Asia and 777 were employed in Europe. Many of our employees in Europe
have statutory collective bargaining rights. We have never experienced a general work stoppage or strike, and
management believes that our relations with our employees are good.
Available Information
We are subject to the informational requirements of the Exchange Act. Therefore, we file periodic reports,
proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be obtained by visiting the Public Reference Room of the Securities and
Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549 or by calling the Securities and Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an internet
website (http://www.sec.gov) that contains reports, proxy statements and other information that issuers are required
to file electronically.
Our internet address is: http://www.osi-systems.com. The information found on, or otherwise accessible
through, our website is not incorporated into, and does not form a part of this annual report on Form 10-K or any
other report or document we file with or furnish to the Securities and Exchange Commission. We make available,
free of charge through our internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act, and reports filed pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable
after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. Also
available on our website free of charge are our Corporate Governance Guidelines, the Charters of our Nominating
and Governance, Audit, Compensation, Technology and Executive Committees of our Board of Directors and our
Code of Ethics and Conduct (which applies to all Directors and employees, including our principal executive
officer, principal financial officer and principal accounting officer). A copy of this annual report on Form 10-K is
available without charge upon written request addressed to: c/o Secretary, OSI Systems, Inc., 12525 Chadron
Avenue, Hawthorne, CA 90250 or by calling telephone number (310) 978-0516.
22
23
CEIA, Nuctech, Analogic, IDSS and Astrophysics. Competition could result in price reductions, reduced margins
and loss of market share. Although our competitors offer products in competition with one or more of our products,
we can supply a variety of system types and offer among the widest array of solutions available from a single
supplier. This variety of technologies also permits us to offer unique hybrid systems to our customers that utilize
two or more of these technologies, thereby optimizing flexibility, performance and cost to meet the customer’s
unique application requirements.
In the patient monitoring, diagnostic cardiology, and anesthesia systems delivery markets, competition is also
based on a variety of factors including product performance, functionality, value and breadth of sales and service
organization. We believe that our principal competitors in the market for patient monitoring, diagnostic cardiology,
anesthesia systems and related supplies are Philips Healthcare, GE Healthcare, Mindray Medical, Mortara
Instrument, Dr¨ager Medical, Nihon Kohden, Penlon, Maquet, iRhythym and Welch Allyn. Competition could result
in price reductions, reduced margins and loss of our market share. We believe that our patient monitoring products
are easier to use than the products of many of our competitors because we offer a consistent user interface
throughout many of our product lines. We also believe that the capability of our monitoring systems to connect
together, and to the hospital IT infrastructure, is a key competitive advantage. Further, while some of our
competitors are also beginning to introduce portal technology, which allows remote access to data from the bedside
monitor, central station or other point of care, we believe that our competing technologies bring valuable, instant
access to labs, radiology and charting at the point of care.
In the markets in which we compete to provide optoelectronic devices and electronics manufacturing services,
competition is based primarily on such factors as expertise in the design and development of optoelectronic devices,
product quality, timeliness of delivery, price, customer technical support and the ability to provide fully integrated
services from application development and design through production. We believe that our major competitors in the
optoelectronic device markets where we provide products and services are Hamamatsu Photonics, First Sensor and
Excelitas Technologies. Because we specialize in custom subsystems requiring a high degree of engineering
expertise, we believe that we generally do not compete to any significant degree with any other large United States,
European or Asian manufacturers of standard optoelectronic components. Competition in the extensive electronic
manufacturing services market ranges from multinational corporations with sales in excess of several billions of
dollars, to large regional competitors and to small local assembly companies. In our experience, the OEM
customers to whom we provide such services prefer to engage companies that offer both local and lower-cost
off-shore facilities. We believe that our primary domestic competitors for these services are Flextronics,
Benchmark Electronics, Plexus, Qual Pro, ESC and Express Manufacturing Inc. In the United Kingdom, our
primary competitors are STI Limited, AsteelFlash and other regional companies. In addition, our high-volume,
low-cost contract manufacturing locations in Southeast Asia compete with other manufacturers in the same region.
Backlog
We currently measure our backlog as quantifiable purchase orders or contracts that have been signed, for
which revenues are expected to be recognized within the next five years. In instances where we are not able to
estimate the value of a purchase order or contract they are not included in backlog.
We ship most of our baggage and parcel inspection, people screening, patient monitoring, diagnostic
cardiology and anesthesia systems and optoelectronic devices and value-added subsystems within one to several
months after receiving an order. However, such shipments may be delayed for a variety of reasons, including any
special design or requirements of the customer. In addition, large orders of security and inspection products
typically require greater lead-times. Fulfillment of orders of our Rapiscan# RTT# hold (checked) baggage
screening equipment generally requires longer lead times. Further, we provide turnkey screening services to certain
customers for which we may recognize revenue over multi-year periods.
Certain of our cargo and vehicle inspection systems may require up to a year of lead-time. We have
experienced some significant shipping delays associated with our cargo and vehicle inspection systems. Such
delays can occur for many reasons, including: (i) additional time necessary to coordinate and conduct factory
inspections with the customer before shipment; (ii) a customer’s need to engage in time-consuming special site
preparation to accommodate the system, over which we have no control or responsibility; (iii) additional fine tuning
of such systems once they are installed; (iv) design or specification changes by the customer; (v) time needed to
obtain export licenses and/or letters of credit; and (vi) delays originating from other contractors on the project.
As of June 30, 2017, our consolidated backlog totaled approximately $738 million, compared to
approximately $623 million as of June 30, 2016. Approximately $227 million of our backlog as of June 30, 2017 is
not reasonably expected to be fulfilled in fiscal year 2018. The backlog includes the large turnkey security
screening program in Mexico that we were awarded in fiscal 2012. As the revenue generated from this program is
recognized, the corresponding backlog decreases. Sales orders underlying our backlog are firm orders; although,
from time to time we may agree to permit a customer to cancel an order or an order may be cancelled for other
reasons. Variations in the size of orders, product mix, or delivery requirements, among other factors, may result in
substantial fluctuations in backlog from period to period. Backlog as of any particular date should not be relied
upon as indicative of our revenues for any future period and cannot be considered a meaningful indicator of our
performance on an annual or quarterly basis.
Employees
As of June 30, 2017, we employed 5,763 people, of whom 3,098 were employed in manufacturing, 402 were
employed in engineering or research and development, 544 were employed in administration, 394 were employed in
sales and marketing and 1,325 were employed in service capacities. Of the total employees, 2,269 were employed in
the Americas, 2,717 were employed in Asia and 777 were employed in Europe. Many of our employees in Europe
have statutory collective bargaining rights. We have never experienced a general work stoppage or strike, and
management believes that our relations with our employees are good.
Available Information
We are subject to the informational requirements of the Exchange Act. Therefore, we file periodic reports,
proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be obtained by visiting the Public Reference Room of the Securities and
Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549 or by calling the Securities and Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an internet
website (http://www.sec.gov) that contains reports, proxy statements and other information that issuers are required
to file electronically.
Our internet address is: http://www.osi-systems.com. The information found on, or otherwise accessible
through, our website is not incorporated into, and does not form a part of this annual report on Form 10-K or any
other report or document we file with or furnish to the Securities and Exchange Commission. We make available,
free of charge through our internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act, and reports filed pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable
after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. Also
available on our website free of charge are our Corporate Governance Guidelines, the Charters of our Nominating
and Governance, Audit, Compensation, Technology and Executive Committees of our Board of Directors and our
Code of Ethics and Conduct (which applies to all Directors and employees, including our principal executive
officer, principal financial officer and principal accounting officer). A copy of this annual report on Form 10-K is
available without charge upon written request addressed to: c/o Secretary, OSI Systems, Inc., 12525 Chadron
Avenue, Hawthorne, CA 90250 or by calling telephone number (310) 978-0516.
22
23
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange
Commission are descriptions of the risks and uncertainties that could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained in this report. We encourage you to
carefully consider all such risk factors when making investment decisions regarding our company. If any such risks,
or any other risks that we do not currently consider to be material, or which are not known to us, materialize, our
business, financial condition and operating results could be materially adversely affected.
Unfavorable currency exchange rate fluctuations could adversely affect our financial results.
Our international sales and our operations in foreign countries expose us to risks associated with fluctuating
currency values and exchange rates. Gains and losses on the conversion of accounts receivable, accounts payable
and other monetary assets and liabilities to U.S. dollars may contribute to fluctuations in our results of operations.
In addition, since we conduct business in currencies other than the U.S. dollar but report our financial results in U.S.
dollars, increases or decreases in the value of the U.S. dollar relative to other currencies could have an adverse effect
on our results of operations.
Fluctuations in our operating results may cause our stock price to decline.
We face aggressive competition in each of our operating divisions. If we do not compete effectively, our
Given the nature of the markets in which we participate, it is difficult to reliably predict future revenues and
profitability. Changes in competitive, market and economic conditions may cause us to adjust our operations. A
high proportion of our costs are fixed, due in part to our significant sales, research and development and
manufacturing costs. Thus, small declines in revenue could disproportionately affect our operating results. Factors
that may affect our operating results and/or the market price of our Common Stock include, but are not limited to:
• demand for and market acceptance of our products;
• competitive pressures resulting in lower selling prices;
• adverse changes in the level of economic activity in regions in which we do business;
• low or fluctuating levels of political stability in regions in which we do business;
• adverse changes in industries on which we are particularly dependent;
• changes in the portions of our revenue represented by various products and customers;
• delays or problems in the introduction of new products;
• announcements or introductions of new products, services or technological innovations by our competitors;
• variations in our product mix;
• timing and amount of our expenditures in anticipation of future sales;
• availability of equity and credit markets to provide our customers with funding to make equipment
purchases;
• public guidance that we provide regarding future financial results based on facts, judgments and
assumptions made at the time of the publication of the guidance, all of which may change after the
publication of the guidance;
• adverse outcomes in our litigation matters;
• exchange rate fluctuations;
• increased costs of raw materials or supplies;
• changes in the volume or timing of product orders;
• timing of completion of acceptance testing of some of our products;
• changes in regulatory requirements;
• natural disasters;
• changes in general economic factors; and
• non-renewal of significant contracts.
business will be harmed.
We encounter aggressive competition from numerous competitors in each of our divisions. In the security and
inspection and patient monitoring, cardiology and anesthesia systems markets, competition is based primarily on
such factors as product performance, functionality and quality, cost, prior customer relationships, technological
capabilities of the product, price, certification by government authorities, past performance, local market presence
and breadth of sales and service organization. In the optoelectronic devices and electronics manufacturing markets,
competition is based primarily on factors such as expertise in the design and development of optoelectronic devices,
product quality, timeliness of delivery, price, customer technical support and on the ability to provide fully-
integrated services from application development and design through volume subsystem production. We may not
be able to compete effectively with all of our competitors. To remain competitive, we must develop new products
and enhance our existing products and services in a timely manner. We anticipate that we may have to adjust the
prices of many of our products to stay competitive. In addition, new competitors may emerge and entire product
lines or service offerings may be threatened by new technologies or market trends that reduce the value of these
product lines or service offerings.
Continuing terrorist attacks worldwide have increased financial expectations that may not materialize.
Continuing terrorist attacks worldwide create increased interest in our security and inspection systems and
service offerings. However, we are not certain whether the level of demand will continue to be as high as it is now.
We do not know what solutions will continue to be adopted by the U.S. Department of Homeland Security, the U.S.
Department of Defense, and similar agencies in other countries and whether our products will be a part of those
solutions. Additionally, should our products and services be considered as a part of future security solutions, it is
unclear what the demand for our products and services may be and how quickly funding to purchase our products
and services may be made available. These factors may adversely impact us and create unpredictability in revenues
and operating results.
If operators of, or algorithms installed in, our security and inspection systems fail to detect weapons,
explosives or other devices or materials that are used to commit a terrorist act, we could be exposed to product
and professional liability and related claims for which we may not have adequate insurance coverage.
Our business exposes us to potential product liability risks that are inherent in the development,
manufacturing, sale and service of security and inspection systems as well as in the provision of training to our
customers in the use and operation of such systems. Our customers use our security and inspection systems to help
them detect items that could be used in performing terrorist acts or other crimes. Some of our security and
inspection systems require that an operator interpret an image of suspicious items within a bag, parcel, container,
vehicle or other vessel. Others signal to the operator that further investigation is required. In either case, the
training, reliability and competence of the customer’s operator are crucial to the detection of suspicious items.
Security inspection systems that signal to the operator that further investigation is required are sometimes
referred to in the security industry as ‘‘automatic’’ detection systems. Such systems utilize software algorithms to
interpret data produced by the system and to signal to the operator when a dangerous object may be present. Such
24
25
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange
Commission are descriptions of the risks and uncertainties that could cause our actual results to differ materially
from the results contemplated by the forward-looking statements contained in this report. We encourage you to
carefully consider all such risk factors when making investment decisions regarding our company. If any such risks,
or any other risks that we do not currently consider to be material, or which are not known to us, materialize, our
business, financial condition and operating results could be materially adversely affected.
Unfavorable currency exchange rate fluctuations could adversely affect our financial results.
Our international sales and our operations in foreign countries expose us to risks associated with fluctuating
currency values and exchange rates. Gains and losses on the conversion of accounts receivable, accounts payable
and other monetary assets and liabilities to U.S. dollars may contribute to fluctuations in our results of operations.
In addition, since we conduct business in currencies other than the U.S. dollar but report our financial results in U.S.
dollars, increases or decreases in the value of the U.S. dollar relative to other currencies could have an adverse effect
on our results of operations.
Fluctuations in our operating results may cause our stock price to decline.
We face aggressive competition in each of our operating divisions. If we do not compete effectively, our
Given the nature of the markets in which we participate, it is difficult to reliably predict future revenues and
profitability. Changes in competitive, market and economic conditions may cause us to adjust our operations. A
high proportion of our costs are fixed, due in part to our significant sales, research and development and
manufacturing costs. Thus, small declines in revenue could disproportionately affect our operating results. Factors
that may affect our operating results and/or the market price of our Common Stock include, but are not limited to:
• demand for and market acceptance of our products;
• competitive pressures resulting in lower selling prices;
• adverse changes in the level of economic activity in regions in which we do business;
• low or fluctuating levels of political stability in regions in which we do business;
• adverse changes in industries on which we are particularly dependent;
• changes in the portions of our revenue represented by various products and customers;
• delays or problems in the introduction of new products;
• announcements or introductions of new products, services or technological innovations by our competitors;
• variations in our product mix;
• timing and amount of our expenditures in anticipation of future sales;
• availability of equity and credit markets to provide our customers with funding to make equipment
purchases;
• public guidance that we provide regarding future financial results based on facts, judgments and
assumptions made at the time of the publication of the guidance, all of which may change after the
publication of the guidance;
• adverse outcomes in our litigation matters;
• exchange rate fluctuations;
• increased costs of raw materials or supplies;
• changes in the volume or timing of product orders;
• timing of completion of acceptance testing of some of our products;
• changes in regulatory requirements;
• natural disasters;
• changes in general economic factors; and
• non-renewal of significant contracts.
business will be harmed.
We encounter aggressive competition from numerous competitors in each of our divisions. In the security and
inspection and patient monitoring, cardiology and anesthesia systems markets, competition is based primarily on
such factors as product performance, functionality and quality, cost, prior customer relationships, technological
capabilities of the product, price, certification by government authorities, past performance, local market presence
and breadth of sales and service organization. In the optoelectronic devices and electronics manufacturing markets,
competition is based primarily on factors such as expertise in the design and development of optoelectronic devices,
product quality, timeliness of delivery, price, customer technical support and on the ability to provide fully-
integrated services from application development and design through volume subsystem production. We may not
be able to compete effectively with all of our competitors. To remain competitive, we must develop new products
and enhance our existing products and services in a timely manner. We anticipate that we may have to adjust the
prices of many of our products to stay competitive. In addition, new competitors may emerge and entire product
lines or service offerings may be threatened by new technologies or market trends that reduce the value of these
product lines or service offerings.
Continuing terrorist attacks worldwide have increased financial expectations that may not materialize.
Continuing terrorist attacks worldwide create increased interest in our security and inspection systems and
service offerings. However, we are not certain whether the level of demand will continue to be as high as it is now.
We do not know what solutions will continue to be adopted by the U.S. Department of Homeland Security, the U.S.
Department of Defense, and similar agencies in other countries and whether our products will be a part of those
solutions. Additionally, should our products and services be considered as a part of future security solutions, it is
unclear what the demand for our products and services may be and how quickly funding to purchase our products
and services may be made available. These factors may adversely impact us and create unpredictability in revenues
and operating results.
If operators of, or algorithms installed in, our security and inspection systems fail to detect weapons,
explosives or other devices or materials that are used to commit a terrorist act, we could be exposed to product
and professional liability and related claims for which we may not have adequate insurance coverage.
Our business exposes us to potential product liability risks that are inherent in the development,
manufacturing, sale and service of security and inspection systems as well as in the provision of training to our
customers in the use and operation of such systems. Our customers use our security and inspection systems to help
them detect items that could be used in performing terrorist acts or other crimes. Some of our security and
inspection systems require that an operator interpret an image of suspicious items within a bag, parcel, container,
vehicle or other vessel. Others signal to the operator that further investigation is required. In either case, the
training, reliability and competence of the customer’s operator are crucial to the detection of suspicious items.
Security inspection systems that signal to the operator that further investigation is required are sometimes
referred to in the security industry as ‘‘automatic’’ detection systems. Such systems utilize software algorithms to
interpret data produced by the system and to signal to the operator when a dangerous object may be present. Such
24
25
algorithms are probabilistic in nature and are also subject to significant technical limitations. Nevertheless, if such a
system were to fail to signal to an operator when an explosive or other contraband was in fact present, resulting in
significant damage, we could become the subject of significant product liability claims.
Furthermore, security inspection by technological means is circumstance and application-specific. Our
security and inspection systems are not designed to work under all circumstances and can malfunction.
We also offer turnkey security screening solutions under which we perform certain of the security screening
tasks that have historically been performed by our customers. Such tasks include: design, layout and construction of
the security checkpoint where the inspection equipment is located; selection of the security equipment to be used at
the checkpoint; selection, training and management of the personnel operating the checkpoint; operation of the
security screening equipment; interpretation of the images and other signals produced by the security screening
equipment; maintenance and security of the checkpoint as well as other related services. Such projects expose us to
certain professional liability risks that are inherent in performing security inspection services (in live checkpoint
environments and over extended periods of time) for the purpose of assisting our customers in the detection of
contraband items, including items that could be used in performing terrorist acts or other crimes. If a contraband
item were to pass through the checkpoint and be used to perform a terrorist act or other crime, we could become the
subject of significant professional liability claims.
In addition, there are also many other factors beyond our control that could lead to liability claims should an
act of terrorism occur. Past terrorism attacks in the U.S. and in other locations worldwide and the potential for future
attacks have caused commercial insurance for such threats to become extremely difficult to obtain. Although we
have been able to obtain insurance coverage, it is likely that, should we be found liable following a major act of
terrorism, the insurance we currently have in place would not fully cover the claims for damages.
The Support Anti-terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) may not
shield us against all legal claims we may face following an act of terrorism.
The SAFETY Act provides important legal liability protections for providers of qualified anti-terrorism
products and services. Under the SAFETY Act, providers, such as our Security division, may apply to the U.S.
Department of Homeland Security for coverage of the products and services. If granted coverage, such providers
would receive certain legal protections against product liability, professional liability and certain other claims that
could arise following an act of terrorism.
We have applied to the U.S. Department of Homeland Security for many of the products and services offered
by our Security division but we do not enjoy coverage (or the highest level of coverage) for every product line,
model number and service offering that our Security division provides. In addition, the terms of the SAFETY Act
coverage decisions awarded to us by the U.S. Department of Homeland Security contain conditions and
requirements that we may not (or may not be able to) continue to satisfy in the future.
In the future, if we fail to maintain the coverage that we currently enjoy or fail to apply in a timely way for
coverage for new products and services as we acquire or introduce them, or if the U.S. Department of Homeland
Security limits the scope of any coverage previously awarded to us, denies us coverage or continued coverage for a
particular product, product line or service offering, or delays in making decisions about whether to grant us
coverage, we may become exposed to legal claims that the SAFETY Act was otherwise designed to prevent.
The SAFETY Act was not designed to shield providers of qualified anti-terrorism products and services from
all types of claims that may arise from acts of terrorism, including from many types of claims lodged in courts
outside of the United States or acts of terrorism that occur outside of the United States. This too could leave us
exposed to significant legal claims and litigation defense costs despite the SAFETY Act awards we have received.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. We maintain insurance
for certain risks, and we believe our insurance coverage is consistent with general practices within our industry.
However, the amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear
substantial costs. While some of our products are shielded from liability within the U.S. under the SAFETY Act, no
such protection is available outside the U.S., potentially resulting in significant liabilities. The amount of insurance
coverage we maintain may be inadequate to cover these or other claims or liabilities.
Our patient monitoring, diagnostic cardiology and anesthesia systems could give rise to product liability
claims and product recall events that could materially and adversely affect our financial condition and results of
operations.
The development, manufacturing and sale of medical devices expose us to significant risk of product liability
claims, product recalls and, sometimes, product failure claims. We face an inherent business risk of financial
exposure to product liability claims if the use of our medical devices results in personal injury or death. Substantial
product liability litigation currently exists within the medical device industry. Some of our patient monitoring,
diagnostic cardiology and anesthesia systems products may become subject to product liability claims and/or
product recalls. Future product liability claims and/or product recall costs may exceed the limits of our insurance
coverages or such insurance may not continue to be available to us on commercially reasonable terms, or at all. In
addition, a significant product liability claim or product recall could significantly damage our reputation for
producing safe, reliable and effective products, making it more difficult for us to market and sell our products in the
future. Consequently, a product liability claim, product recall or other claim could have a material adverse effect on
our business, financial condition, operating results and cash flows.
If we are unable to sustain high-quality processes for the manufacture and delivery of goods and services,
our reputation could be harmed, our competitive advantage could erode and we could incur significant costs.
Quality is extremely important to us and our customers, due in part to the serious consequences of product
failure. Our quality certifications are critical both to the marketing success of our goods and services and to the
satisfaction of both regulatory and contractual requirements under which we sell many of our products. If we fail to
meet these standards or other standards required in our industries, we could lose customers and market share, our
revenue could decline and we could face significant costs and other liabilities.
As a U.S. Government contractor, we are subject to extensive Federal procurement rules and regulations
as well as contractual obligations that are unique to doing business with the U.S. Government. Non-compliance
with any such rules, regulations or contractual obligations could negatively affect current programs, potential
awards and our ability to do business with the U.S. Government in the future.
U.S. Government contractors must comply with extensive procurement regulations and other requirements
including, but not limited to, those appearing in the Federal Acquisition Regulation (FAR) and its supplements, as
well as specific procurement rules and contractual conditions imposed by various U.S. Government agencies. Many
of these types of requirements do not appear in our contracts with commercial customers or foreign governments.
In particular, U.S. Government contracts typically contain provisions and are subject to laws and regulations
that give the Government agencies rights and remedies not typically found in commercial contracts, including
providing the Government agency with the ability to unilaterally:
• terminate our existing contracts;
• reduce the value of our existing contracts;
• modify some of the terms and conditions in our existing contracts;
26
27
algorithms are probabilistic in nature and are also subject to significant technical limitations. Nevertheless, if such a
system were to fail to signal to an operator when an explosive or other contraband was in fact present, resulting in
significant damage, we could become the subject of significant product liability claims.
Furthermore, security inspection by technological means is circumstance and application-specific. Our
security and inspection systems are not designed to work under all circumstances and can malfunction.
We also offer turnkey security screening solutions under which we perform certain of the security screening
tasks that have historically been performed by our customers. Such tasks include: design, layout and construction of
the security checkpoint where the inspection equipment is located; selection of the security equipment to be used at
the checkpoint; selection, training and management of the personnel operating the checkpoint; operation of the
security screening equipment; interpretation of the images and other signals produced by the security screening
equipment; maintenance and security of the checkpoint as well as other related services. Such projects expose us to
certain professional liability risks that are inherent in performing security inspection services (in live checkpoint
environments and over extended periods of time) for the purpose of assisting our customers in the detection of
contraband items, including items that could be used in performing terrorist acts or other crimes. If a contraband
item were to pass through the checkpoint and be used to perform a terrorist act or other crime, we could become the
subject of significant professional liability claims.
In addition, there are also many other factors beyond our control that could lead to liability claims should an
act of terrorism occur. Past terrorism attacks in the U.S. and in other locations worldwide and the potential for future
attacks have caused commercial insurance for such threats to become extremely difficult to obtain. Although we
have been able to obtain insurance coverage, it is likely that, should we be found liable following a major act of
terrorism, the insurance we currently have in place would not fully cover the claims for damages.
The Support Anti-terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) may not
shield us against all legal claims we may face following an act of terrorism.
The SAFETY Act provides important legal liability protections for providers of qualified anti-terrorism
products and services. Under the SAFETY Act, providers, such as our Security division, may apply to the U.S.
Department of Homeland Security for coverage of the products and services. If granted coverage, such providers
would receive certain legal protections against product liability, professional liability and certain other claims that
could arise following an act of terrorism.
We have applied to the U.S. Department of Homeland Security for many of the products and services offered
by our Security division but we do not enjoy coverage (or the highest level of coverage) for every product line,
model number and service offering that our Security division provides. In addition, the terms of the SAFETY Act
coverage decisions awarded to us by the U.S. Department of Homeland Security contain conditions and
requirements that we may not (or may not be able to) continue to satisfy in the future.
In the future, if we fail to maintain the coverage that we currently enjoy or fail to apply in a timely way for
coverage for new products and services as we acquire or introduce them, or if the U.S. Department of Homeland
Security limits the scope of any coverage previously awarded to us, denies us coverage or continued coverage for a
particular product, product line or service offering, or delays in making decisions about whether to grant us
coverage, we may become exposed to legal claims that the SAFETY Act was otherwise designed to prevent.
The SAFETY Act was not designed to shield providers of qualified anti-terrorism products and services from
all types of claims that may arise from acts of terrorism, including from many types of claims lodged in courts
outside of the United States or acts of terrorism that occur outside of the United States. This too could leave us
exposed to significant legal claims and litigation defense costs despite the SAFETY Act awards we have received.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We are exposed to liabilities that are unique to the products and services we provide. We maintain insurance
for certain risks, and we believe our insurance coverage is consistent with general practices within our industry.
However, the amount of our insurance coverage may not cover all claims or liabilities and we may be forced to bear
substantial costs. While some of our products are shielded from liability within the U.S. under the SAFETY Act, no
such protection is available outside the U.S., potentially resulting in significant liabilities. The amount of insurance
coverage we maintain may be inadequate to cover these or other claims or liabilities.
Our patient monitoring, diagnostic cardiology and anesthesia systems could give rise to product liability
claims and product recall events that could materially and adversely affect our financial condition and results of
operations.
The development, manufacturing and sale of medical devices expose us to significant risk of product liability
claims, product recalls and, sometimes, product failure claims. We face an inherent business risk of financial
exposure to product liability claims if the use of our medical devices results in personal injury or death. Substantial
product liability litigation currently exists within the medical device industry. Some of our patient monitoring,
diagnostic cardiology and anesthesia systems products may become subject to product liability claims and/or
product recalls. Future product liability claims and/or product recall costs may exceed the limits of our insurance
coverages or such insurance may not continue to be available to us on commercially reasonable terms, or at all. In
addition, a significant product liability claim or product recall could significantly damage our reputation for
producing safe, reliable and effective products, making it more difficult for us to market and sell our products in the
future. Consequently, a product liability claim, product recall or other claim could have a material adverse effect on
our business, financial condition, operating results and cash flows.
If we are unable to sustain high-quality processes for the manufacture and delivery of goods and services,
our reputation could be harmed, our competitive advantage could erode and we could incur significant costs.
Quality is extremely important to us and our customers, due in part to the serious consequences of product
failure. Our quality certifications are critical both to the marketing success of our goods and services and to the
satisfaction of both regulatory and contractual requirements under which we sell many of our products. If we fail to
meet these standards or other standards required in our industries, we could lose customers and market share, our
revenue could decline and we could face significant costs and other liabilities.
As a U.S. Government contractor, we are subject to extensive Federal procurement rules and regulations
as well as contractual obligations that are unique to doing business with the U.S. Government. Non-compliance
with any such rules, regulations or contractual obligations could negatively affect current programs, potential
awards and our ability to do business with the U.S. Government in the future.
U.S. Government contractors must comply with extensive procurement regulations and other requirements
including, but not limited to, those appearing in the Federal Acquisition Regulation (FAR) and its supplements, as
well as specific procurement rules and contractual conditions imposed by various U.S. Government agencies. Many
of these types of requirements do not appear in our contracts with commercial customers or foreign governments.
In particular, U.S. Government contracts typically contain provisions and are subject to laws and regulations
that give the Government agencies rights and remedies not typically found in commercial contracts, including
providing the Government agency with the ability to unilaterally:
• terminate our existing contracts;
• reduce the value of our existing contracts;
• modify some of the terms and conditions in our existing contracts;
26
27
• suspend or permanently prohibit us from doing business with the government or with any specific
government agency;
• control and potentially prohibit the export of our products;
• cancel or delay existing multiyear contracts and related orders if the necessary funds for contract
performance for any subsequent year are not appropriated;
• decline to exercise an option to extend an existing multiyear contract; and
• claim rights in technologies and systems invented, developed or produced by us.
U.S. Government agencies and the agencies of certain other governments with which we contract can
terminate their contracts with us for convenience, and in that event we generally may recover only our incurred or
committed costs, settlement expenses and profit on the work completed prior to termination. If an agency
terminates a contract with us for default, we may be denied any recovery and may be liable for excess costs incurred
by the agency in procuring undelivered items from an alternative source. Decisions by an agency to terminate one of
our contracts for default could negatively affect our ability to win future awards not only from such agency, but also
from other government agencies and commercial customers, many of whom evaluate past performance, or are
required to review past performance information, when making their procurement decisions.
U.S. Government agencies may also initiate civil False Claims Act litigation against us based on allegations
related to our performance of contracts for the U.S. Government, or to our compliance with procurement
regulations and other legal requirements to which such contracts are subject, or both. Such litigation can be
expensive to defend and if found liable can result in treble damages and significant civil penalties. The U.S.
Government may also initiate administrative proceedings that, if resulting in an adverse finding against us or any of
our subsidiaries as to our present responsibility to be a U.S. Government contractor or subcontractor, could result in
our company or our subsidiaries being suspended for a period of time from eligibility for awards of new government
contracts or task orders or in a loss of export privileges and, if satisfying the requisite level of seriousness, in our
debarment from contracting with the U.S. Government for a specified term as well as being subject to other
remedies available to the U.S. Government.
For example, subsidiaries within our Security division received a ‘‘show cause’’ letter in November 2012 from
the U.S. Transportation Security Administration and a related Notice for Proposed Debarment from the U.S.
Department of Homeland Security in May 2013. Although, with respect to that ‘‘show cause’’ letter and Notice for
Proposed Debarment, we ultimately reached an Administrative Agreement with the U.S. Government, which
allowed us to continue with our current and future business with U.S. Government agencies, there is no assurance
that we would be able to reach a similar outcome with respect to any future proceedings in which we may become
involved, whether related to the same or new matters. In addition, if our Security division fails to remain in
compliance with its current Administrative Agreement, the U.S. Department of Homeland Security could initiate
debarment proceedings.
The loss of certain of our customers, including government agencies that can modify or terminate
agreements more easily than other commercial customers with which we contract, the failure to continue to
diversify our customer base or the non-renewal of certain material contracts could have a negative effect on our
reputation and could have a material adverse effect on our business, financial condition and results of
operations.
We sell many of our products to prominent, well-respected institutions, including agencies and departments of
the U.S. Government, state and local governments, foreign governments, renowned hospitals and hospital networks,
and large military-defense and space-industry contractors. Many of these larger customers spend considerable
resources testing and evaluating our products and our design and manufacturing processes and services. Some of
our smaller customers know this and rely on this as an indication of the high-quality and reliability of our products
and services. As a result, part of our reputation and success depends on our ability to continue to sell to larger
institutions that are known for demanding high standards of excellence.
The loss or termination of a contract by such an institution, even if for reasons unrelated to the quality of our
products or services, could therefore have a more wide-spread and potentially material adverse effect on our
business, financial condition and results of operations.
Further, we are generating revenues from certain customers, the loss of which could have a material adverse
effect on our business. In particular, our contract with the Mexican government to provide a turnkey security
screening solution at various locations throughout the country is scheduld to expire in January 2018. Revenue
attributable to this contract comprised approximately 12% of our total revenue for the fiscal year ended June 30,
2017. The termination, non-renewal or reduction in scope of this contract, or the renewal of this contract with
reduced scope or on other modified terms, even if for reasons unrelated to the quality of our products or services,
could have a material adverse effect on our business, financial condition and results of operations, including, but
not limited to, impairment of capital assets purchased or manufactured specifically for this contract.
Our revenues are dependent on orders of security and inspection systems, turnkey security screening
solutions and patient monitoring, diagnostic cardiology and anesthesia systems, which may have lengthy and
unpredictable sales cycles.
Sales of security and inspection systems and turnkey security screening solutions often depend upon the
decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport
inspection sites, military facilities and other security installations. In the case of turnkey security screening
solutions, the commencement of screening operations may be dependent on the approval, by a government agency,
of the protocols and procedures that our personnel are to follow during the performance of their activities. Sales
outside of the United States of our patient monitoring, diagnostic cardiology and anesthesia systems depend in
significant part on the decision of governmental agencies to build new medical facilities or to expand or update
existing medical facilities. Accordingly, a significant portion of our sales of security and inspection systems,
turnkey security screening solutions and our patient monitoring, diagnostic cardiology and anesthesia systems is
often subject to delays associated with the lengthy approval processes. During these approval periods, we expend
significant financial and management resources in anticipation of future revenues that may not occur. If we fail to
receive such revenues after expending such resources, such failure could have a material adverse effect on our
business, financial condition and results of operations.
U.S and foreign budget control provisions could reduce government spending, which could adversely
impact our revenues, earnings, cash flows and financial condition.
In August 2011, Congress enacted the Budget Control Act of 2011 (BCA), committing the U.S. Government
to significantly reduce the federal deficit over ten years. The BCA contains provisions commonly referred to as
‘‘sequestration’’, which call for substantial, unspecified automatic spending cuts split between defense and
non-defense programs that may continue for a period of ten years. The BCA also included reductions to Medicare
payments to providers of 2% per fiscal year, which went into effect in April 2013 and will stay in effect through
2024, unless additional Congressional action is taken. Likewise, various European governments have implemented
or intend to implement austerity measures intended to reduce government spending. Such measures may reduce
demand for our products directly by affected governmental agencies and by our customers who derive revenues
from these governmental agencies or governmental healthcare programs. We cannot currently predict the impact of
governmental spending reductions on us or our customers or whether and to what extent our business and results of
operations may be adversely harmed.
28
29
• suspend or permanently prohibit us from doing business with the government or with any specific
government agency;
• control and potentially prohibit the export of our products;
• cancel or delay existing multiyear contracts and related orders if the necessary funds for contract
performance for any subsequent year are not appropriated;
• decline to exercise an option to extend an existing multiyear contract; and
• claim rights in technologies and systems invented, developed or produced by us.
U.S. Government agencies and the agencies of certain other governments with which we contract can
terminate their contracts with us for convenience, and in that event we generally may recover only our incurred or
committed costs, settlement expenses and profit on the work completed prior to termination. If an agency
terminates a contract with us for default, we may be denied any recovery and may be liable for excess costs incurred
by the agency in procuring undelivered items from an alternative source. Decisions by an agency to terminate one of
our contracts for default could negatively affect our ability to win future awards not only from such agency, but also
from other government agencies and commercial customers, many of whom evaluate past performance, or are
required to review past performance information, when making their procurement decisions.
U.S. Government agencies may also initiate civil False Claims Act litigation against us based on allegations
related to our performance of contracts for the U.S. Government, or to our compliance with procurement
regulations and other legal requirements to which such contracts are subject, or both. Such litigation can be
expensive to defend and if found liable can result in treble damages and significant civil penalties. The U.S.
Government may also initiate administrative proceedings that, if resulting in an adverse finding against us or any of
our subsidiaries as to our present responsibility to be a U.S. Government contractor or subcontractor, could result in
our company or our subsidiaries being suspended for a period of time from eligibility for awards of new government
contracts or task orders or in a loss of export privileges and, if satisfying the requisite level of seriousness, in our
debarment from contracting with the U.S. Government for a specified term as well as being subject to other
remedies available to the U.S. Government.
For example, subsidiaries within our Security division received a ‘‘show cause’’ letter in November 2012 from
the U.S. Transportation Security Administration and a related Notice for Proposed Debarment from the U.S.
Department of Homeland Security in May 2013. Although, with respect to that ‘‘show cause’’ letter and Notice for
Proposed Debarment, we ultimately reached an Administrative Agreement with the U.S. Government, which
allowed us to continue with our current and future business with U.S. Government agencies, there is no assurance
that we would be able to reach a similar outcome with respect to any future proceedings in which we may become
involved, whether related to the same or new matters. In addition, if our Security division fails to remain in
compliance with its current Administrative Agreement, the U.S. Department of Homeland Security could initiate
debarment proceedings.
The loss of certain of our customers, including government agencies that can modify or terminate
agreements more easily than other commercial customers with which we contract, the failure to continue to
diversify our customer base or the non-renewal of certain material contracts could have a negative effect on our
reputation and could have a material adverse effect on our business, financial condition and results of
operations.
We sell many of our products to prominent, well-respected institutions, including agencies and departments of
the U.S. Government, state and local governments, foreign governments, renowned hospitals and hospital networks,
and large military-defense and space-industry contractors. Many of these larger customers spend considerable
resources testing and evaluating our products and our design and manufacturing processes and services. Some of
our smaller customers know this and rely on this as an indication of the high-quality and reliability of our products
and services. As a result, part of our reputation and success depends on our ability to continue to sell to larger
institutions that are known for demanding high standards of excellence.
The loss or termination of a contract by such an institution, even if for reasons unrelated to the quality of our
products or services, could therefore have a more wide-spread and potentially material adverse effect on our
business, financial condition and results of operations.
Further, we are generating revenues from certain customers, the loss of which could have a material adverse
effect on our business. In particular, our contract with the Mexican government to provide a turnkey security
screening solution at various locations throughout the country is scheduld to expire in January 2018. Revenue
attributable to this contract comprised approximately 12% of our total revenue for the fiscal year ended June 30,
2017. The termination, non-renewal or reduction in scope of this contract, or the renewal of this contract with
reduced scope or on other modified terms, even if for reasons unrelated to the quality of our products or services,
could have a material adverse effect on our business, financial condition and results of operations, including, but
not limited to, impairment of capital assets purchased or manufactured specifically for this contract.
Our revenues are dependent on orders of security and inspection systems, turnkey security screening
solutions and patient monitoring, diagnostic cardiology and anesthesia systems, which may have lengthy and
unpredictable sales cycles.
Sales of security and inspection systems and turnkey security screening solutions often depend upon the
decision of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport
inspection sites, military facilities and other security installations. In the case of turnkey security screening
solutions, the commencement of screening operations may be dependent on the approval, by a government agency,
of the protocols and procedures that our personnel are to follow during the performance of their activities. Sales
outside of the United States of our patient monitoring, diagnostic cardiology and anesthesia systems depend in
significant part on the decision of governmental agencies to build new medical facilities or to expand or update
existing medical facilities. Accordingly, a significant portion of our sales of security and inspection systems,
turnkey security screening solutions and our patient monitoring, diagnostic cardiology and anesthesia systems is
often subject to delays associated with the lengthy approval processes. During these approval periods, we expend
significant financial and management resources in anticipation of future revenues that may not occur. If we fail to
receive such revenues after expending such resources, such failure could have a material adverse effect on our
business, financial condition and results of operations.
U.S and foreign budget control provisions could reduce government spending, which could adversely
impact our revenues, earnings, cash flows and financial condition.
In August 2011, Congress enacted the Budget Control Act of 2011 (BCA), committing the U.S. Government
to significantly reduce the federal deficit over ten years. The BCA contains provisions commonly referred to as
‘‘sequestration’’, which call for substantial, unspecified automatic spending cuts split between defense and
non-defense programs that may continue for a period of ten years. The BCA also included reductions to Medicare
payments to providers of 2% per fiscal year, which went into effect in April 2013 and will stay in effect through
2024, unless additional Congressional action is taken. Likewise, various European governments have implemented
or intend to implement austerity measures intended to reduce government spending. Such measures may reduce
demand for our products directly by affected governmental agencies and by our customers who derive revenues
from these governmental agencies or governmental healthcare programs. We cannot currently predict the impact of
governmental spending reductions on us or our customers or whether and to what extent our business and results of
operations may be adversely harmed.
28
29
If we fail to perform on our existing agreements to provide security screening solutions to customers after
expending substantial resources, such failure could have a material adverse effect on our business, financial
condition and results of operations.
Certain of our projects require the expenditure of substantial management and financial resources in
anticipation of future revenue generation. For example, in 2012, we entered into a substantial six-year contract with
the Mexican government to provide a turnkey security screening solution at various sites throughout Mexico, which
required substantial expenditures for capital equipment and infrastructure. Although to date we have performed
well under this contract, if our performance declines during the remainder of this contract, this could inhibit our
ability to renew the contract prior to its scheduled expiration in January 2018, which could have a material adverse
effect on our business, financial condition and results of operations. We anticipate that future contracts for turnkey
security screening solutions in other territories could also require the outlay and management of substantial
financial resources for capital equipment and infrastructure.
Turnkey screening solutions projects, in contrast to the sale and installation of security inspection equipment,
also require that we hire and manage large numbers of local personnel in jurisdictions where we may not have
previously operated. They also require that we establish, adhere to, adapt and monitor operating procedures over
periods that last much longer than our other projects. If we are unable to efficiently manage the adaptation and
growth of our operations relating to these projects, our operations could be materially and adversely affected.
If we do not introduce new products in a timely manner, our products could become obsolete and our
operating results would suffer.
We sell many of our products in industries characterized by rapid technological changes, frequent new product
and service introductions and evolving industry standards and customer needs. Without the timely introduction of
new products and enhancements, our products could become technologically obsolete over time, in which case our
revenue and operating results would suffer. The success of our new product offerings will depend upon several
factors, including our ability to:
• accurately anticipate customer needs;
• innovate and develop new technologies and applications;
• successfully commercialize new technologies in a timely manner;
• price our products competitively and manufacture and deliver our products in sufficient volumes and on
time; and
• differentiate our offerings from our competitors’ offerings.
Some of our products are used by our customers to develop, test and manufacture their products. We therefore
must anticipate industry trends and develop products in advance of the commercialization of our customers’
products. In developing any new product, we may be required to make a substantial investment before we can
determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and
future activities, we may invest heavily in research and development of products that do not lead to significant
revenues.
materials and subcomponents that we use are currently available to us only from a single vendor. The reliance on a
single qualified vendor could result in delays in delivering products or increases in the cost of manufacturing the
affected products. Any material interruption in our ability to purchase necessary raw materials or subcomponents
could adversely affect our ability to fulfill customer orders and therefore could ultimately have a material adverse
effect on our business, financial condition and results of operations.
Delays by the construction firms we engage may interfere with our ability to complete projects on time.
Purchasers of our security and inspection systems and turnkey security screening solutions sometimes require,
as a part of our contract, the construction of the facilities that will house our systems and/or operations. Some of
these construction projects are significant in size and complexity. We engage qualified construction firms to
perform this work. However, if such firms experience delays, if they perform sub-standard work or if we fail to
properly monitor the quality of their work or the timeliness of their progress, we may not be able to complete our
construction projects on time. In any such circumstance, we could face the imposition of delay penalties and breach
of contract claims by our customer. In addition, we could be forced to incur significant expenses to rectify the
problems caused by the construction firm. Any material delay caused by our construction firm subcontractors could
therefore ultimately have a material adverse effect on our business, financial condition and results of operations.
We contract with third party service vendors that may be unable to fulfill contracts on time.
We contract with third-party vendors to service our equipment in the field. We have made such arrangements
because sometimes it is more efficient to outsource these activities than it is for our own employees to service our
equipment. In addition, some of these vendors maintain stocks of spare parts that are more efficiently accessed in
conjunction with a service agreement than would be the case if we were to maintain such spare parts independently.
Any material interruption in the ability of our vendors to fulfill such service contracts could adversely affect our
ability to fulfill customer orders and therefore could ultimately have a material adverse effect on our business,
financial condition and results of operations.
We may accumulate excess inventory.
Because of long lead times and specialized product designs, in certain cases we purchase components and
manufacture products in anticipation of customer orders based on customer forecasts. For a variety of reasons, such
as decreased end-user demand for our products, inadequate or inaccurate forecasts, or other issues that might
impact production planning, our customers might not purchase all the products that we have manufactured or for
which we have purchased components. In any such event, we would attempt to recoup material and manufacturing
costs by means such as returning components to our vendors, disposing of excess inventory through other channels,
or requiring our OEM customers to purchase or otherwise compensate us for such excess inventory. However, some
of our significant customer agreements do not give us the ability to require our OEM customers to do this. To the
extent that we are unsuccessful in recouping our material and manufacturing costs, this could have a material
adverse effect on our business, financial condition and results of operations. In addition, because of the complex
customer acceptance criteria associated with some of our products, on some occasions, products whose title has
passed to our customers are still included in our inventory until revenue recognition criteria are met. As a result,
inventory levels may be inflated from time to time.
Interruptions in our ability to purchase raw materials and subcomponents may adversely affect our
We may not be able to successfully implement our acquisitions and investment strategies, integrate
profitability.
We purchase raw materials and certain subcomponents from third parties. Standard purchase order terms are
as long as one year at fixed costs, but we generally do not have guaranteed long-term supply arrangements with our
suppliers. In addition, for certain raw materials and subcomponents that we use, there are a limited number of
potential suppliers that we have qualified or that we are currently able to qualify. Consequently, some of the key raw
acquired businesses into our existing business or make acquired businesses profitable.
One of our strategies is to supplement our internal growth by acquiring and investing in businesses and
technologies that complement or augment our existing product lines. This growth has placed, and may continue to
30
31
If we fail to perform on our existing agreements to provide security screening solutions to customers after
expending substantial resources, such failure could have a material adverse effect on our business, financial
condition and results of operations.
Certain of our projects require the expenditure of substantial management and financial resources in
anticipation of future revenue generation. For example, in 2012, we entered into a substantial six-year contract with
the Mexican government to provide a turnkey security screening solution at various sites throughout Mexico, which
required substantial expenditures for capital equipment and infrastructure. Although to date we have performed
well under this contract, if our performance declines during the remainder of this contract, this could inhibit our
ability to renew the contract prior to its scheduled expiration in January 2018, which could have a material adverse
effect on our business, financial condition and results of operations. We anticipate that future contracts for turnkey
security screening solutions in other territories could also require the outlay and management of substantial
financial resources for capital equipment and infrastructure.
Turnkey screening solutions projects, in contrast to the sale and installation of security inspection equipment,
also require that we hire and manage large numbers of local personnel in jurisdictions where we may not have
previously operated. They also require that we establish, adhere to, adapt and monitor operating procedures over
periods that last much longer than our other projects. If we are unable to efficiently manage the adaptation and
growth of our operations relating to these projects, our operations could be materially and adversely affected.
If we do not introduce new products in a timely manner, our products could become obsolete and our
operating results would suffer.
We sell many of our products in industries characterized by rapid technological changes, frequent new product
and service introductions and evolving industry standards and customer needs. Without the timely introduction of
new products and enhancements, our products could become technologically obsolete over time, in which case our
revenue and operating results would suffer. The success of our new product offerings will depend upon several
factors, including our ability to:
• accurately anticipate customer needs;
• innovate and develop new technologies and applications;
• successfully commercialize new technologies in a timely manner;
• price our products competitively and manufacture and deliver our products in sufficient volumes and on
time; and
• differentiate our offerings from our competitors’ offerings.
Some of our products are used by our customers to develop, test and manufacture their products. We therefore
must anticipate industry trends and develop products in advance of the commercialization of our customers’
products. In developing any new product, we may be required to make a substantial investment before we can
determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and
future activities, we may invest heavily in research and development of products that do not lead to significant
revenues.
materials and subcomponents that we use are currently available to us only from a single vendor. The reliance on a
single qualified vendor could result in delays in delivering products or increases in the cost of manufacturing the
affected products. Any material interruption in our ability to purchase necessary raw materials or subcomponents
could adversely affect our ability to fulfill customer orders and therefore could ultimately have a material adverse
effect on our business, financial condition and results of operations.
Delays by the construction firms we engage may interfere with our ability to complete projects on time.
Purchasers of our security and inspection systems and turnkey security screening solutions sometimes require,
as a part of our contract, the construction of the facilities that will house our systems and/or operations. Some of
these construction projects are significant in size and complexity. We engage qualified construction firms to
perform this work. However, if such firms experience delays, if they perform sub-standard work or if we fail to
properly monitor the quality of their work or the timeliness of their progress, we may not be able to complete our
construction projects on time. In any such circumstance, we could face the imposition of delay penalties and breach
of contract claims by our customer. In addition, we could be forced to incur significant expenses to rectify the
problems caused by the construction firm. Any material delay caused by our construction firm subcontractors could
therefore ultimately have a material adverse effect on our business, financial condition and results of operations.
We contract with third party service vendors that may be unable to fulfill contracts on time.
We contract with third-party vendors to service our equipment in the field. We have made such arrangements
because sometimes it is more efficient to outsource these activities than it is for our own employees to service our
equipment. In addition, some of these vendors maintain stocks of spare parts that are more efficiently accessed in
conjunction with a service agreement than would be the case if we were to maintain such spare parts independently.
Any material interruption in the ability of our vendors to fulfill such service contracts could adversely affect our
ability to fulfill customer orders and therefore could ultimately have a material adverse effect on our business,
financial condition and results of operations.
We may accumulate excess inventory.
Because of long lead times and specialized product designs, in certain cases we purchase components and
manufacture products in anticipation of customer orders based on customer forecasts. For a variety of reasons, such
as decreased end-user demand for our products, inadequate or inaccurate forecasts, or other issues that might
impact production planning, our customers might not purchase all the products that we have manufactured or for
which we have purchased components. In any such event, we would attempt to recoup material and manufacturing
costs by means such as returning components to our vendors, disposing of excess inventory through other channels,
or requiring our OEM customers to purchase or otherwise compensate us for such excess inventory. However, some
of our significant customer agreements do not give us the ability to require our OEM customers to do this. To the
extent that we are unsuccessful in recouping our material and manufacturing costs, this could have a material
adverse effect on our business, financial condition and results of operations. In addition, because of the complex
customer acceptance criteria associated with some of our products, on some occasions, products whose title has
passed to our customers are still included in our inventory until revenue recognition criteria are met. As a result,
inventory levels may be inflated from time to time.
Interruptions in our ability to purchase raw materials and subcomponents may adversely affect our
We may not be able to successfully implement our acquisitions and investment strategies, integrate
profitability.
We purchase raw materials and certain subcomponents from third parties. Standard purchase order terms are
as long as one year at fixed costs, but we generally do not have guaranteed long-term supply arrangements with our
suppliers. In addition, for certain raw materials and subcomponents that we use, there are a limited number of
potential suppliers that we have qualified or that we are currently able to qualify. Consequently, some of the key raw
acquired businesses into our existing business or make acquired businesses profitable.
One of our strategies is to supplement our internal growth by acquiring and investing in businesses and
technologies that complement or augment our existing product lines. This growth has placed, and may continue to
30
31
place, significant demands on our management, working capital and financial resources. We may be unable to
identify or complete promising acquisitions for many reasons, including:
• competition among buyers;
• the need for regulatory approvals, including antitrust approvals; and
• the high valuations of businesses.
Some of the businesses we may seek to acquire or invest in may be marginally profitable or unprofitable. For
these businesses to achieve acceptable levels of profitability, we must improve their management, operations,
products and market penetration. We may not be successful in this regard and we may encounter other difficulties in
integrating acquired businesses into our existing operations.
To finance our acquisitions, we may have to raise additional funds, through either public or private financings.
We may be unable to obtain such funds or may be able to do so only on unfavorable terms.
Our acquisition and alliance activities could disrupt our ongoing business.
We intend to continue to make investments in companies, products and technologies, either through
acquisitions, investments or alliances. Acquisition and alliance activities often involve risks, including:
• difficulty in assimilating the acquired operations and employees and realizing synergies expected to result
from the acquisition;
• difficulty in managing product co-development activities with our alliance partners;
• difficulty in effectively coordinating sales and marketing efforts;
• difficulty in combining product offerings and product lines quickly and effectively;
• difficulty in retaining the key employees of the acquired operation;
• disruption of our ongoing business, including diversion of management time;
• inability to successfully integrate the acquired technologies and operations into our businesses and maintain
uniform standards, controls, policies and procedures;
• lacking the experience necessary to enter into new product or technology markets successfully; and
• difficulty in integrating financial reporting systems and implementing controls, procedures and policies,
including disclosure controls and procedures and internal control over financial reporting, appropriate for
public companies of our size at companies that, prior the acquisition, had lacked such controls, procedures
and policies.
Integrating acquired businesses has been and will continue to be complex, time consuming and expensive, and
can negatively impact the effectiveness of our internal control over financial reporting. The use of debt to fund
acquisitions or for other related purposes increases our interest expense and leverage. If we issue equity securities
as consideration in an acquisition, current stockholders percentage ownership and earnings per share may be
diluted. As a result of these and other risks, we cannot be certain that our previous or future acquisitions will be
successful and will not materially adversely affect the conduct, operating results or financial condition of our
business.
Our ability to successfully adapt to ongoing organizational changes could impact our business results.
We have executed a number of significant business and organizational changes to rationalize our overall cost
structure. These changes have included and may continue to include the implementation of cost-cutting measures
and the consolidation of facilities. We expect these types of changes may continue from time to time in the future as
we uncover additional opportunities to streamline our operations. Successfully managing these changes is critical to
our productivity improvement and business success. If we are unable to successfully manage these changes, while
continuing to invest in business growth, our financial results could be adversely impacted.
Economic, political, legal, operational and other risks associated with international sales and operations
could adversely affect our financial performance.
In fiscal 2015, 2016 and 2017 revenues from shipments made to customers outside of the United States
accounted for approximately 57%, 64% and 60% of our revenues, respectively. Since we sell certain of our products
and services worldwide, our businesses are subject to risks associated with doing business internationally. We
anticipate that revenues from international operations will continue to represent a substantial portion of our total
revenue. In addition, many of our manufacturing facilities, and therefore employees, suppliers, real property, capital
equipment, cash and other assets are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including without limitation:
• changes in foreign currency exchange rates;
• changes in a country’s or region’s political or economic conditions, particularly in developing or emerging
markets;
• political and economic instability, including the possibility of civil unrest, terrorism, mass violence or
armed conflict;
• longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;
• trade protection measures;
• difficulty in staffing and managing widespread operations;
• difficulty in managing distributors and sales agents and their compliance with applicable laws;
• changes in a foreign government’s budget, leadership and national priorities;
• increased legal risks arising from differing legal systems; and
• compliance with export control and anticorruption legislation, including but not limited to, the Foreign
Corrupt Practices Act and UK Bribery Act and International Traffic in Arms Regulations.
Further, on June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit
from the European Union (E.U.), commonly referred to as ‘‘Brexit’’. The impact of Brexit depends on the terms of
the UK’s withdrawal from the EU, which still need to be determined and could take several years to accomplish. The
UK’s withdrawal from the EU could result in a global economic downturn, which could depress the demand for our
products and services. The UK also could lose access to the single EU market and to the global trade deals
negotiated by the EU on behalf of its members, depressing trade between the UK and other countries, which would
negatively impact our international operations. Additionally, we may face new regulations regarding trade, security
and employees, among others in the UK. Compliance with such regulations could be costly, negatively impacting
our business, results of operations and financial condition.
32
33
place, significant demands on our management, working capital and financial resources. We may be unable to
identify or complete promising acquisitions for many reasons, including:
• competition among buyers;
• the need for regulatory approvals, including antitrust approvals; and
• the high valuations of businesses.
Some of the businesses we may seek to acquire or invest in may be marginally profitable or unprofitable. For
these businesses to achieve acceptable levels of profitability, we must improve their management, operations,
products and market penetration. We may not be successful in this regard and we may encounter other difficulties in
integrating acquired businesses into our existing operations.
To finance our acquisitions, we may have to raise additional funds, through either public or private financings.
We may be unable to obtain such funds or may be able to do so only on unfavorable terms.
Our acquisition and alliance activities could disrupt our ongoing business.
We intend to continue to make investments in companies, products and technologies, either through
acquisitions, investments or alliances. Acquisition and alliance activities often involve risks, including:
• difficulty in assimilating the acquired operations and employees and realizing synergies expected to result
from the acquisition;
• difficulty in managing product co-development activities with our alliance partners;
• difficulty in effectively coordinating sales and marketing efforts;
• difficulty in combining product offerings and product lines quickly and effectively;
• difficulty in retaining the key employees of the acquired operation;
• disruption of our ongoing business, including diversion of management time;
• inability to successfully integrate the acquired technologies and operations into our businesses and maintain
uniform standards, controls, policies and procedures;
• lacking the experience necessary to enter into new product or technology markets successfully; and
• difficulty in integrating financial reporting systems and implementing controls, procedures and policies,
including disclosure controls and procedures and internal control over financial reporting, appropriate for
public companies of our size at companies that, prior the acquisition, had lacked such controls, procedures
and policies.
Integrating acquired businesses has been and will continue to be complex, time consuming and expensive, and
can negatively impact the effectiveness of our internal control over financial reporting. The use of debt to fund
acquisitions or for other related purposes increases our interest expense and leverage. If we issue equity securities
as consideration in an acquisition, current stockholders percentage ownership and earnings per share may be
diluted. As a result of these and other risks, we cannot be certain that our previous or future acquisitions will be
successful and will not materially adversely affect the conduct, operating results or financial condition of our
business.
Our ability to successfully adapt to ongoing organizational changes could impact our business results.
We have executed a number of significant business and organizational changes to rationalize our overall cost
structure. These changes have included and may continue to include the implementation of cost-cutting measures
and the consolidation of facilities. We expect these types of changes may continue from time to time in the future as
we uncover additional opportunities to streamline our operations. Successfully managing these changes is critical to
our productivity improvement and business success. If we are unable to successfully manage these changes, while
continuing to invest in business growth, our financial results could be adversely impacted.
Economic, political, legal, operational and other risks associated with international sales and operations
could adversely affect our financial performance.
In fiscal 2015, 2016 and 2017 revenues from shipments made to customers outside of the United States
accounted for approximately 57%, 64% and 60% of our revenues, respectively. Since we sell certain of our products
and services worldwide, our businesses are subject to risks associated with doing business internationally. We
anticipate that revenues from international operations will continue to represent a substantial portion of our total
revenue. In addition, many of our manufacturing facilities, and therefore employees, suppliers, real property, capital
equipment, cash and other assets are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including without limitation:
• changes in foreign currency exchange rates;
• changes in a country’s or region’s political or economic conditions, particularly in developing or emerging
markets;
• political and economic instability, including the possibility of civil unrest, terrorism, mass violence or
armed conflict;
• longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;
• trade protection measures;
• difficulty in staffing and managing widespread operations;
• difficulty in managing distributors and sales agents and their compliance with applicable laws;
• changes in a foreign government’s budget, leadership and national priorities;
• increased legal risks arising from differing legal systems; and
• compliance with export control and anticorruption legislation, including but not limited to, the Foreign
Corrupt Practices Act and UK Bribery Act and International Traffic in Arms Regulations.
Further, on June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit
from the European Union (E.U.), commonly referred to as ‘‘Brexit’’. The impact of Brexit depends on the terms of
the UK’s withdrawal from the EU, which still need to be determined and could take several years to accomplish. The
UK’s withdrawal from the EU could result in a global economic downturn, which could depress the demand for our
products and services. The UK also could lose access to the single EU market and to the global trade deals
negotiated by the EU on behalf of its members, depressing trade between the UK and other countries, which would
negatively impact our international operations. Additionally, we may face new regulations regarding trade, security
and employees, among others in the UK. Compliance with such regulations could be costly, negatively impacting
our business, results of operations and financial condition.
32
33
We are facing an increasingly complex international regulatory environment which is constantly
changing and if we fail to comply with international regulatory requirements, or are unable to comply with
changes to such requirements, our financial performance may be harmed.
Our international operations and sales subject us to an international regulatory environment which is
becoming increasingly complex and is constantly changing due to factors beyond our control. Risks associated with
our international operations and sales include, without limitation, those arising from the following factors:
• differing legal and court systems and changes to such systems;
• differing labor laws and changes in those laws;
• differing tax laws and changes in those laws;
• differing environmental laws and changes in those laws;
• differing laws governing our distributors and sales agents and changes in those laws;
• differing protection of intellectual property and changes in that protection; and
• differing import and export requirements and changes to those requirements.
If we fail to comply with applicable international regulatory requirements, even if such non-compliance by us
is inadvertent, or if we are unable to comply with changes to such requirements, our financial performance may be
harmed.
There are inherent risks associated with operations in Mexico.
We are currently in the process of fulfilling a multi-year agreement to provide a turnkey security scanning
solution to the tax and customs authority of Mexico. This agreement is individually material to our business,
financial condition and results of operations. There are certain administrative, legal, governmental and societal
risks to operating in Mexico that could adversely impact our operations. Any one or more of the risks that could
adversely affect our ability to fulfill our agreement and therefore ultimately have a material adverse effect on our
business, financial condition and results of operations include, without limitation:
• regional political and economic instability;
• high rate of crime in Mexico where we conduct operations;
• ability of key suppliers and subcontractors to fulfill obligations;
• ability to hire and maintain a significant work force;
• burdensome and evolving government regulations;
• cooperation of various departments of the Mexican government in issuing permits, and inspecting our
operations on a timely basis;
• providing adequate security among other items;
• receipt of payments in a timely manner;
• termination, non-renewal, or change in scope of program at the election of the government; and
Our global operations expose us to legal compliance risks related to certain anti-bribery and
• change in the value of the Mexican peso.
anti-corruption laws.
We are required to comply with the U.S. Foreign Corrupt Practices Act, which prohibits United States
companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. It also requires us to maintain specific record-keeping standards and adequate
internal accounting controls. In addition, we are subject to similar requirements in other countries. Bribery,
corruption, and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity
and severity on a global basis. Although we have internal policies and procedures with the intention of assuring
compliance with these laws and regulations, our employees, distributors, resellers and contractors involved in our
international sales may take actions in violations of such policies. If our internal controls and compliance program
do not adequately prevent or deter our employees, distributors, resellers, contractors and/or other third parties with
whom we do business from violating anti-bribery, anti-corruption or similar laws and regulations, we may incur
severe fines, penalties and reputational damage.
We are subject to import and export controls that could subject us to liability or impair our ability to
compete in international markets.
Due to the international scope of our operations, we are subject to a complex system of import- and export-
related laws and regulations, including U.S. export control and customs regulations and customs regulations of
other countries. These regulations are complex and vary among the legal jurisdictions in which we operate. Any
alleged or actual failure to comply with such regulations may subject us to government scrutiny, investigation, and
civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside
the United States. Depending on severity, any of these penalties could have a material impact on our business,
financial condition and results of operations.
Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts
and other events beyond our control, which could adversely impact our operations.
Although we perform manufacturing in multiple locations, we generally do not have redundant manufacturing
capabilities in place for any particular product or component. As a result, we depend on our current facilities for the
continued operation of our business. A natural disaster, epidemic, terrorist act, act of war, or other natural or
manmade disaster affecting any of our facilities could significantly disrupt our operations, or delay or prevent
product manufacturing and shipment for the time required to repair, rebuild, or replace our manufacturing facilities.
This delay could be lengthy and we could incur significant expenses to repair or replace the facilities. Any similar
natural or manmade disaster that affects a key supplier or customer could lead to a similar disruption in our
business.
Third parties may claim we are infringing their intellectual property rights, and we could suffer
significant litigation or licensing expenses or be prevented from selling products.
As we introduce any new and potentially promising product or service, or improve existing products or
services with new features or components, companies possessing competing technologies, or other companies
owning patents or other intellectual property rights, may be motivated to assert infringement claims in order to
generate royalty revenues, delay or diminish potential sales and challenge our right to market such products or
services. Even if successful in defending against such claims, patent and other intellectual property related
litigation is costly and time consuming. In addition, we may find it necessary to initiate litigation in order to protect
our patent or other intellectual property rights, and even if the claims are well-founded and ultimately successful
such litigation is typically costly and time-consuming and may expose us to counterclaims, including claims for
intellectual property infringement, antitrust, or other such claims. Third parties could also obtain patents or other
intellectual property rights that may require us to either redesign products or, if possible, negotiate licenses from
such third parties. Adverse determinations in any such litigation could result in significant liabilities to third parties
or injunctions, or could require us to seek licenses from third parties, and if such licenses are not available on
34
35
We are facing an increasingly complex international regulatory environment which is constantly
changing and if we fail to comply with international regulatory requirements, or are unable to comply with
changes to such requirements, our financial performance may be harmed.
Our international operations and sales subject us to an international regulatory environment which is
becoming increasingly complex and is constantly changing due to factors beyond our control. Risks associated with
our international operations and sales include, without limitation, those arising from the following factors:
• differing legal and court systems and changes to such systems;
• differing labor laws and changes in those laws;
• differing tax laws and changes in those laws;
• differing environmental laws and changes in those laws;
• differing laws governing our distributors and sales agents and changes in those laws;
• differing protection of intellectual property and changes in that protection; and
• differing import and export requirements and changes to those requirements.
If we fail to comply with applicable international regulatory requirements, even if such non-compliance by us
is inadvertent, or if we are unable to comply with changes to such requirements, our financial performance may be
harmed.
There are inherent risks associated with operations in Mexico.
We are currently in the process of fulfilling a multi-year agreement to provide a turnkey security scanning
solution to the tax and customs authority of Mexico. This agreement is individually material to our business,
financial condition and results of operations. There are certain administrative, legal, governmental and societal
risks to operating in Mexico that could adversely impact our operations. Any one or more of the risks that could
adversely affect our ability to fulfill our agreement and therefore ultimately have a material adverse effect on our
business, financial condition and results of operations include, without limitation:
• regional political and economic instability;
• high rate of crime in Mexico where we conduct operations;
• ability of key suppliers and subcontractors to fulfill obligations;
• ability to hire and maintain a significant work force;
• burdensome and evolving government regulations;
• cooperation of various departments of the Mexican government in issuing permits, and inspecting our
operations on a timely basis;
• providing adequate security among other items;
• receipt of payments in a timely manner;
• termination, non-renewal, or change in scope of program at the election of the government; and
Our global operations expose us to legal compliance risks related to certain anti-bribery and
• change in the value of the Mexican peso.
anti-corruption laws.
We are required to comply with the U.S. Foreign Corrupt Practices Act, which prohibits United States
companies from engaging in bribery or making other prohibited payments to foreign officials for the purpose of
obtaining or retaining business. It also requires us to maintain specific record-keeping standards and adequate
internal accounting controls. In addition, we are subject to similar requirements in other countries. Bribery,
corruption, and trade laws and regulations, and the enforcement thereof, are increasing in frequency, complexity
and severity on a global basis. Although we have internal policies and procedures with the intention of assuring
compliance with these laws and regulations, our employees, distributors, resellers and contractors involved in our
international sales may take actions in violations of such policies. If our internal controls and compliance program
do not adequately prevent or deter our employees, distributors, resellers, contractors and/or other third parties with
whom we do business from violating anti-bribery, anti-corruption or similar laws and regulations, we may incur
severe fines, penalties and reputational damage.
We are subject to import and export controls that could subject us to liability or impair our ability to
compete in international markets.
Due to the international scope of our operations, we are subject to a complex system of import- and export-
related laws and regulations, including U.S. export control and customs regulations and customs regulations of
other countries. These regulations are complex and vary among the legal jurisdictions in which we operate. Any
alleged or actual failure to comply with such regulations may subject us to government scrutiny, investigation, and
civil and criminal penalties, and may limit our ability to import or export our products or to provide services outside
the United States. Depending on severity, any of these penalties could have a material impact on our business,
financial condition and results of operations.
Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts
and other events beyond our control, which could adversely impact our operations.
Although we perform manufacturing in multiple locations, we generally do not have redundant manufacturing
capabilities in place for any particular product or component. As a result, we depend on our current facilities for the
continued operation of our business. A natural disaster, epidemic, terrorist act, act of war, or other natural or
manmade disaster affecting any of our facilities could significantly disrupt our operations, or delay or prevent
product manufacturing and shipment for the time required to repair, rebuild, or replace our manufacturing facilities.
This delay could be lengthy and we could incur significant expenses to repair or replace the facilities. Any similar
natural or manmade disaster that affects a key supplier or customer could lead to a similar disruption in our
business.
Third parties may claim we are infringing their intellectual property rights, and we could suffer
significant litigation or licensing expenses or be prevented from selling products.
As we introduce any new and potentially promising product or service, or improve existing products or
services with new features or components, companies possessing competing technologies, or other companies
owning patents or other intellectual property rights, may be motivated to assert infringement claims in order to
generate royalty revenues, delay or diminish potential sales and challenge our right to market such products or
services. Even if successful in defending against such claims, patent and other intellectual property related
litigation is costly and time consuming. In addition, we may find it necessary to initiate litigation in order to protect
our patent or other intellectual property rights, and even if the claims are well-founded and ultimately successful
such litigation is typically costly and time-consuming and may expose us to counterclaims, including claims for
intellectual property infringement, antitrust, or other such claims. Third parties could also obtain patents or other
intellectual property rights that may require us to either redesign products or, if possible, negotiate licenses from
such third parties. Adverse determinations in any such litigation could result in significant liabilities to third parties
or injunctions, or could require us to seek licenses from third parties, and if such licenses are not available on
34
35
commercially reasonable terms, prevent us from manufacturing, importing, distributing, selling or using certain
products, any one of which could have a material adverse effect on us. In addition, some licenses may be
non-exclusive, which could provide our competitors access to the same technologies. Under any of these
circumstances, we may incur significant expenses.
Our ongoing success is dependent upon the continued availability of certain key employees.
We are dependent in our operations on the continued availability of the services of our employees, many of
whom are individually key to our current and future success, and the availability of new employees to implement
our growth plans. The market for skilled employees is highly competitive, especially for employees in technical
fields. While our compensation programs are intended to attract and retain the employees required for us to be
successful, ultimately, we may not be able to retain the services of all of our key employees or a sufficient number to
execute on our plans. In addition, we may not be able to continue to attract new employees as required.
Food, Drug and Cosmetic Act. In the 510(k) clearance process, the FDA must determine that a proposed device is
‘‘substantially equivalent’’ to a device legally on the market, known as a ‘‘predicate’’ device, in order to clear the
proposed device for marketing. To be ‘‘substantially equivalent,’’ the proposed device must have the same intended
use as the predicate device, and either have the same technological characteristics as the predicate device or have
different technological characteristics and not raise different questions of safety or effectiveness than the predicate
device. Clinical data is sometimes required to support substantial equivalence.
Some modifications made to products cleared through a 510(k) may require a new 510(k). The FDA can delay,
limit or deny clearance or approval of a device for many reasons, including:
• we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their
intended uses;
• the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval,
where required;
Healthcare cost containment pressures and legislative or regulatory reforms may affect our ability to sell
• the manufacturing process or facilities we use may not meet applicable requirements; and
our products profitably.
All third-party payers, whether governmental or commercial, whether inside the United States or outside, are
developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods also
potentially limit the amount that healthcare providers may be willing to pay for medical devices. In the United
States, hospital and other healthcare provider customers, including physicians and ambulatory surgery centers, that
purchase our products typically bill various third-party payers to cover all or a portion of the costs and fees
associated with the procedures or tests in which our products are used and bill patients for any deductibles or
co-payments. Because there is often no separate reimbursement for our products, any decline in the amount payers
are willing to reimburse our customers for the procedures and tests associated with our products could make it
difficult for customers to continue using, or adopt, our products and create additional pricing pressure for us. If we
are forced to lower the price we charge for our products, our gross margins will decrease, which will adversely
affect our ability to invest in and grow our business.
There have been, and we expect there will continue to be, legislative and regulatory proposals to change the
healthcare system, and some could significantly affect the ways in which doctors, hospitals, healthcare systems and
health insurance companies are compensated for the services they provide, which could have a material impact on
our business. It is not clear at this time what changes may impact the ability of hospitals and hospital networks to
purchase the patient monitoring, diagnostic cardiology and anesthesia systems that we sell or if it will alter market-
based incentives that hospitals and hospital networks currently face to continually improve, upgrade and expand
their use of such equipment.
Efforts by governmental and third-party payers to reduce healthcare costs or the implementation of new
legislative reforms imposing additional government controls could cause a reduction in sales or in the selling price
of our products, which could adversely affect our business.
Substantial government regulation in the United States and abroad may restrict our ability to sell our
patient monitoring, diagnostic cardiology and anesthesia systems, and failure to comply with such laws and
regulations may have a material adverse impact on our business.
The FDA and comparable regulatory authorities in foreign countries extensively and rigorously regulate our
patient monitoring, diagnostic cardiology and anesthesia systems, including the research and development, design,
testing, clinical trials, manufacturing, clearance or approval, safety and efficacy, labeling, advertising, promotion,
pricing, recordkeeping, reporting, import and export, post-approval studies and sale and distribution of these
products. In the United States, before we can market a new medical device, or a new use of, new claim for, or
significant modification to, an existing product, we must first receive clearance under Section 510(k) of the Federal
• the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to
change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance
or approval.
Our future products may not obtain FDA clearance on a timely basis, or at all. Further, the FDA makes periodic
inspections of medical device manufacturers and in connection with such inspections issues observations when the
FDA believes the manufacturer has failed to comply with applicable regulations. If FDA observations are not
addressed to the FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to other forms of
enforcement action, which could include the shutdown of our production facilities, adverse publicity, and civil and
criminal penalties. The expense and costs of any corrective actions that we may take, which may include product
recalls, correction and removal of products from customer sites and/or changes to our product manufacturing and
quality systems, could adversely impact our financial results. Issuance of a warning letter may also lead customers
to delay purchasing decisions or cancel orders.
Our patient monitoring, diagnostic cardiology, and anesthesia systems must also comply with the laws and
regulations of foreign countries in which we develop, manufacture and market such products. In general, the extent
and complexity of medical device regulation is increasing worldwide. This trend is likely to continue and the cost
and time required to obtain marketing clearance in any given country may increase as a result. Our products may not
obtain any necessary foreign clearances on a timely basis, or at all.
Once any of our patient monitoring, diagnostic cardiology, or anesthesia systems is cleared for sale, regulatory
authorities may still limit the use of such product, prevent its sale or manufacture or require a recall or withdrawal of
such product from the marketplace. Following initial clearance from regulatory authorities, we continue to be
subject to extensive regulatory requirements. Government authorities can withdraw marketing clearance or impose
sanctions due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems
following initial clearance. Ongoing regulatory requirements are wide-ranging and govern, among other things:
• annual inspections to retain a CE mark for sale of products in the European Union;
• product manufacturing;
• patient health data protection and medical device security;
• supplier substitution;
• product changes;
• process modifications;
36
37
commercially reasonable terms, prevent us from manufacturing, importing, distributing, selling or using certain
products, any one of which could have a material adverse effect on us. In addition, some licenses may be
non-exclusive, which could provide our competitors access to the same technologies. Under any of these
circumstances, we may incur significant expenses.
Our ongoing success is dependent upon the continued availability of certain key employees.
We are dependent in our operations on the continued availability of the services of our employees, many of
whom are individually key to our current and future success, and the availability of new employees to implement
our growth plans. The market for skilled employees is highly competitive, especially for employees in technical
fields. While our compensation programs are intended to attract and retain the employees required for us to be
successful, ultimately, we may not be able to retain the services of all of our key employees or a sufficient number to
execute on our plans. In addition, we may not be able to continue to attract new employees as required.
Food, Drug and Cosmetic Act. In the 510(k) clearance process, the FDA must determine that a proposed device is
‘‘substantially equivalent’’ to a device legally on the market, known as a ‘‘predicate’’ device, in order to clear the
proposed device for marketing. To be ‘‘substantially equivalent,’’ the proposed device must have the same intended
use as the predicate device, and either have the same technological characteristics as the predicate device or have
different technological characteristics and not raise different questions of safety or effectiveness than the predicate
device. Clinical data is sometimes required to support substantial equivalence.
Some modifications made to products cleared through a 510(k) may require a new 510(k). The FDA can delay,
limit or deny clearance or approval of a device for many reasons, including:
• we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their
intended uses;
• the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval,
where required;
Healthcare cost containment pressures and legislative or regulatory reforms may affect our ability to sell
• the manufacturing process or facilities we use may not meet applicable requirements; and
our products profitably.
All third-party payers, whether governmental or commercial, whether inside the United States or outside, are
developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods also
potentially limit the amount that healthcare providers may be willing to pay for medical devices. In the United
States, hospital and other healthcare provider customers, including physicians and ambulatory surgery centers, that
purchase our products typically bill various third-party payers to cover all or a portion of the costs and fees
associated with the procedures or tests in which our products are used and bill patients for any deductibles or
co-payments. Because there is often no separate reimbursement for our products, any decline in the amount payers
are willing to reimburse our customers for the procedures and tests associated with our products could make it
difficult for customers to continue using, or adopt, our products and create additional pricing pressure for us. If we
are forced to lower the price we charge for our products, our gross margins will decrease, which will adversely
affect our ability to invest in and grow our business.
There have been, and we expect there will continue to be, legislative and regulatory proposals to change the
healthcare system, and some could significantly affect the ways in which doctors, hospitals, healthcare systems and
health insurance companies are compensated for the services they provide, which could have a material impact on
our business. It is not clear at this time what changes may impact the ability of hospitals and hospital networks to
purchase the patient monitoring, diagnostic cardiology and anesthesia systems that we sell or if it will alter market-
based incentives that hospitals and hospital networks currently face to continually improve, upgrade and expand
their use of such equipment.
Efforts by governmental and third-party payers to reduce healthcare costs or the implementation of new
legislative reforms imposing additional government controls could cause a reduction in sales or in the selling price
of our products, which could adversely affect our business.
Substantial government regulation in the United States and abroad may restrict our ability to sell our
patient monitoring, diagnostic cardiology and anesthesia systems, and failure to comply with such laws and
regulations may have a material adverse impact on our business.
The FDA and comparable regulatory authorities in foreign countries extensively and rigorously regulate our
patient monitoring, diagnostic cardiology and anesthesia systems, including the research and development, design,
testing, clinical trials, manufacturing, clearance or approval, safety and efficacy, labeling, advertising, promotion,
pricing, recordkeeping, reporting, import and export, post-approval studies and sale and distribution of these
products. In the United States, before we can market a new medical device, or a new use of, new claim for, or
significant modification to, an existing product, we must first receive clearance under Section 510(k) of the Federal
• the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to
change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance
or approval.
Our future products may not obtain FDA clearance on a timely basis, or at all. Further, the FDA makes periodic
inspections of medical device manufacturers and in connection with such inspections issues observations when the
FDA believes the manufacturer has failed to comply with applicable regulations. If FDA observations are not
addressed to the FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to other forms of
enforcement action, which could include the shutdown of our production facilities, adverse publicity, and civil and
criminal penalties. The expense and costs of any corrective actions that we may take, which may include product
recalls, correction and removal of products from customer sites and/or changes to our product manufacturing and
quality systems, could adversely impact our financial results. Issuance of a warning letter may also lead customers
to delay purchasing decisions or cancel orders.
Our patient monitoring, diagnostic cardiology, and anesthesia systems must also comply with the laws and
regulations of foreign countries in which we develop, manufacture and market such products. In general, the extent
and complexity of medical device regulation is increasing worldwide. This trend is likely to continue and the cost
and time required to obtain marketing clearance in any given country may increase as a result. Our products may not
obtain any necessary foreign clearances on a timely basis, or at all.
Once any of our patient monitoring, diagnostic cardiology, or anesthesia systems is cleared for sale, regulatory
authorities may still limit the use of such product, prevent its sale or manufacture or require a recall or withdrawal of
such product from the marketplace. Following initial clearance from regulatory authorities, we continue to be
subject to extensive regulatory requirements. Government authorities can withdraw marketing clearance or impose
sanctions due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems
following initial clearance. Ongoing regulatory requirements are wide-ranging and govern, among other things:
• annual inspections to retain a CE mark for sale of products in the European Union;
• product manufacturing;
• patient health data protection and medical device security;
• supplier substitution;
• product changes;
• process modifications;
36
37
• medical device reporting; and
• product sales and distribution.
We must continually monitor the performance of our products once approved and marketed for signs that
their use may elicit serious and unexpected adverse effects. Any recall of our products, either voluntarily or at
the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our
products that leads to corrective actions, could have a material adverse impact on us.
Although we believe that existing data continue to support the efficacy and safety of our patient monitoring,
cardiology, and anesthesia products, in the future, longer term study outcomes could demonstrate conflicting
clinical effectiveness, a reduction of effectiveness, no clinical effectiveness or longer term safety issues. This type
of differing data could have a detrimental effect on the market penetration and usage of our medical device
products. As a result, our sales may decline or expected growth would be negatively impacted. This could negatively
impact our operating condition and financial results.
More generally, all medical devices can experience performance problems that require review and possible
corrective action by us or a component supplier. We cannot provide assurance that component failures,
manufacturing errors, noncompliance with quality system requirements or good manufacturing practices, design
defects and/or labeling inadequacies in any device that could result in an unsafe condition or injury to the patient
will not occur. The FDA and similar foreign governmental authorities have the authority to require the recall of
commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in
the event that a product poses an unacceptable risk to health. Manufacturers may also, under their own initiative,
stop shipment or recall a product if any material deficiency is found or withdraw a product to improve device
performance or for other reasons. A government-mandated or voluntary recall by us could occur as a result of an
unacceptable risk to health, component failures, manufacturing errors, noncompliance with good manufacturing
practices or quality system requirements, design or labeling defects or other deficiencies and issues. Similar
regulatory agencies in other countries have similar authority to recall products because of material deficiencies or
defects in design or manufacture that could endanger health. A recall involving our products could be particularly
harmful to our business, financial and operating results.
The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after
the recall is initiated. Notice to the FDA of a correction or removal is required when undertaken to reduce a risk to
health, including when there is a reasonable probability that the product will cause serious adverse health
consequences or death, or when use of the device may cause temporary or medically reversible adverse health
consequences or an outcome where the probability of serious adverse health consequences is remote. In addition,
companies are required to maintain certain records of corrections and removal, even if they are not reportable to the
FDA or similar foreign governmental authorities. We may initiate voluntary recalls involving our products in the
future that we determine do not require notification of the FDA or foreign governmental authorities. If the FDA or
foreign governmental authorities disagree with our determinations, they could require us to report those actions as
recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In
addition, the FDA or a foreign governmental authority could take enforcement action for failing to report the recalls
when they were conducted.
In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any
incident in which our product may have caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
Repeated product malfunctions may result in a voluntary or involuntary product recall.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or
applicable foreign regulatory authority may require, or we may decide, that we will need to obtain new approvals or
clearances for the device before we may market or distribute the corrected device. Seeking such approvals or
clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, we may face
additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions,
administrative penalties, civil penalties or criminal fines. We may also be required to bear other costs or take other
actions that may have a negative impact on our sales as well as face material adverse publicity or regulatory
consequences, which could harm our business, including our ability to market our products in the future.
Any adverse event involving our products, whether in the United States or abroad, could result in future
voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection,
mandatory recall, orders of repair, replacement or refund or other enforcement action. Any corrective action,
whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time
and capital and may harm our reputation and financial results.
We may be subject to fines, penalties, injunctions or other enforcement actions if we are determined to be
promoting the use of our products for unapproved or ‘‘off-label’’ uses, resulting in damage to our reputation and
business.
Our promotional materials and training methods must comply with FDA and other applicable laws and
regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or
approved by the FDA. Use of a device outside of its cleared or approved indications is known as ‘‘off-label’’ use.
Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment
within the practice of medicine. However, if the FDA determines that our promotional materials or training
constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or
subject us to regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines,
penalties, consent decrees, injunctions, or seizures, which could have an adverse impact on our reputation and
financial results. We could also be subject to enforcement action under other federal or state laws, including the
False Claims Act.
We are subject to additional federal, state and foreign laws and regulations relating to our healthcare
business; our failure to comply with those laws could have a material adverse effect on our results of operations
and financial condition.
Although we do not provide healthcare services, submit claims for third-party reimbursement or receive
payments directly from Medicare, Medicaid or other third-party payers for our product, we are subject to healthcare
fraud and abuse regulation and enforcement by federal and state governments, which could significantly impact our
business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our
operations include:
• the federal Anti-Kickback Statute, which applies to our marketing practices, pricing policies and
relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or
providing remuneration intended to induce the purchase or recommendation of an item or service
reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs;
• federal civil and criminal false claims laws and civil monetary penalty laws, including civil whistleblower or
qui tam actions, that prohibit, among other things, knowingly presenting, or causing to be presented, claims
for payment or approval to the federal government that are false or fraudulent, knowingly making a false
statement material to an obligation to pay or transmit money or property to the federal government or
knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit
money or property to the federal government;
• the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and its implementing
regulations, which created federal criminal laws that prohibit, among other things, executing a scheme to
defraud any healthcare benefit program or making false statements relating to healthcare matters;
38
39
• medical device reporting; and
• product sales and distribution.
We must continually monitor the performance of our products once approved and marketed for signs that
their use may elicit serious and unexpected adverse effects. Any recall of our products, either voluntarily or at
the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our
products that leads to corrective actions, could have a material adverse impact on us.
Although we believe that existing data continue to support the efficacy and safety of our patient monitoring,
cardiology, and anesthesia products, in the future, longer term study outcomes could demonstrate conflicting
clinical effectiveness, a reduction of effectiveness, no clinical effectiveness or longer term safety issues. This type
of differing data could have a detrimental effect on the market penetration and usage of our medical device
products. As a result, our sales may decline or expected growth would be negatively impacted. This could negatively
impact our operating condition and financial results.
More generally, all medical devices can experience performance problems that require review and possible
corrective action by us or a component supplier. We cannot provide assurance that component failures,
manufacturing errors, noncompliance with quality system requirements or good manufacturing practices, design
defects and/or labeling inadequacies in any device that could result in an unsafe condition or injury to the patient
will not occur. The FDA and similar foreign governmental authorities have the authority to require the recall of
commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in
the event that a product poses an unacceptable risk to health. Manufacturers may also, under their own initiative,
stop shipment or recall a product if any material deficiency is found or withdraw a product to improve device
performance or for other reasons. A government-mandated or voluntary recall by us could occur as a result of an
unacceptable risk to health, component failures, manufacturing errors, noncompliance with good manufacturing
practices or quality system requirements, design or labeling defects or other deficiencies and issues. Similar
regulatory agencies in other countries have similar authority to recall products because of material deficiencies or
defects in design or manufacture that could endanger health. A recall involving our products could be particularly
harmful to our business, financial and operating results.
The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after
the recall is initiated. Notice to the FDA of a correction or removal is required when undertaken to reduce a risk to
health, including when there is a reasonable probability that the product will cause serious adverse health
consequences or death, or when use of the device may cause temporary or medically reversible adverse health
consequences or an outcome where the probability of serious adverse health consequences is remote. In addition,
companies are required to maintain certain records of corrections and removal, even if they are not reportable to the
FDA or similar foreign governmental authorities. We may initiate voluntary recalls involving our products in the
future that we determine do not require notification of the FDA or foreign governmental authorities. If the FDA or
foreign governmental authorities disagree with our determinations, they could require us to report those actions as
recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In
addition, the FDA or a foreign governmental authority could take enforcement action for failing to report the recalls
when they were conducted.
In addition, under the FDA’s medical device reporting regulations, we are required to report to the FDA any
incident in which our product may have caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
Repeated product malfunctions may result in a voluntary or involuntary product recall.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or
applicable foreign regulatory authority may require, or we may decide, that we will need to obtain new approvals or
clearances for the device before we may market or distribute the corrected device. Seeking such approvals or
clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, we may face
additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions,
administrative penalties, civil penalties or criminal fines. We may also be required to bear other costs or take other
actions that may have a negative impact on our sales as well as face material adverse publicity or regulatory
consequences, which could harm our business, including our ability to market our products in the future.
Any adverse event involving our products, whether in the United States or abroad, could result in future
voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection,
mandatory recall, orders of repair, replacement or refund or other enforcement action. Any corrective action,
whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time
and capital and may harm our reputation and financial results.
We may be subject to fines, penalties, injunctions or other enforcement actions if we are determined to be
promoting the use of our products for unapproved or ‘‘off-label’’ uses, resulting in damage to our reputation and
business.
Our promotional materials and training methods must comply with FDA and other applicable laws and
regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or
approved by the FDA. Use of a device outside of its cleared or approved indications is known as ‘‘off-label’’ use.
Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment
within the practice of medicine. However, if the FDA determines that our promotional materials or training
constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or
subject us to regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines,
penalties, consent decrees, injunctions, or seizures, which could have an adverse impact on our reputation and
financial results. We could also be subject to enforcement action under other federal or state laws, including the
False Claims Act.
We are subject to additional federal, state and foreign laws and regulations relating to our healthcare
business; our failure to comply with those laws could have a material adverse effect on our results of operations
and financial condition.
Although we do not provide healthcare services, submit claims for third-party reimbursement or receive
payments directly from Medicare, Medicaid or other third-party payers for our product, we are subject to healthcare
fraud and abuse regulation and enforcement by federal and state governments, which could significantly impact our
business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our
operations include:
• the federal Anti-Kickback Statute, which applies to our marketing practices, pricing policies and
relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or
providing remuneration intended to induce the purchase or recommendation of an item or service
reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs;
• federal civil and criminal false claims laws and civil monetary penalty laws, including civil whistleblower or
qui tam actions, that prohibit, among other things, knowingly presenting, or causing to be presented, claims
for payment or approval to the federal government that are false or fraudulent, knowingly making a false
statement material to an obligation to pay or transmit money or property to the federal government or
knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit
money or property to the federal government;
• the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) and its implementing
regulations, which created federal criminal laws that prohibit, among other things, executing a scheme to
defraud any healthcare benefit program or making false statements relating to healthcare matters;
38
39
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act
(HITECH), imposes certain regulatory and contractual requirements regarding the privacy, security and
transmission of individually identifiable health information;
• federal ‘‘Sunshine Act’’ requirements imposed by the Affordable Care Act, on device manufacturers
regarding any ‘‘payment or other transfer of value’’ to physicians and teaching hospitals. Failure to submit
required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or
up to an aggregate of $1 million per year for ‘‘knowing failures’’) for all payments, transfers of value or
ownership or investment interests that are not timely, accurately and completely reported in an annual
submission; and
• state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false
claims laws that may apply to items or services reimbursed by any third-party payer, including commercial
insurers; state laws that require device companies to comply with the industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government or otherwise
restrict payments that may be made to healthcare providers; state laws that require drug and device
manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures; and state laws governing the privacy and security of certain
health information, many of which differ from each other in significant ways and often are not preempted by
HIPAA/HITECH, thus complicating compliance efforts.
The risk of our being found in violation of these laws and regulations is increased by the fact that many of them
have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety
of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the
Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and
criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of these statutes or
specific intent to violate them to have committed a violation. In addition, the Affordable Care Act provided that the
government may assert that a claim including items or services resulting from a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available
under such laws, it is possible that some of our business activities could be subject to challenge under one or more
of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses and divert our management’s attention from the operation of our business. If
our operations are found to be in violation of any of the laws described above or any other governmental regulations
that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion
from governmental health care programs, disgorgement, contractual damages, reputational harm, diminished
profits and future earnings, and the curtailment or restructuring of our operations, any of which could impair our
ability to operate our business and our financial results.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of
operations.
The healthcare industry has been consolidating and organizations such as group purchasing organizations,
independent delivery networks, and large single accounts such as the United States Veterans Administration,
continue to consolidate purchasing decisions for many of our healthcare provider customers. As a result,
transactions with customers are larger, more complex, and tend to involve more long-term contracts. The
purchasing power of these larger customers has increased, and may continue to increase, causing downward
pressure on product pricing. If we are not one of the providers selected by one of these organizations, we may be
precluded from making sales to its members or participants. Even if we are one of the selected providers, we may be
at a disadvantage relative to other selected providers that are able to offer volume discounts based on purchases of a
broader range of products. Further, we may be required to commit to pricing that has a material adverse effect on
our revenues and profit margins, business, financial condition and results of operations. We expect that market
demand, governmental regulation, third-party reimbursement policies and societal pressures will continue to
change the worldwide healthcare industry, resulting in further business consolidations and alliances, which may
exert further downward pressure on the prices of our products and could adversely impact our business, financial
condition, and results of operations.
Technological advances and evolving industry and regulatory standards and certifications could reduce
our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs,
evolving industry or regulatory standards and certifications and frequent new product introductions and
enhancements. The emergence of new industry or regulatory standards and certification requirements in related
fields may adversely affect the demand for our products. This could happen, for example, if new standards and
technologies emerged that were incompatible with customer deployments of our applications. In addition, any
products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses
incurred in connection with their development. We cannot provide assurance that we will succeed in developing and
marketing product enhancements or new products that respond to technological change, new industry standards,
changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if
we are able to develop new products and product enhancements, we cannot provide assurance that they will be
profitable or that they will achieve market acceptance.
We develop certain of our security inspection technologies to meet the certification requirements of various
agencies worldwide, including the U.S. Transportation Safety Administration and the European Civil Aviation
Conference among others. Such standards frequently change and there is a risk now and in the future that we may
not ultimately be able to develop technologies, or develop in a timely way, solutions that are ultimately able to meet
the new standards.
We are subject to various environmental regulations which may impose liability on us whether or not we
knew of or caused the release of hazardous substances on or in our facilities.
We are subject to various U.S. and international environmental laws, directives, and regulations pertaining to
the use, storage, handling and disposal of hazardous substances used, and hazardous wastes used or generated, in
the manufacture of our products. Such laws mandate the use of controls and practices designed to mitigate the
impact of our operations on the environment, and under such laws we may be held liable for the costs associated
with the remediation and removal of any unintended or previously unknown releases of hazardous substances on,
beneath or from our property and associated operations, including the remediation of hazardous waste disposed
off-site. Such laws may impose liability without regard to whether we knew of or caused the release of such
hazardous substances or wastes. For example, we continue to investigate soil and groundwater contamination at our
Hawthorne, California facility that we believe stems from historical releases and off-site sources. See ‘‘Business—
Environmental Regulations’’. Any failure by us to comply with present or future regulations could subject us to the
imposition of substantial fines, suspension of production, alteration of manufacturing processes, or cessation of
operations, any of which could have a material adverse effect on our business, financial condition and results of
operations.
A failure of a key information technology system, process or site could have a material adverse impact on
our ability to conduct business.
We rely extensively on information technology systems to interact with our employees and our customers.
These interactions include, but are not limited to, ordering and managing materials from suppliers, converting
materials to finished products, shipping product to customers, processing transactions, summarizing and reporting
results of operations, transmitting data used by our service personnel and by and among our wide-spread personnel
40
41
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act
(HITECH), imposes certain regulatory and contractual requirements regarding the privacy, security and
transmission of individually identifiable health information;
• federal ‘‘Sunshine Act’’ requirements imposed by the Affordable Care Act, on device manufacturers
regarding any ‘‘payment or other transfer of value’’ to physicians and teaching hospitals. Failure to submit
required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or
up to an aggregate of $1 million per year for ‘‘knowing failures’’) for all payments, transfers of value or
ownership or investment interests that are not timely, accurately and completely reported in an annual
submission; and
• state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false
claims laws that may apply to items or services reimbursed by any third-party payer, including commercial
insurers; state laws that require device companies to comply with the industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government or otherwise
restrict payments that may be made to healthcare providers; state laws that require drug and device
manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures; and state laws governing the privacy and security of certain
health information, many of which differ from each other in significant ways and often are not preempted by
HIPAA/HITECH, thus complicating compliance efforts.
The risk of our being found in violation of these laws and regulations is increased by the fact that many of them
have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety
of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the
Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and
criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of these statutes or
specific intent to violate them to have committed a violation. In addition, the Affordable Care Act provided that the
government may assert that a claim including items or services resulting from a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available
under such laws, it is possible that some of our business activities could be subject to challenge under one or more
of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses and divert our management’s attention from the operation of our business. If
our operations are found to be in violation of any of the laws described above or any other governmental regulations
that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion
from governmental health care programs, disgorgement, contractual damages, reputational harm, diminished
profits and future earnings, and the curtailment or restructuring of our operations, any of which could impair our
ability to operate our business and our financial results.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of
operations.
The healthcare industry has been consolidating and organizations such as group purchasing organizations,
independent delivery networks, and large single accounts such as the United States Veterans Administration,
continue to consolidate purchasing decisions for many of our healthcare provider customers. As a result,
transactions with customers are larger, more complex, and tend to involve more long-term contracts. The
purchasing power of these larger customers has increased, and may continue to increase, causing downward
pressure on product pricing. If we are not one of the providers selected by one of these organizations, we may be
precluded from making sales to its members or participants. Even if we are one of the selected providers, we may be
at a disadvantage relative to other selected providers that are able to offer volume discounts based on purchases of a
broader range of products. Further, we may be required to commit to pricing that has a material adverse effect on
our revenues and profit margins, business, financial condition and results of operations. We expect that market
demand, governmental regulation, third-party reimbursement policies and societal pressures will continue to
change the worldwide healthcare industry, resulting in further business consolidations and alliances, which may
exert further downward pressure on the prices of our products and could adversely impact our business, financial
condition, and results of operations.
Technological advances and evolving industry and regulatory standards and certifications could reduce
our future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs,
evolving industry or regulatory standards and certifications and frequent new product introductions and
enhancements. The emergence of new industry or regulatory standards and certification requirements in related
fields may adversely affect the demand for our products. This could happen, for example, if new standards and
technologies emerged that were incompatible with customer deployments of our applications. In addition, any
products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses
incurred in connection with their development. We cannot provide assurance that we will succeed in developing and
marketing product enhancements or new products that respond to technological change, new industry standards,
changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if
we are able to develop new products and product enhancements, we cannot provide assurance that they will be
profitable or that they will achieve market acceptance.
We develop certain of our security inspection technologies to meet the certification requirements of various
agencies worldwide, including the U.S. Transportation Safety Administration and the European Civil Aviation
Conference among others. Such standards frequently change and there is a risk now and in the future that we may
not ultimately be able to develop technologies, or develop in a timely way, solutions that are ultimately able to meet
the new standards.
We are subject to various environmental regulations which may impose liability on us whether or not we
knew of or caused the release of hazardous substances on or in our facilities.
We are subject to various U.S. and international environmental laws, directives, and regulations pertaining to
the use, storage, handling and disposal of hazardous substances used, and hazardous wastes used or generated, in
the manufacture of our products. Such laws mandate the use of controls and practices designed to mitigate the
impact of our operations on the environment, and under such laws we may be held liable for the costs associated
with the remediation and removal of any unintended or previously unknown releases of hazardous substances on,
beneath or from our property and associated operations, including the remediation of hazardous waste disposed
off-site. Such laws may impose liability without regard to whether we knew of or caused the release of such
hazardous substances or wastes. For example, we continue to investigate soil and groundwater contamination at our
Hawthorne, California facility that we believe stems from historical releases and off-site sources. See ‘‘Business—
Environmental Regulations’’. Any failure by us to comply with present or future regulations could subject us to the
imposition of substantial fines, suspension of production, alteration of manufacturing processes, or cessation of
operations, any of which could have a material adverse effect on our business, financial condition and results of
operations.
A failure of a key information technology system, process or site could have a material adverse impact on
our ability to conduct business.
We rely extensively on information technology systems to interact with our employees and our customers.
These interactions include, but are not limited to, ordering and managing materials from suppliers, converting
materials to finished products, shipping product to customers, processing transactions, summarizing and reporting
results of operations, transmitting data used by our service personnel and by and among our wide-spread personnel
40
41
and facilities, complying with regulatory, legal and tax requirements, and other processes necessary to manage our
business. If our systems are damaged or cease to function properly due to any number of causes, ranging from the
failures of third-party service providers, to catastrophic events, to power outages, to security breaches, and our
business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our ability
to manage operations which may adversely impact our results of operations and/or financial condition.
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted
computer crime could pose a risk to our systems, networks, products, services and data.
Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related
attacks pose a risk to the security of our and our customers’, suppliers’ and third-party service providers’ products,
systems and networks and the confidentiality, availability and integrity of our and our customers’ data. Although we
have implemented policies, procedures and controls to protect against, detect and mitigate these threats, we remain
potentially vulnerable to additional known or unknown threats. We also have access to sensitive, confidential or
personal data or information that is subject to privacy and security laws, regulations and customer-imposed
controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable
to material security breaches, theft, misplaced or lost data, programming errors, employee errors and/or
malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or
information, improper use of our systems or networks, unauthorized access, use, disclosure, modification or
destruction of information, defective products, production downtimes and operational disruptions. In addition, a
cyber-related attack could result in other negative consequences, including damage to our reputation or
competitiveness and remediation or increased protection costs, and could subject us to fines, damages, litigation
and enforcement actions.
We may experience difficulties implementing our new global enterprise resource planning system.
We are engaged in a multi-year implementation of a new global enterprise resource planning system (ERP).
The ERP is designed to accurately maintain our books and records and provide information important to the
operation of our business to our management team. Our ERP will continue to require significant investment of
human and financial resources. In implementing the ERP, we may experience significant delays, increased costs
and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could
adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual
obligations or otherwise operate our business. While we have invested significant resources in planning and project
management, significant implementation issues may arise.
We receive significant amounts of research and development funding for our security and inspection
systems from government grants and contracts, but we may not receive comparable levels of funding in the
future.
The U.S. Government currently plays an important role in funding the development of certain of our security
and inspection systems and sponsoring their deployment at airports, ports, military installations and border
crossings. However, in the future, additional research and development funds from the government may not be
available to us. If the government does not sponsor our technologies in the future, we may have to expend more
resources on product development or cease development of certain technologies, which could adversely affect our
business. Government funded research and development also presents risks associated with government contracting
in general that are described elsewhere in our risk factors. Government agencies can generally terminate their
contracts for convenience, and if we fail to meet the goals of government funded research and development, there is
a risk that the government agency may terminate our contracts for default. In addition, any future grants to our
competitors may improve their ability to develop and market competing products and cause our customers to delay
purchase decisions, which could harm our ability to market our products.
Certain of our U.S. Government contracts are dependent upon our employees obtaining and maintaining
required security clearances, as well as our ability to obtain security clearances for the facilities in which we
perform sensitive government work.
Certain of our U.S. Government contracts require our employees to maintain various levels of security
clearances, and we are required to maintain certain facility security clearances. If we cannot maintain or obtain the
required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we
may be unable to perform certain U.S. Government contracts. Further, loss of a facility clearance, or an employee’s
failure to obtain or maintain a security clearance, could result in a U.S. Government customer terminating an
existing contract or choosing not to renew a contract. Lack of required clearances could also impede our ability to
bid on or win new U.S. Government contracts. This could damage our reputation and adversely affect our business,
financial condition and results of operations.
We are involved in various litigation matters, which could have a material adverse effect on our business,
financial condition or operating results.
Litigation can be lengthy, expensive and disruptive to our operations, and can divert our management’s
attention away from the running of our business. Claims arising out of actual or alleged violations of law could be
asserted against us by individuals, either individually or through class actions, or by governmental entities in
investigations and proceedings. If we are unsuccessful in our defense in litigation matters, or any other legal
proceeding, we may be forced to pay damages or fines and/or change our business practices, any of which could
have a material adverse effect on our business, financial condition and results of operations. For more information
about our litigation matters, see ‘‘Legal Proceedings’’ and note 10 to the consolidated financial statements.
Our credit facility contains provisions that could restrict our ability to finance our future operations or
engage in other business activities that may be in our interest.
Our credit facility contains a number of significant covenants that, among other things, limit our ability to:
• dispose of assets;
• incur certain additional indebtedness;
• repay certain indebtedness;
• create liens on assets;
• pay dividends on our Common Stock;
• make certain investments, loans and advances;
• repurchase or redeem capital stock;
• make certain capital expenditures;
• engage in acquisitions, mergers or consolidations; and
• engage in certain transactions with subsidiaries and affiliates.
These covenants could limit our ability to plan for or react to market conditions, finance our operations,
engage in strategic acquisitions or disposals or meet our capital needs or could otherwise restrict our activities or
business plans. Our ability to comply with these covenants may be affected by events beyond our control. In
addition, our credit facility also requires us to maintain compliance with certain financial ratios. Our inability to
comply with the required financial ratios or covenants could result in an event of default under our credit facility. A
default, if not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could
terminate their commitments to make further extensions of credit under our credit facility. If our indebtedness is
42
43
and facilities, complying with regulatory, legal and tax requirements, and other processes necessary to manage our
business. If our systems are damaged or cease to function properly due to any number of causes, ranging from the
failures of third-party service providers, to catastrophic events, to power outages, to security breaches, and our
business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our ability
to manage operations which may adversely impact our results of operations and/or financial condition.
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted
computer crime could pose a risk to our systems, networks, products, services and data.
Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related
attacks pose a risk to the security of our and our customers’, suppliers’ and third-party service providers’ products,
systems and networks and the confidentiality, availability and integrity of our and our customers’ data. Although we
have implemented policies, procedures and controls to protect against, detect and mitigate these threats, we remain
potentially vulnerable to additional known or unknown threats. We also have access to sensitive, confidential or
personal data or information that is subject to privacy and security laws, regulations and customer-imposed
controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable
to material security breaches, theft, misplaced or lost data, programming errors, employee errors and/or
malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or
information, improper use of our systems or networks, unauthorized access, use, disclosure, modification or
destruction of information, defective products, production downtimes and operational disruptions. In addition, a
cyber-related attack could result in other negative consequences, including damage to our reputation or
competitiveness and remediation or increased protection costs, and could subject us to fines, damages, litigation
and enforcement actions.
We may experience difficulties implementing our new global enterprise resource planning system.
We are engaged in a multi-year implementation of a new global enterprise resource planning system (ERP).
The ERP is designed to accurately maintain our books and records and provide information important to the
operation of our business to our management team. Our ERP will continue to require significant investment of
human and financial resources. In implementing the ERP, we may experience significant delays, increased costs
and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could
adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual
obligations or otherwise operate our business. While we have invested significant resources in planning and project
management, significant implementation issues may arise.
We receive significant amounts of research and development funding for our security and inspection
systems from government grants and contracts, but we may not receive comparable levels of funding in the
future.
The U.S. Government currently plays an important role in funding the development of certain of our security
and inspection systems and sponsoring their deployment at airports, ports, military installations and border
crossings. However, in the future, additional research and development funds from the government may not be
available to us. If the government does not sponsor our technologies in the future, we may have to expend more
resources on product development or cease development of certain technologies, which could adversely affect our
business. Government funded research and development also presents risks associated with government contracting
in general that are described elsewhere in our risk factors. Government agencies can generally terminate their
contracts for convenience, and if we fail to meet the goals of government funded research and development, there is
a risk that the government agency may terminate our contracts for default. In addition, any future grants to our
competitors may improve their ability to develop and market competing products and cause our customers to delay
purchase decisions, which could harm our ability to market our products.
Certain of our U.S. Government contracts are dependent upon our employees obtaining and maintaining
required security clearances, as well as our ability to obtain security clearances for the facilities in which we
perform sensitive government work.
Certain of our U.S. Government contracts require our employees to maintain various levels of security
clearances, and we are required to maintain certain facility security clearances. If we cannot maintain or obtain the
required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we
may be unable to perform certain U.S. Government contracts. Further, loss of a facility clearance, or an employee’s
failure to obtain or maintain a security clearance, could result in a U.S. Government customer terminating an
existing contract or choosing not to renew a contract. Lack of required clearances could also impede our ability to
bid on or win new U.S. Government contracts. This could damage our reputation and adversely affect our business,
financial condition and results of operations.
We are involved in various litigation matters, which could have a material adverse effect on our business,
financial condition or operating results.
Litigation can be lengthy, expensive and disruptive to our operations, and can divert our management’s
attention away from the running of our business. Claims arising out of actual or alleged violations of law could be
asserted against us by individuals, either individually or through class actions, or by governmental entities in
investigations and proceedings. If we are unsuccessful in our defense in litigation matters, or any other legal
proceeding, we may be forced to pay damages or fines and/or change our business practices, any of which could
have a material adverse effect on our business, financial condition and results of operations. For more information
about our litigation matters, see ‘‘Legal Proceedings’’ and note 10 to the consolidated financial statements.
Our credit facility contains provisions that could restrict our ability to finance our future operations or
engage in other business activities that may be in our interest.
Our credit facility contains a number of significant covenants that, among other things, limit our ability to:
• dispose of assets;
• incur certain additional indebtedness;
• repay certain indebtedness;
• create liens on assets;
• pay dividends on our Common Stock;
• make certain investments, loans and advances;
• repurchase or redeem capital stock;
• make certain capital expenditures;
• engage in acquisitions, mergers or consolidations; and
• engage in certain transactions with subsidiaries and affiliates.
These covenants could limit our ability to plan for or react to market conditions, finance our operations,
engage in strategic acquisitions or disposals or meet our capital needs or could otherwise restrict our activities or
business plans. Our ability to comply with these covenants may be affected by events beyond our control. In
addition, our credit facility also requires us to maintain compliance with certain financial ratios. Our inability to
comply with the required financial ratios or covenants could result in an event of default under our credit facility. A
default, if not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could
terminate their commitments to make further extensions of credit under our credit facility. If our indebtedness is
42
43
accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we
will have the ability to refinance accelerated indebtedness on terms favorable to us or at all.
We may not have the ability to raise the funds necessary to settle conversions of our 1.25% convertible
senior notes due 2022 (the ‘‘Notes’’) or to repurchase the Notes upon a fundamental change, and our future debt
may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of our Notes have the right to require us to repurchase their Notes upon the occurrence of a
fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of our Notes
to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, unless we
elect to deliver solely shares of our Common Stock to settle such conversion (other than paying cash in lieu of
delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases of Notes surrendered or Notes being converted. In addition, our ability to repurchase the Notes or to
pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing
our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture
or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default
under the indenture. A default under the indenture or the fundamental change itself could also lead to a default
under agreements governing our current and future indebtedness. If the repayment of the related indebtedness were
to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the
indebtedness and repurchase the Notes or make cash payments upon conversion of the Notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition
and operating results.
If the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert
them at any time during specified periods at their option. See note 7 to the consolidated financial statements for
additional information. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion
obligation by delivering solely shares of our Common Stock (other than paying cash in lieu of delivering any
fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of
cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we
could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the
Notes as a current rather than long-term liability, which would result in a material reduction of our net working
capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes,
could have a material effect on our reported financial results.
Under FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement), subsequently codified as Accounting Standards
Codification 470-20, Debt with Conversion and Other Options (‘‘ASC 470-20’’), an entity must separately account
for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled
entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect
of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the
additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the
equity component would be treated as original issue discount for purposes of accounting for the debt component of
the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods
presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the
term of the Notes. Because ASC 470-20 will require interest to include both the current period’s amortization of the
debt discount and the instrument’s coupon interest, we will report lower net income in our financial results, and the
trading price of our Common Stock and the trading price of the Notes could be materially and adversely affected.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled
entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that
the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share
except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock
method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of
Common Stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are
issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury
stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon
conversion of the Notes, then our diluted earnings per share would be adversely affected.
Changes in our tax rates could affect our future financial results.
Our future effective tax rates could be favorably or unfavorably affected by changes in the valuation of our
deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the
examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an
adverse effect on our operating results and financial condition.
Changes in tax laws or tax rulings could materially affect our financial position and results of
operations.
Changes in tax laws or tax rulings could materially affect our financial position and results of operations. For
example, the current U.S. administration and key members of Congress have made public statements indicating that
tax reform is a priority. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation
on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax
treatment of our foreign earnings. In addition, many countries in the European Union, as well as a number of other
countries and organizations such as the Organization for Economic Cooperation and Development, are actively
considering changes to existing tax laws. Certain proposals could include recommendations that would
significantly increase our tax obligations in many countries where we do business. Due to the large and expanding
scale of our international business activities, any changes in the taxation of such activities may increase our
worldwide effective tax rate and harm our financial position and results of operations.
If goodwill or other intangible assets in connection with our acquisitions become impaired, we could take
significant non-cash charges against earnings.
We have pursued and will continue to seek potential acquisitions to complement and expand our existing
businesses, increase our revenues and profitability, and expand our markets. As a result of prior acquisitions, we
have goodwill and intangible assets recorded on our balance sheet as described in note 5 to our consolidated
financial statements. Under current accounting guidelines, we must assess, at least annually, whether the value of
goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or
other intangible assets will result in charges against earnings, which could adversely affect our results of operations
in future periods.
If we do not remediate a material weakness in our internal control over financial reporting, we may be
adversely affected.
Under Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, companies are
required to conduct a comprehensive evaluation of their internal control over financial reporting. As part of this
process, we are required to document and test our internal control over financial reporting; our management is
required to assess and issue a report concerning our internal control over financial reporting; and our independent
44
45
accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we
will have the ability to refinance accelerated indebtedness on terms favorable to us or at all.
We may not have the ability to raise the funds necessary to settle conversions of our 1.25% convertible
senior notes due 2022 (the ‘‘Notes’’) or to repurchase the Notes upon a fundamental change, and our future debt
may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of our Notes have the right to require us to repurchase their Notes upon the occurrence of a
fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of our Notes
to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, unless we
elect to deliver solely shares of our Common Stock to settle such conversion (other than paying cash in lieu of
delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make
repurchases of Notes surrendered or Notes being converted. In addition, our ability to repurchase the Notes or to
pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing
our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture
or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default
under the indenture. A default under the indenture or the fundamental change itself could also lead to a default
under agreements governing our current and future indebtedness. If the repayment of the related indebtedness were
to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the
indebtedness and repurchase the Notes or make cash payments upon conversion of the Notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition
and operating results.
If the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert
them at any time during specified periods at their option. See note 7 to the consolidated financial statements for
additional information. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion
obligation by delivering solely shares of our Common Stock (other than paying cash in lieu of delivering any
fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of
cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we
could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the
Notes as a current rather than long-term liability, which would result in a material reduction of our net working
capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes,
could have a material effect on our reported financial results.
Under FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement), subsequently codified as Accounting Standards
Codification 470-20, Debt with Conversion and Other Options (‘‘ASC 470-20’’), an entity must separately account
for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled
entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect
of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the
additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the
equity component would be treated as original issue discount for purposes of accounting for the debt component of
the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods
presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the
term of the Notes. Because ASC 470-20 will require interest to include both the current period’s amortization of the
debt discount and the instrument’s coupon interest, we will report lower net income in our financial results, and the
trading price of our Common Stock and the trading price of the Notes could be materially and adversely affected.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled
entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that
the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share
except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock
method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of
Common Stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are
issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury
stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon
conversion of the Notes, then our diluted earnings per share would be adversely affected.
Changes in our tax rates could affect our future financial results.
Our future effective tax rates could be favorably or unfavorably affected by changes in the valuation of our
deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the
examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an
adverse effect on our operating results and financial condition.
Changes in tax laws or tax rulings could materially affect our financial position and results of
operations.
Changes in tax laws or tax rulings could materially affect our financial position and results of operations. For
example, the current U.S. administration and key members of Congress have made public statements indicating that
tax reform is a priority. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation
on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax
treatment of our foreign earnings. In addition, many countries in the European Union, as well as a number of other
countries and organizations such as the Organization for Economic Cooperation and Development, are actively
considering changes to existing tax laws. Certain proposals could include recommendations that would
significantly increase our tax obligations in many countries where we do business. Due to the large and expanding
scale of our international business activities, any changes in the taxation of such activities may increase our
worldwide effective tax rate and harm our financial position and results of operations.
If goodwill or other intangible assets in connection with our acquisitions become impaired, we could take
significant non-cash charges against earnings.
We have pursued and will continue to seek potential acquisitions to complement and expand our existing
businesses, increase our revenues and profitability, and expand our markets. As a result of prior acquisitions, we
have goodwill and intangible assets recorded on our balance sheet as described in note 5 to our consolidated
financial statements. Under current accounting guidelines, we must assess, at least annually, whether the value of
goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or
other intangible assets will result in charges against earnings, which could adversely affect our results of operations
in future periods.
If we do not remediate a material weakness in our internal control over financial reporting, we may be
adversely affected.
Under Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, companies are
required to conduct a comprehensive evaluation of their internal control over financial reporting. As part of this
process, we are required to document and test our internal control over financial reporting; our management is
required to assess and issue a report concerning our internal control over financial reporting; and our independent
44
45
registered public accounting firm is required to attest to and report on the effectiveness of our internal control over
financial reporting. Management’s assessment of our internal control over financial reporting as of June 30, 2017
identified a material weakness of internal control procedures surrounding non-routine transactions. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. This material weakness is more fully described in Item 9A. Controls and
Procedures. As further discussed in Item 9A, we are taking steps to remediate this material weakness. We will need
to monitor and evaluate these procedures to ensure that they are operating effectively.
We have made certain assumptions relating to the acquisition of AS&E# that may prove to be materially
inaccurate.
We have made certain assumptions relating to the acquisition of AS&E#, including, for example:
• projections of AS&E#’s future revenues;
• the amount of goodwill and intangibles that will result from the acquisition;
• certain other purchase accounting adjustments that we expect will be recorded in our financial statements in
connection with the acquisition;
• acquisition costs, including transaction and integration costs;
• the amount of cost savings as a result of synergies from the merger;
• our ability to maintain, develop and deepen relationships with AS&E#’s customers; and
• potential outcomes of, and contingencies related to, the ongoing investigation of AS&E# by the U.S.
General Services Administration, or GSA, regarding its GSA contracting activity.
While management has made such assumptions in good faith and believes them to be reasonable, the assumptions
may turn out to be materially inaccurate, including for reasons beyond our control. If these assumptions are
incorrect we may change or modify our assumptions, such change or modification could have a material adverse
effect on our financial condition or results of operations.
Our Certificate of Incorporation and other agreements contain provisions that could discourage a
takeover.
Our Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of
Preferred Stock in one or more series, to fix the rights, preferences, privileges and restrictions of Preferred Stock, to
fix the number of shares constituting any such series and to fix the designation of any such series, without further
vote or action by stockholders. The terms of any series of Preferred Stock, which may include economic rights
senior to our Common Stock and special voting rights, could adversely affect the rights of the holders of our
Common Stock and thereby reduce the value of our Common Stock. The issuance of Preferred Stock, coupled with
the concentration of ownership in the directors and executive officers, could discourage certain types of
transactions involving an actual or potential change in control of our company, including transactions in which the
holders of Common Stock might otherwise receive a premium for their shares over then current prices, could
otherwise dilute the rights of holders of Common Stock and may limit the ability of such stockholders to cause or
approve transactions which they may deem to be in their best interests, all of which could have a material adverse
effect on the market price of our Common Stock.
Our Certificate of Incorporation limits the liability of our directors, which may limit the remedies we or
our stockholders have available.
Our Certificate of Incorporation provides that, pursuant to the Delaware General Corporation Law, the liability
of our directors for monetary damages shall be eliminated to the fullest extent permissible under Delaware law, as
that law exists currently and as it may be amended in the future. This is intended to eliminate the personal liability
of a director for monetary damages in an action brought by us, or in our right for breach of a director’s duties to us or
our stockholders and may limit the remedies available to us or our stockholders. Under Delaware law, this provision
does not apply to eliminate or limit a director’s monetary liabilities for: (i) breaches of the director’s duty of loyalty
to us or our stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law; (iii) the unlawful payment of dividends or unlawful stock repurchases or redemptions
under Section 174 of the Delaware General Corporation Law or (iv) transactions in which the director received an
improper personal benefit. Additionally, under Delaware law, this provision does not limit a director’s liability for
the violation of, or otherwise relieve us or our directors from complying with, federal or state securities laws, nor
does it limit the availability of non-monetary remedies such as injunctive relief or rescission for a violation of
federal or state securities laws.
New regulations related to conflict minerals may force us to incur additional expenses, may make our
supply chain more complex and may result in damage to our relationships with customers.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted
requirements for companies that manufacture products that contain certain minerals and metals, known as conflict
minerals. These rules require public companies to perform diligence and to report annually to the SEC whether
such minerals originate from the Democratic Republic of Congo and adjoining countries. These requirements could
adversely affect the sourcing, availability and pricing of minerals we use in the manufacture of certain of our
products. In addition, we incur additional costs to comply with the disclosure requirements, including costs related
to determining the source of any of the relevant minerals used in our products. Since our supply chain is complex,
we may not be able to ascertain the origins for these minerals used in our products through the due diligence
procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying
customers who may require that our products be certified as conflict mineral free, which could harm our
relationships with these customers and lead to a loss of revenue. These requirements could limit the pool of
suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at
competitive prices, which could increase our costs and adversely affect our manufacturing operations and our
profitability.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
46
47
registered public accounting firm is required to attest to and report on the effectiveness of our internal control over
financial reporting. Management’s assessment of our internal control over financial reporting as of June 30, 2017
identified a material weakness of internal control procedures surrounding non-routine transactions. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. This material weakness is more fully described in Item 9A. Controls and
Procedures. As further discussed in Item 9A, we are taking steps to remediate this material weakness. We will need
to monitor and evaluate these procedures to ensure that they are operating effectively.
We have made certain assumptions relating to the acquisition of AS&E# that may prove to be materially
inaccurate.
We have made certain assumptions relating to the acquisition of AS&E#, including, for example:
• projections of AS&E#’s future revenues;
• the amount of goodwill and intangibles that will result from the acquisition;
• certain other purchase accounting adjustments that we expect will be recorded in our financial statements in
connection with the acquisition;
• acquisition costs, including transaction and integration costs;
• the amount of cost savings as a result of synergies from the merger;
• our ability to maintain, develop and deepen relationships with AS&E#’s customers; and
• potential outcomes of, and contingencies related to, the ongoing investigation of AS&E# by the U.S.
General Services Administration, or GSA, regarding its GSA contracting activity.
While management has made such assumptions in good faith and believes them to be reasonable, the assumptions
may turn out to be materially inaccurate, including for reasons beyond our control. If these assumptions are
incorrect we may change or modify our assumptions, such change or modification could have a material adverse
effect on our financial condition or results of operations.
Our Certificate of Incorporation and other agreements contain provisions that could discourage a
takeover.
Our Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of
Preferred Stock in one or more series, to fix the rights, preferences, privileges and restrictions of Preferred Stock, to
fix the number of shares constituting any such series and to fix the designation of any such series, without further
vote or action by stockholders. The terms of any series of Preferred Stock, which may include economic rights
senior to our Common Stock and special voting rights, could adversely affect the rights of the holders of our
Common Stock and thereby reduce the value of our Common Stock. The issuance of Preferred Stock, coupled with
the concentration of ownership in the directors and executive officers, could discourage certain types of
transactions involving an actual or potential change in control of our company, including transactions in which the
holders of Common Stock might otherwise receive a premium for their shares over then current prices, could
otherwise dilute the rights of holders of Common Stock and may limit the ability of such stockholders to cause or
approve transactions which they may deem to be in their best interests, all of which could have a material adverse
effect on the market price of our Common Stock.
Our Certificate of Incorporation limits the liability of our directors, which may limit the remedies we or
our stockholders have available.
Our Certificate of Incorporation provides that, pursuant to the Delaware General Corporation Law, the liability
of our directors for monetary damages shall be eliminated to the fullest extent permissible under Delaware law, as
that law exists currently and as it may be amended in the future. This is intended to eliminate the personal liability
of a director for monetary damages in an action brought by us, or in our right for breach of a director’s duties to us or
our stockholders and may limit the remedies available to us or our stockholders. Under Delaware law, this provision
does not apply to eliminate or limit a director’s monetary liabilities for: (i) breaches of the director’s duty of loyalty
to us or our stockholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law; (iii) the unlawful payment of dividends or unlawful stock repurchases or redemptions
under Section 174 of the Delaware General Corporation Law or (iv) transactions in which the director received an
improper personal benefit. Additionally, under Delaware law, this provision does not limit a director’s liability for
the violation of, or otherwise relieve us or our directors from complying with, federal or state securities laws, nor
does it limit the availability of non-monetary remedies such as injunctive relief or rescission for a violation of
federal or state securities laws.
New regulations related to conflict minerals may force us to incur additional expenses, may make our
supply chain more complex and may result in damage to our relationships with customers.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted
requirements for companies that manufacture products that contain certain minerals and metals, known as conflict
minerals. These rules require public companies to perform diligence and to report annually to the SEC whether
such minerals originate from the Democratic Republic of Congo and adjoining countries. These requirements could
adversely affect the sourcing, availability and pricing of minerals we use in the manufacture of certain of our
products. In addition, we incur additional costs to comply with the disclosure requirements, including costs related
to determining the source of any of the relevant minerals used in our products. Since our supply chain is complex,
we may not be able to ascertain the origins for these minerals used in our products through the due diligence
procedures that we implement, which may harm our reputation. We may also face difficulties in satisfying
customers who may require that our products be certified as conflict mineral free, which could harm our
relationships with these customers and lead to a loss of revenue. These requirements could limit the pool of
suppliers that can provide conflict-free minerals, and we may be unable to obtain conflict-free minerals at
competitive prices, which could increase our costs and adversely affect our manufacturing operations and our
profitability.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
46
47
ITEM 2. PROPERTIES
As of June 30, 2017, we leased the following principal facilities (i.e., facilities greater than 50,000 square
As of June 30, 2017, we owned the following principal facilities (i.e., facilities greater than 50,000 square
feet):
Location
Hawthorne, California
Snoqualmie, Washington (1)
Stoke on Trent, United Kingdom
Surrey, United Kingdom
Batam, Indonesia
(1) This facility is encumbered by a mortgage.
Description of Facility
Corporate headquarters and administrative,
manufacturing, engineering, sales and
marketing and service for our Optoelectronics
and Manufacturing division
Headquarters and administrative,
manufacturing, engineering, sales, marketing
and service for our Healthcare division
Manufacturing, engineering, sales, marketing
and service for our Security division
Manufacturing, engineering, sales, marketing
and service for our Security division
Manufacturing for our Optoelectronics and
Manufacturing division
Approximate
Square Footage
88,000
177,000
90,000
59,000
59,000
feet):
Location
Billerica, Massachusetts (1)
Batam, Indonesia (2)
Torrance, California
Johor Bahru, Malaysia
Johor Bahru, Malaysia
Sunnyvale, California (3)
Hyderabad, India (4)
Description of Facility
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing for our
Optoelectronics and Manufacturing
division
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing, engineering, sales and
service for our Security division
Manufacturing, engineering, sales and
service for our Optoelectronics and
Manufacturing division
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing and engineering for
our Security, Healthcare and
Optoelectronics and Manufacturing
divisions
Approximate
Square Footage
Expiration
186,200
2023
94,700
2017 ~ 2019
91,900
2022
89,000
2018
71,000
2017
62,500
2017
50,400
2021
(1) On July 24, 2017, we entered into a purchase agreement to acquire this facility.
(2) This is comprised of five leases, ranging in size between 11,000 square feet and 37,400 square feet, at the same
or nearby facilities.
(3) We plan to vacate this facility upon lease expiration and move into a 24,006 square foot facility under a lease
that expires in 2025.
(4) This is comprised of three leases, ranging in size between 5,000 square feet and 33,600 square feet, at the same
or nearby facilities.
In conjunction with the acquisition of the explosive trace detection business, on July 7, 2017, we assumed a
lease for a 64,200 square foot facility in Andover, Massachusetts, which expires in 2027. We believe that our
facilities are in good condition to support our current operations but will expand as necessary to support our
growth. We currently anticipate that we will be able to renew the leases that are scheduled to expire in the next few
years on terms that are substantially the same as those currently in effect. However, even if we were not able to
renew one or more of the leases, we believe that suitable substitute space is available to relocate any of the facilities.
Accordingly, we do not believe that our failure to renew any of the leases that are scheduled to expire in the next few
years will have a material adverse effect on our operations.
48
49
ITEM 2. PROPERTIES
As of June 30, 2017, we leased the following principal facilities (i.e., facilities greater than 50,000 square
As of June 30, 2017, we owned the following principal facilities (i.e., facilities greater than 50,000 square
feet):
Location
Hawthorne, California
Snoqualmie, Washington (1)
Stoke on Trent, United Kingdom
Surrey, United Kingdom
Batam, Indonesia
(1) This facility is encumbered by a mortgage.
Description of Facility
Corporate headquarters and administrative,
manufacturing, engineering, sales and
marketing and service for our Optoelectronics
and Manufacturing division
Headquarters and administrative,
manufacturing, engineering, sales, marketing
and service for our Healthcare division
Manufacturing, engineering, sales, marketing
and service for our Security division
Manufacturing, engineering, sales, marketing
and service for our Security division
Manufacturing for our Optoelectronics and
Manufacturing division
Approximate
Square Footage
88,000
177,000
90,000
59,000
59,000
feet):
Location
Billerica, Massachusetts (1)
Batam, Indonesia (2)
Torrance, California
Johor Bahru, Malaysia
Johor Bahru, Malaysia
Sunnyvale, California (3)
Hyderabad, India (4)
Description of Facility
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing for our
Optoelectronics and Manufacturing
division
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing, engineering, sales and
service for our Security division
Manufacturing, engineering, sales and
service for our Optoelectronics and
Manufacturing division
Manufacturing, engineering, sales and
marketing and service for our
Security division
Manufacturing and engineering for
our Security, Healthcare and
Optoelectronics and Manufacturing
divisions
Approximate
Square Footage
Expiration
186,200
2023
94,700
2017 ~ 2019
91,900
2022
89,000
2018
71,000
2017
62,500
2017
50,400
2021
(1) On July 24, 2017, we entered into a purchase agreement to acquire this facility.
(2) This is comprised of five leases, ranging in size between 11,000 square feet and 37,400 square feet, at the same
or nearby facilities.
(3) We plan to vacate this facility upon lease expiration and move into a 24,006 square foot facility under a lease
that expires in 2025.
(4) This is comprised of three leases, ranging in size between 5,000 square feet and 33,600 square feet, at the same
or nearby facilities.
In conjunction with the acquisition of the explosive trace detection business, on July 7, 2017, we assumed a
lease for a 64,200 square foot facility in Andover, Massachusetts, which expires in 2027. We believe that our
facilities are in good condition to support our current operations but will expand as necessary to support our
growth. We currently anticipate that we will be able to renew the leases that are scheduled to expire in the next few
years on terms that are substantially the same as those currently in effect. However, even if we were not able to
renew one or more of the leases, we believe that suitable substitute space is available to relocate any of the facilities.
Accordingly, we do not believe that our failure to renew any of the leases that are scheduled to expire in the next few
years will have a material adverse effect on our operations.
48
49
ITEM 3. LEGAL PROCEEDINGS
PART II
Our recently acquired subsidiary, AS&E#, has been the subject of an investigation by the Office of the
Inspector General of the U.S. General Services Administration (‘‘GSA’’). The investigation relates to AS&E#’s
discount practices and compliance with the pricing provisions of AS&E#’s GSA Schedule contract. The
investigation could lead to claims or findings of violations of the False Claims Act in connection with AS&E#’s
GSA contracting activity. Violations of the False Claims Act could result in the imposition of damages (up to treble
damages) plus civil penalties in some cases, and we expect to incur legal costs in connection with the investigation.
We continue to cooperate with the GSA investigation and believe that an appropriate accrual for this uncertainty has
been provided in the accompanying condensed consolidated financial statements.
We are involved in various other claims and legal proceedings arising in the ordinary course of business. In our
opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a
material adverse effect on our business, financial condition, results of operations or cash flows. We have not
accrued for loss contingencies relating to such matters because we believe that, although unfavorable outcomes in
the proceedings may be possible, they are not considered by management to be probable or reasonably estimable. If
one or more of these matters are resolved in a manner adverse to us, the impact on our business, financial condition,
results of operations and liquidity could be material.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Other Information
Our Common Stock is traded on The NASDAQ Global Select Market under the symbol ‘‘OSIS.’’
The following table sets forth the high and low sale prices of a share of our Common Stock as reported by The
NASDAQ Global Select Market on a quarterly basis for fiscal 2016 and 2017. The prices shown reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
2016:
High
Low
Quarter ended September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79.28
$96.75
$88.33
$66.43
$66.94
$75.60
$48.19
$48.76
2017:
Quarter ended September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$69.49
$78.86
$81.55
$82.26
$55.76
$65.00
$69.45
$69.08
As of September 6, 2017, there were approximately 117 holders of record of our Common Stock. This number
does not include beneficial owners holding shares through nominees or in ‘‘street’’ name.
Dividend Policy
We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do
not currently intend to pay any cash dividends in the foreseeable future. Our Board of Directors will determine the
payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of cash
dividends and future borrowings may contain similar restrictions.
Issuer Purchases of Equity Securities
The following table presents the shares acquired during the quarter ended June 30, 2017:
April 1, 2017 to April 30, 2017 . . . . . .
May 1, 2017 to May 31, 2017 . . . . . . .
June 1, 2017 to June 30, 2017 . . . . . .
Total number of
shares (or units)
Purchased (1)
Average price
paid per share
(or unit)
1,569
828
402
2,799
$71.20
$78.16
$73.66
$73.62
Maximum number
(or approximate
dollar value)
of shares (or units)
that may
yet be purchased
under the plans or
programs (2)
872,481
872,481
872,481
Total number of
shares (or units)
purchased as
part of publicly
announced plans or
programs
0
0
0
0
(1) Represent shares of Common Stock tendered to satisfy minimum statutory tax withholding obligations related
to the vesting of restricted shares.
50
51
ITEM 3. LEGAL PROCEEDINGS
PART II
Our recently acquired subsidiary, AS&E#, has been the subject of an investigation by the Office of the
Inspector General of the U.S. General Services Administration (‘‘GSA’’). The investigation relates to AS&E#’s
discount practices and compliance with the pricing provisions of AS&E#’s GSA Schedule contract. The
investigation could lead to claims or findings of violations of the False Claims Act in connection with AS&E#’s
GSA contracting activity. Violations of the False Claims Act could result in the imposition of damages (up to treble
damages) plus civil penalties in some cases, and we expect to incur legal costs in connection with the investigation.
We continue to cooperate with the GSA investigation and believe that an appropriate accrual for this uncertainty has
been provided in the accompanying condensed consolidated financial statements.
We are involved in various other claims and legal proceedings arising in the ordinary course of business. In our
opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a
material adverse effect on our business, financial condition, results of operations or cash flows. We have not
accrued for loss contingencies relating to such matters because we believe that, although unfavorable outcomes in
the proceedings may be possible, they are not considered by management to be probable or reasonably estimable. If
one or more of these matters are resolved in a manner adverse to us, the impact on our business, financial condition,
results of operations and liquidity could be material.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Other Information
Our Common Stock is traded on The NASDAQ Global Select Market under the symbol ‘‘OSIS.’’
The following table sets forth the high and low sale prices of a share of our Common Stock as reported by The
NASDAQ Global Select Market on a quarterly basis for fiscal 2016 and 2017. The prices shown reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
2016:
High
Low
Quarter ended September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79.28
$96.75
$88.33
$66.43
$66.94
$75.60
$48.19
$48.76
2017:
High
Low
Quarter ended September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter ended June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$69.49
$78.86
$81.55
$82.26
$55.76
$65.00
$69.45
$69.08
As of September 6, 2017, there were approximately 117 holders of record of our Common Stock. This number
does not include beneficial owners holding shares through nominees or in ‘‘street’’ name.
Dividend Policy
We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do
not currently intend to pay any cash dividends in the foreseeable future. Our Board of Directors will determine the
payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of cash
dividends and future borrowings may contain similar restrictions.
Issuer Purchases of Equity Securities
The following table presents the shares acquired during the quarter ended June 30, 2017:
April 1, 2017 to April 30, 2017 . . . . . .
May 1, 2017 to May 31, 2017 . . . . . . .
June 1, 2017 to June 30, 2017 . . . . . .
Total number of
shares (or units)
Purchased (1)
Average price
paid per share
(or unit)
1,569
828
402
2,799
$71.20
$78.16
$73.66
$73.62
Maximum number
(or approximate
dollar value)
of shares (or units)
that may
yet be purchased
under the plans or
programs (2)
872,481
872,481
872,481
Total number of
shares (or units)
purchased as
part of publicly
announced plans or
programs
0
0
0
0
(1) Represent shares of Common Stock tendered to satisfy minimum statutory tax withholding obligations related
to the vesting of restricted shares.
50
51
(2)
In April 2016, the Board of Directors authorized a stock repurchase program of up to 1,000,000 shares. This
program does not have an expiration date. Upon repurchase, the shares are restored to the status of authorized
but unissued, and we record them as a reduction in the number of shares of Common Stock issued and
outstanding in the consolidated financial statements.
The following table provides information concerning our equity compensation plans as of June 30, 2017.
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Equity compensation plans approved by
security holders (1) . . . . . . . . . . . . . .
780,671
Equity compensation plans not approved
by security holders . . . . . . . . . . . . . . .
—
Total
. . . . . . . . . . . . . . . . . . . . . . . .
780,671
(a)
(b)
$30.00
N/A
$30.00
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
1,312,813 (2)(3)(4)
—
1,312,813
(1)
Includes shares of our Common Stock issuable upon exercise of options under our 2006 Equity Participation
Plan and our 2012 Incentive Award Plan.
(2) These shares are available for future issuance under our 2012 Incentive Award Plan, which was approved by
our shareholders on December 12, 2012. Upon shareholder approval of the 2012 Incentive Award Plan, we
froze the 2006 Equity Participation Plan, and no further awards can be granted thereunder.
(3) Awards of restricted stock, restricted stock units or other awards that convey the full value of the shares subject
to the award are counted as 1.87 shares for every one award granted.
(4) Shares subject to awards outstanding under the 2006 Equity Participation Plan that terminate, expire or lapse
for any reason (up to a maximum of 2,220,000 shares) also become available for future issuance under our
2012 Incentive Award Plan.
Performance Graph
The graph below compares the cumulative total stockholder return for the period beginning on the market
close on the last trading day before the beginning of our fifth preceding fiscal year through and including the end of
our last completed fiscal year with (a) The NASDAQ Composite Index and (b) a peer group of publicly-traded
issuer(s) with which we have generally competed.
The peer group includes the following company: Analogic Corporation (NASDAQ Symbol: ALOG).
The graph assumes that $100.00 was invested on June 30, 2012 in (a) our Common Stock, (b) The NASDAQ
Composite Index and (c) the company comprising the peer group described above (weighted according to the
issuer’s stock market capitalization at the beginning of each period for which a return is indicated). The graph
assumes that all dividends were reinvested. Historical stock price performance is not necessarily indicative of future
stock price performance.
This performance graph shall not be deemed ‘‘filed’’ for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any Company filing under the Securities Act of 1933, as amended, or the Exchange
Act, except as shall be expressly set forth by specific reference in such filing.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2012 through June 2017
Among OSI Systems, Inc.
The NASDAQ Composite Index and a Peer Group
$250
$200
$150
$100
$50
$0
6/12
6/13
6/14
6/15
6/16
6/17
OSI Systems, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 6/30/12 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
22AUG201700324313
The following table provides the same information in tabular form as of June 30:
OSI Systems, Inc.
. . . . . . . . . . . .
The NASDAQ Composite Index . . .
Peer Group . . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$101.71
117.69
118.09
$105.38
155.50
127.49
$111.76
177.19
129.22
$ 91.77
173.36
130.74
$118.65
221.11
120.18
2012
2013
2014
2015
2016
2017
52
53
(2)
In April 2016, the Board of Directors authorized a stock repurchase program of up to 1,000,000 shares. This
program does not have an expiration date. Upon repurchase, the shares are restored to the status of authorized
but unissued, and we record them as a reduction in the number of shares of Common Stock issued and
outstanding in the consolidated financial statements.
The following table provides information concerning our equity compensation plans as of June 30, 2017.
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Equity compensation plans approved by
security holders (1) . . . . . . . . . . . . . .
780,671
Equity compensation plans not approved
by security holders . . . . . . . . . . . . . . .
—
Total
. . . . . . . . . . . . . . . . . . . . . . . .
780,671
(a)
(b)
$30.00
N/A
$30.00
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
1,312,813 (2)(3)(4)
—
1,312,813
(1)
Includes shares of our Common Stock issuable upon exercise of options under our 2006 Equity Participation
Plan and our 2012 Incentive Award Plan.
(2) These shares are available for future issuance under our 2012 Incentive Award Plan, which was approved by
our shareholders on December 12, 2012. Upon shareholder approval of the 2012 Incentive Award Plan, we
froze the 2006 Equity Participation Plan, and no further awards can be granted thereunder.
(3) Awards of restricted stock, restricted stock units or other awards that convey the full value of the shares subject
to the award are counted as 1.87 shares for every one award granted.
(4) Shares subject to awards outstanding under the 2006 Equity Participation Plan that terminate, expire or lapse
for any reason (up to a maximum of 2,220,000 shares) also become available for future issuance under our
2012 Incentive Award Plan.
Performance Graph
The graph below compares the cumulative total stockholder return for the period beginning on the market
close on the last trading day before the beginning of our fifth preceding fiscal year through and including the end of
our last completed fiscal year with (a) The NASDAQ Composite Index and (b) a peer group of publicly-traded
issuer(s) with which we have generally competed.
The peer group includes the following company: Analogic Corporation (NASDAQ Symbol: ALOG).
The graph assumes that $100.00 was invested on June 30, 2012 in (a) our Common Stock, (b) The NASDAQ
Composite Index and (c) the company comprising the peer group described above (weighted according to the
issuer’s stock market capitalization at the beginning of each period for which a return is indicated). The graph
assumes that all dividends were reinvested. Historical stock price performance is not necessarily indicative of future
stock price performance.
This performance graph shall not be deemed ‘‘filed’’ for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any Company filing under the Securities Act of 1933, as amended, or the Exchange
Act, except as shall be expressly set forth by specific reference in such filing.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2012 through June 2017
Among OSI Systems, Inc.
The NASDAQ Composite Index and a Peer Group
$250
$200
$150
$100
$50
$0
6/12
6/13
6/14
6/15
6/16
6/17
OSI Systems, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 6/30/12 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
22AUG201700324313
The following table provides the same information in tabular form as of June 30:
OSI Systems, Inc.
. . . . . . . . . . . .
The NASDAQ Composite Index . . .
Peer Group . . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$101.71
117.69
118.09
$105.38
155.50
127.49
$111.76
177.19
129.22
$ 91.77
173.36
130.74
$118.65
221.11
120.18
2012
2013
2014
2015
2016
2017
52
53
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
The following tables set forth our selected consolidated financial data as of and for each of the five fiscal years
ended June 30, 2017, and is derived from our consolidated financial statements. The consolidated financial
statements as of June 30, 2016 and 2017, and for each of the years in the three-year period ended June 30, 2017, are
included in Item 8 of this report. The following data should be read in conjunction with ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements and
notes thereto included elsewhere in this report.
Consolidated Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Operating expenses:
. . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30,
2013
2014
2015
2016
2017
(in thousands, except earnings per share data)
$802,047
511,621
$906,742
601,742
$958,202
632,849
$829,660
552,801
$960,951
637,450
290,426
305,000
325,353
276,859
323,501
Selling, general and administrative . . . . . . . .
Research and development . . . . . . . . . . . . .
Impairment, restructuring and other charges .
159,761
48,240
7,987
166,869
44,792
12,044
171,756
51,639
9,850
166,655
49,816
22,014
192,560
50,951
46,698
Total operating expenses . . . . . . . . . . . . . .
215,988
223,705
233,245
238,485
290,209
Income from operations . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . .
74,438
(5,024)
69,414
25,279
81,295
(5,440)
75,855
27,961
92,108
(3,255)
88,853
23,702
38,374
(2,879)
35,495
9,338
33,292
(7,541)
25,751
4,675
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,135
$ 47,894
$ 65,151
$ 26,157
$ 21,076
Net income available to common stockholders—
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,135
$ 47,894
$ 65,151
$ 26,157
$ 21,076
Basic earnings per common share . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . .
$
$
2.21
2.15
$
$
2.40
2.33
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Weighted average shares outstanding—diluted . . .
20,568
20,587
20,526
20,076
19,689
2013
2014
2015
2016
2017
Year Ended June 30,
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Long-term debt
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . .
$ 34,697
244,885
952,739
10,673
71,470
478,451
$
38,831
263,514
1,011,077
10,436
37,255
532,213
$ 47,593
254,991
937,289
8,556
11,357
581,779
$104,370
187,483
991,723
6,054
133,813
540,846
$ 169,650
306,866
1,230,087
241,750
347,146
569,213
RESULTS OF OPERATIONS
Overview
We are a vertically integrated designer and manufacturer of specialized electronic systems and components for
critical applications. We sell our products and provide related services in diversified markets, including homeland
security, healthcare, defense and aerospace. We have three operating divisions: (a) Security, providing security and
inspection systems and turnkey security screening solutions; (b) Healthcare, providing patient monitoring,
diagnostic cardiology, and anesthesia systems; and (c) Optoelectronics and Manufacturing, providing specialized
electronic components for our Security and Healthcare divisions, as well as to third parties for applications in the
defense and aerospace markets, among others.
Security Division. Through our Security division, we provide security screening products and services
worldwide, as well as turnkey security screening solutions. These products and services are used to inspect
baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear
materials and other contraband. Revenues from our Security division accounted for 58% of our total consolidated
revenues for fiscal 2017. During fiscal 2017, in conjunction with ongoing cost optimization efforts, we undertook
an initiative to consolidate a manufacturing facility where we incurred approximately $0.6 million of costs. This
facility consolidation is expected to result in recurring annualized savings of approximately $0.8 million.
As a result of the terrorist attacks in the U.S. and 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,
railways, 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.
Currently, the U.S. federal government is discussing various options to address sequestration and the U.S.
federal government’s overall fiscal challenges and we cannot predict the outcome of these efforts. While we believe
that national security spending will continue to be a priority, U.S. government budget deficits and the national debt
have created increasing pressure to examine and reduce spending across many federal agencies. Additionally, there
continues to be volatility in international markets that has impacted international security spending. We believe that
the diversified product portfolio and international customer mix of our Security division position us well to
withstand the impact of these uncertainties and even benefit from specific initiatives within various governments.
However, depending on how future sequestration cuts are implemented and how the U.S. federal government and
our other international customers manage their fiscal challenges, we believe that these actions could have a
material, adverse effect on our business, financial condition and results of operations.
Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient
monitoring, diagnostic cardiology, and anesthesia delivery and ventilation systems worldwide for sale primarily to
hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of
the hospital and provide 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 21% of our total consolidated revenues for fiscal 2017. During fiscal 2017, in conjunction
with ongoing cost optimization efforts, we undertook an initiative to consolidate a manufacturing and R&D facility
where we incurred approximately $1.4 million of employee termination costs and $0.6 million of other costs. This
facility consolidation is expected to result in recurring annualized savings of approximately $3.0 million.
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. There is
continued uncertainty regarding the U.S. federal government budget and the Affordable Care Act, either of which
54
55
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
The following tables set forth our selected consolidated financial data as of and for each of the five fiscal years
ended June 30, 2017, and is derived from our consolidated financial statements. The consolidated financial
statements as of June 30, 2016 and 2017, and for each of the years in the three-year period ended June 30, 2017, are
included in Item 8 of this report. The following data should be read in conjunction with ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements and
notes thereto included elsewhere in this report.
Consolidated Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Operating expenses:
. . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30,
2013
2014
2015
2016
2017
(in thousands, except earnings per share data)
$802,047
511,621
$906,742
601,742
$958,202
632,849
$829,660
552,801
$960,951
637,450
290,426
305,000
325,353
276,859
323,501
Selling, general and administrative . . . . . . . .
Research and development . . . . . . . . . . . . .
Impairment, restructuring and other charges .
159,761
48,240
7,987
166,869
44,792
12,044
171,756
51,639
9,850
166,655
49,816
22,014
192,560
50,951
46,698
Total operating expenses . . . . . . . . . . . . . .
215,988
223,705
233,245
238,485
290,209
Income from operations . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . .
74,438
(5,024)
69,414
25,279
81,295
(5,440)
75,855
27,961
92,108
(3,255)
88,853
23,702
38,374
(2,879)
35,495
9,338
33,292
(7,541)
25,751
4,675
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,135
$ 47,894
$ 65,151
$ 26,157
$ 21,076
Net income available to common stockholders—
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 44,135
$ 47,894
$ 65,151
$ 26,157
$ 21,076
Basic earnings per common share . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . .
$
$
2.21
2.15
$
$
2.40
2.33
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Weighted average shares outstanding—diluted . . .
20,568
20,587
20,526
20,076
19,689
2013
2014
2015
2016
2017
Year Ended June 30,
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Long-term debt
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . .
$ 34,697
244,885
952,739
10,673
71,470
478,451
$
38,831
263,514
1,011,077
10,436
37,255
532,213
$ 47,593
254,991
937,289
8,556
11,357
581,779
$104,370
187,483
991,723
6,054
133,813
540,846
$ 169,650
306,866
1,230,087
241,750
347,146
569,213
RESULTS OF OPERATIONS
Overview
We are a vertically integrated designer and manufacturer of specialized electronic systems and components for
critical applications. We sell our products and provide related services in diversified markets, including homeland
security, healthcare, defense and aerospace. We have three operating divisions: (a) Security, providing security and
inspection systems and turnkey security screening solutions; (b) Healthcare, providing patient monitoring,
diagnostic cardiology, and anesthesia systems; and (c) Optoelectronics and Manufacturing, providing specialized
electronic components for our Security and Healthcare divisions, as well as to third parties for applications in the
defense and aerospace markets, among others.
Security Division. Through our Security division, we provide security screening products and services
worldwide, as well as turnkey security screening solutions. These products and services are used to inspect
baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear
materials and other contraband. Revenues from our Security division accounted for 58% of our total consolidated
revenues for fiscal 2017. During fiscal 2017, in conjunction with ongoing cost optimization efforts, we undertook
an initiative to consolidate a manufacturing facility where we incurred approximately $0.6 million of costs. This
facility consolidation is expected to result in recurring annualized savings of approximately $0.8 million.
As a result of the terrorist attacks in the U.S. and 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,
railways, 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.
Currently, the U.S. federal government is discussing various options to address sequestration and the U.S.
federal government’s overall fiscal challenges and we cannot predict the outcome of these efforts. While we believe
that national security spending will continue to be a priority, U.S. government budget deficits and the national debt
have created increasing pressure to examine and reduce spending across many federal agencies. Additionally, there
continues to be volatility in international markets that has impacted international security spending. We believe that
the diversified product portfolio and international customer mix of our Security division position us well to
withstand the impact of these uncertainties and even benefit from specific initiatives within various governments.
However, depending on how future sequestration cuts are implemented and how the U.S. federal government and
our other international customers manage their fiscal challenges, we believe that these actions could have a
material, adverse effect on our business, financial condition and results of operations.
Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient
monitoring, diagnostic cardiology, and anesthesia delivery and ventilation systems worldwide for sale primarily to
hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of
the hospital and provide 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 21% of our total consolidated revenues for fiscal 2017. During fiscal 2017, in conjunction
with ongoing cost optimization efforts, we undertook an initiative to consolidate a manufacturing and R&D facility
where we incurred approximately $1.4 million of employee termination costs and $0.6 million of other costs. This
facility consolidation is expected to result in recurring annualized savings of approximately $3.0 million.
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. There is
continued uncertainty regarding the U.S. federal government budget and the Affordable Care Act, either of which
54
55
may impact hospital spending, third-party payer reimbursement and fees to be levied on certain medical device
revenues, any of which could adversely affect our business and results of operations. In addition, hospital capital
spending appears to have been impacted by strategic uncertainties surrounding the Affordable Care Act and
economic pressures. We also believe that global economic uncertainty has caused some hospitals and healthcare
providers to delay purchases of our products and services. During this period of uncertainty, sales of our healthcare
products may be negatively impacted. We cannot predict when the markets will fully recover or when the
uncertainties related to the U.S. federal government will be resolved 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.
Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division,
we design, manufacture and market optoelectronic devices and provide electronics manufacturing services globally
for use in a broad range of applications, including aerospace and defense electronics, security and inspection
systems, medical imaging and diagnostics, telecommunications, office automation, computer peripherals,
industrial automation, automotive diagnostic systems, and consumer products. We also provide our optoelectronic
devices and electronics manufacturing services to OEM customers, as well as our own Security and Healthcare
divisions. Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 21%
of our total consolidated revenues for fiscal 2017. During fiscal 2017, in conjunction with ongoing cost
optimization efforts, we undertook an initiative to consolidate a manufacturing facility where we incurred
approximately $0.3 million of employee termination costs and $0.4 million of other costs. This facility
consolidation is expected to result in recurring annualized savings of approximately $1.0 million.
Consolidated Results
Fiscal 2017 Compared with Fiscal 2016. We reported consolidated sales of $961.0 million in fiscal 2017, a
16% increase over the prior year, which drove a year-over-year increase in gross profit of $46.6 million. Despite this
increase in sales and gross profit, our income from operations decreased by 13% from the prior year to
$33.3 million in fiscal 2017. This decline in profitability was driven primarily by a 112% increase in impairment,
restructuring and other charges. Such charges related to the abandonment of assets previously built or constructed
for our turnkey scanning program in Mexico and two product lines in our Security division, facility consolidations
among all three of our operating divisions, transaction costs for acquisition activity during the fiscal year and costs
related to the integration of AS&E#, which was acquired in September of 2016.
Fiscal 2016 Compared with Fiscal 2015. We reported consolidated sales of $829.7 million in fiscal 2016, a
13% decrease from the prior year. Our operating profit decreased by 58% from the prior year to $38.4 million in
fiscal 2016. This decline in profitability was driven primarily by the decrease in sales, which was the primary driver
of a $48.5 million decrease in gross profit, and a $12.1 million increase in impairment, restructuring and other
charges. These factors were partially offset by a $5.1 million decrease in SG&A expenses and a $1.8 million
decrease in R&D.
Acquisitions.
In September 2016, we acquired AS&E#, a leading provider of detection solutions for
advanced cargo, parcel and personnel inspection. AS&E#’s operations are included in our Security division. We
financed the total estimated purchase price of $266 million with a combination of cash on hand and borrowing
under our existing revolving bank line of credit, as well as issuance of OSI Systems, Inc. Restricted Stock Units
(‘‘RSUs’’) to replace RSUs previously issued by AS&E#. Immediately following the close of the acquisition, we
used $69 million of AS&E#’s existing cash on hand to pay down the revolving bank line of credit. In conjunction
with the integration of AS&E# into our Security division, we have incurred approximately $8 million of costs
related to employee terminations, which we estimate, along with other integration activities, will result in recurring
annualized savings from synergies of approximately $18 million.
Subsequent to our fiscal year end, on July 7, 2017, we acquired the former Morpho global explosive trace
detection business from Smiths Group plc. We financed the total estimated purchase price of $80.5 million with a
combination of cash on hand and borrowings under our existing revolving bank line of credit.
Trends and Uncertainties
The following is a discussion of certain trends and uncertainties that we believe have and may continue to
influence our results of operations.
Global Economic Considerations. Global economic uncertainty, coupled with the strength of the U.S.
dollar, which may make our products and services less competitive in countries with currencies that have declined
in value against the U.S. dollar, has continued to negatively impact demand for certain of our products and services
in our Security and Healthcare divisions. Additionally, weakness in the oil markets has led to delayed purchasing by
certain customers generally within the security industry impacting our Security division but also in other industries
impacting our other two divisions. It is uncertain how long the period of economic uncertainty or the impact of
lower oil prices will last. Therefore, we expect that there may continue to be a period of delayed or deferred
purchasing by our customers, but we are unable to quantify the magnitude of the potential impact at this time.
Purchase delays and deferments could continue to have a material negative effect on demand for our products and
services, and accordingly, on our business, results of operations and financial condition.
Healthcare Considerations. The results of our operations have been adversely impacted by issues associated
with significant product launches within our Healthcare division. Although we believe that our recent performance
indicates significant progress in resolving the issues surrounding these product launches, the impact from these
issues may continue to adversely impact our results of operations for additional periods. Additionally, the new
Presidential administration and Congress continue to discuss the potential repeal and/or replacement of the
Affordable Care Act, which has created uncertainty in the healthcare industry and has adversely impacted, and may
continue to adversely impact, our results of operations.
European Union Threat Detection Standards. The European Union has implemented regulations for all
airports within the EU to have hold baggage screening systems that are compliant with the European Civil Aviation
Conference (ECAC) Standard 3 beginning in 2020. However, this deadline could potentially be delayed. Our
Security division’s RTT# product has passed the ECAC explosive detection system Standard 3 threat detection
requirement.
Mexico SAT Contract. Our contract with the Mexican government to provide a turnkey security screening
solution at various locations throughout the country is scheduld to expire in January 2018. Revenue attributable to
this contract comprised approximately 12% of our total revenue for the fiscal year ended June 30, 2017. The
termination, non-renewal or reduction in scope of this contract, or the renewal of this contract with reduced scope or
on other modified terms, even if for reasons unrelated to the quality of our products or services, could have a
material adverse effect on our business, financial condition and results of operations, including, but not limited to,
impairment of capital assets purchased or manufactured specifically for this contract.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally
accepted in the United States (‘‘U.S. GAAP’’). Our preparation of these consolidated financial statements requires
us to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. As a result, actual results may differ from
56
57
may impact hospital spending, third-party payer reimbursement and fees to be levied on certain medical device
revenues, any of which could adversely affect our business and results of operations. In addition, hospital capital
spending appears to have been impacted by strategic uncertainties surrounding the Affordable Care Act and
economic pressures. We also believe that global economic uncertainty has caused some hospitals and healthcare
providers to delay purchases of our products and services. During this period of uncertainty, sales of our healthcare
products may be negatively impacted. We cannot predict when the markets will fully recover or when the
uncertainties related to the U.S. federal government will be resolved 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.
Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division,
we design, manufacture and market optoelectronic devices and provide electronics manufacturing services globally
for use in a broad range of applications, including aerospace and defense electronics, security and inspection
systems, medical imaging and diagnostics, telecommunications, office automation, computer peripherals,
industrial automation, automotive diagnostic systems, and consumer products. We also provide our optoelectronic
devices and electronics manufacturing services to OEM customers, as well as our own Security and Healthcare
divisions. Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 21%
of our total consolidated revenues for fiscal 2017. During fiscal 2017, in conjunction with ongoing cost
optimization efforts, we undertook an initiative to consolidate a manufacturing facility where we incurred
approximately $0.3 million of employee termination costs and $0.4 million of other costs. This facility
consolidation is expected to result in recurring annualized savings of approximately $1.0 million.
Consolidated Results
Fiscal 2017 Compared with Fiscal 2016. We reported consolidated sales of $961.0 million in fiscal 2017, a
16% increase over the prior year, which drove a year-over-year increase in gross profit of $46.6 million. Despite this
increase in sales and gross profit, our income from operations decreased by 13% from the prior year to
$33.3 million in fiscal 2017. This decline in profitability was driven primarily by a 112% increase in impairment,
restructuring and other charges. Such charges related to the abandonment of assets previously built or constructed
for our turnkey scanning program in Mexico and two product lines in our Security division, facility consolidations
among all three of our operating divisions, transaction costs for acquisition activity during the fiscal year and costs
related to the integration of AS&E#, which was acquired in September of 2016.
Fiscal 2016 Compared with Fiscal 2015. We reported consolidated sales of $829.7 million in fiscal 2016, a
13% decrease from the prior year. Our operating profit decreased by 58% from the prior year to $38.4 million in
fiscal 2016. This decline in profitability was driven primarily by the decrease in sales, which was the primary driver
of a $48.5 million decrease in gross profit, and a $12.1 million increase in impairment, restructuring and other
charges. These factors were partially offset by a $5.1 million decrease in SG&A expenses and a $1.8 million
decrease in R&D.
Acquisitions.
In September 2016, we acquired AS&E#, a leading provider of detection solutions for
advanced cargo, parcel and personnel inspection. AS&E#’s operations are included in our Security division. We
financed the total estimated purchase price of $266 million with a combination of cash on hand and borrowing
under our existing revolving bank line of credit, as well as issuance of OSI Systems, Inc. Restricted Stock Units
(‘‘RSUs’’) to replace RSUs previously issued by AS&E#. Immediately following the close of the acquisition, we
used $69 million of AS&E#’s existing cash on hand to pay down the revolving bank line of credit. In conjunction
with the integration of AS&E# into our Security division, we have incurred approximately $8 million of costs
related to employee terminations, which we estimate, along with other integration activities, will result in recurring
annualized savings from synergies of approximately $18 million.
Subsequent to our fiscal year end, on July 7, 2017, we acquired the former Morpho global explosive trace
detection business from Smiths Group plc. We financed the total estimated purchase price of $80.5 million with a
combination of cash on hand and borrowings under our existing revolving bank line of credit.
Trends and Uncertainties
The following is a discussion of certain trends and uncertainties that we believe have and may continue to
influence our results of operations.
Global Economic Considerations. Global economic uncertainty, coupled with the strength of the U.S.
dollar, which may make our products and services less competitive in countries with currencies that have declined
in value against the U.S. dollar, has continued to negatively impact demand for certain of our products and services
in our Security and Healthcare divisions. Additionally, weakness in the oil markets has led to delayed purchasing by
certain customers generally within the security industry impacting our Security division but also in other industries
impacting our other two divisions. It is uncertain how long the period of economic uncertainty or the impact of
lower oil prices will last. Therefore, we expect that there may continue to be a period of delayed or deferred
purchasing by our customers, but we are unable to quantify the magnitude of the potential impact at this time.
Purchase delays and deferments could continue to have a material negative effect on demand for our products and
services, and accordingly, on our business, results of operations and financial condition.
Healthcare Considerations. The results of our operations have been adversely impacted by issues associated
with significant product launches within our Healthcare division. Although we believe that our recent performance
indicates significant progress in resolving the issues surrounding these product launches, the impact from these
issues may continue to adversely impact our results of operations for additional periods. Additionally, the new
Presidential administration and Congress continue to discuss the potential repeal and/or replacement of the
Affordable Care Act, which has created uncertainty in the healthcare industry and has adversely impacted, and may
continue to adversely impact, our results of operations.
European Union Threat Detection Standards. The European Union has implemented regulations for all
airports within the EU to have hold baggage screening systems that are compliant with the European Civil Aviation
Conference (ECAC) Standard 3 beginning in 2020. However, this deadline could potentially be delayed. Our
Security division’s RTT# product has passed the ECAC explosive detection system Standard 3 threat detection
requirement.
Mexico SAT Contract. Our contract with the Mexican government to provide a turnkey security screening
solution at various locations throughout the country is scheduld to expire in January 2018. Revenue attributable to
this contract comprised approximately 12% of our total revenue for the fiscal year ended June 30, 2017. The
termination, non-renewal or reduction in scope of this contract, or the renewal of this contract with reduced scope or
on other modified terms, even if for reasons unrelated to the quality of our products or services, could have a
material adverse effect on our business, financial condition and results of operations, including, but not limited to,
impairment of capital assets purchased or manufactured specifically for this contract.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally
accepted in the United States (‘‘U.S. GAAP’’). Our preparation of these consolidated financial statements requires
us to make judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. As a result, actual results may differ from
56
57
such estimates. Our senior management has reviewed these critical accounting policies and related disclosures with
the Audit Committee of our Board of Directors. The following summarizes our critical accounting policies and
significant estimates used in preparing our consolidated financial statements:
Revenue Recognition. Product Sales. We recognize revenue from sales of products upon shipment when
title and risk of loss passes, and when terms are fixed and collection is probable. In instances where terms of a
product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the
acceptance criteria, unless customer acceptance terms are perfunctory or inconsequential.
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 when 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.
Multiple-Deliverable Arrangements. We enter into certain agreements with customers for the all-inclusive
sale of capital equipment that contain multiple elements that may include civil works to prepare a site for the
installation of equipment, the manufacture and delivery of equipment, the installation and integration of equipment,
the training of customer personnel to operate the equipment and the after-market service of the equipment. The
timing for each of these deliverables can range from a short amount of time and be completed entirely within a
single reporting period to over several reporting periods depending upon the after-market service period. The
general timing of revenue recognition for each deliverable 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 as service revenue within a multiple-deliverable arrangement typically is
recognized evenly over the post-warranty period of the service deliverable.
Multiple-deliverable arrangements require that the arrangement consideration be allocated to each deliverable
based on its relative selling price and recognized as revenue when the revenue recognition criteria for each
deliverable has been met. The arrangement is separated into more than one unit of accounting if both of the
following criteria are met: (i) the delivered item has value to the customer on a stand-alone basis; and (ii) if the
arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within our control. If these criteria are not met, the
arrangement is accounted for as one unit of accounting and the recognition of revenue is deferred until delivery is
complete or is recognized ratably over the contract period as appropriate. If these criteria are met, consideration is
allocated at inception of the arrangement to all deliverables on the basis of the relative selling price. We have
generally met these criteria as all of the deliverables in our multiple-deliverable arrangements have stand-alone
value in that either the customer can resell that item or another vendor sells that item separately. We typically do not
offer a general right of return in regards to our multiple-deliverable arrangements.
The selling price of each deliverable is determined by establishing vendor-specific objective evidence
(‘‘VSOE’’), third party evidence (‘‘TPE’’) or best estimate of selling price (‘‘BESP’’) for each delivered item.
Generally, either VSOE or TPE is determinable; however, in the few instances where neither VSOE nor TPE is
determinable, we utilize our BESP in order to allocate consideration to those deliverables. BESP for our product
deliverables is determined by utilizing a weighted average price approach. BESP for our service deliverables is
determined primarily by utilizing a cost plus margin approach, and in some instances uses an average price per hour.
We often provide a guarantee to support our performance under multiple-deliverable arrangements; and 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.
Proportional Performance.
In connection with the agreement with the Servicio de Administraci´on
Tributaria (‘‘SAT’’) in Mexico, revenue is recognized based upon proportional performance, measured by the actual
number of labor hours incurred divided by the total estimated number of labor hours for the project. The impact of
changes in the estimated labor hours to service the agreement is reflected in the period during which the change
becomes known. In the SAT agreement, customer billings may be submitted for several separate deliverables,
including monthly services, activation of services, training of customer personnel and consultation on the design
and location of security scanning operations, among others. In the event that payments received from the customer
exceed revenue recognition, deferred revenue is recorded.
Concurrent with the revenue recognition, we accrue reserves for estimated product return and warranty costs.
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 recognition. Critical
judgments also include estimates of warranty reserves, which are established based on historical experience and
knowledge of the product under warranty.
Allowance for Doubtful Accounts. The allowance for doubtful accounts involves estimates based on
management’s judgment, review of individual receivables and analysis of historical bad debts. We monitor
collections and payments from our customers and we maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. We also assess current economic
trends that might impact the level of credit losses in the future. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Inventory.
Inventory is stated at the lower of cost or market. Cost is determined on the first-in, first-out
method. We write down inventory for slow-moving and obsolete inventory based on assessments of future
demands, market conditions and customers who may be experiencing financial difficulties. If these factors were to
become less favorable than those projected, additional inventory write-downs could be required.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using
the straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage
value. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the
useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization
of property and equipment under capital leases is included with depreciation expense. In the event that property and
equipment are idle, as a result of excess capacity or the early termination, non-renewal or reduction in scope of a
turnkey screening operation, such assets are assessed for impairment on a periodic basis and when an indication
that impairment may exist.
Income Taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities
available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different
interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in
determining our tax expense and in evaluating our tax positions including evaluating uncertainties. We review our
tax positions quarterly and adjust the balances as new information becomes available.
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in
future years. Such assets arise because of temporary differences between the financial reporting and tax bases of
assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability
of these future tax deductions by assessing the adequacy of future expected taxable income from all sources,
including reversal of taxable temporary differences, forecasted operating earnings and available tax planning
strategies. These sources of income inherently rely on estimates. To provide insight, we use our historical
experience and our short and long-range business forecasts. We believe it is more likely than not that a portion of
58
59
such estimates. Our senior management has reviewed these critical accounting policies and related disclosures with
the Audit Committee of our Board of Directors. The following summarizes our critical accounting policies and
significant estimates used in preparing our consolidated financial statements:
Revenue Recognition. Product Sales. We recognize revenue from sales of products upon shipment when
title and risk of loss passes, and when terms are fixed and collection is probable. In instances where terms of a
product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the
acceptance criteria, unless customer acceptance terms are perfunctory or inconsequential.
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 when 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.
Multiple-Deliverable Arrangements. We enter into certain agreements with customers for the all-inclusive
sale of capital equipment that contain multiple elements that may include civil works to prepare a site for the
installation of equipment, the manufacture and delivery of equipment, the installation and integration of equipment,
the training of customer personnel to operate the equipment and the after-market service of the equipment. The
timing for each of these deliverables can range from a short amount of time and be completed entirely within a
single reporting period to over several reporting periods depending upon the after-market service period. The
general timing of revenue recognition for each deliverable 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 as service revenue within a multiple-deliverable arrangement typically is
recognized evenly over the post-warranty period of the service deliverable.
Multiple-deliverable arrangements require that the arrangement consideration be allocated to each deliverable
based on its relative selling price and recognized as revenue when the revenue recognition criteria for each
deliverable has been met. The arrangement is separated into more than one unit of accounting if both of the
following criteria are met: (i) the delivered item has value to the customer on a stand-alone basis; and (ii) if the
arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within our control. If these criteria are not met, the
arrangement is accounted for as one unit of accounting and the recognition of revenue is deferred until delivery is
complete or is recognized ratably over the contract period as appropriate. If these criteria are met, consideration is
allocated at inception of the arrangement to all deliverables on the basis of the relative selling price. We have
generally met these criteria as all of the deliverables in our multiple-deliverable arrangements have stand-alone
value in that either the customer can resell that item or another vendor sells that item separately. We typically do not
offer a general right of return in regards to our multiple-deliverable arrangements.
The selling price of each deliverable is determined by establishing vendor-specific objective evidence
(‘‘VSOE’’), third party evidence (‘‘TPE’’) or best estimate of selling price (‘‘BESP’’) for each delivered item.
Generally, either VSOE or TPE is determinable; however, in the few instances where neither VSOE nor TPE is
determinable, we utilize our BESP in order to allocate consideration to those deliverables. BESP for our product
deliverables is determined by utilizing a weighted average price approach. BESP for our service deliverables is
determined primarily by utilizing a cost plus margin approach, and in some instances uses an average price per hour.
We often provide a guarantee to support our performance under multiple-deliverable arrangements; and 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.
Proportional Performance.
In connection with the agreement with the Servicio de Administraci´on
Tributaria (‘‘SAT’’) in Mexico, revenue is recognized based upon proportional performance, measured by the actual
number of labor hours incurred divided by the total estimated number of labor hours for the project. The impact of
changes in the estimated labor hours to service the agreement is reflected in the period during which the change
becomes known. In the SAT agreement, customer billings may be submitted for several separate deliverables,
including monthly services, activation of services, training of customer personnel and consultation on the design
and location of security scanning operations, among others. In the event that payments received from the customer
exceed revenue recognition, deferred revenue is recorded.
Concurrent with the revenue recognition, we accrue reserves for estimated product return and warranty costs.
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 recognition. Critical
judgments also include estimates of warranty reserves, which are established based on historical experience and
knowledge of the product under warranty.
Allowance for Doubtful Accounts. The allowance for doubtful accounts involves estimates based on
management’s judgment, review of individual receivables and analysis of historical bad debts. We monitor
collections and payments from our customers and we maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. We also assess current economic
trends that might impact the level of credit losses in the future. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Inventory.
Inventory is stated at the lower of cost or market. Cost is determined on the first-in, first-out
method. We write down inventory for slow-moving and obsolete inventory based on assessments of future
demands, market conditions and customers who may be experiencing financial difficulties. If these factors were to
become less favorable than those projected, additional inventory write-downs could be required.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using
the straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage
value. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the
useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization
of property and equipment under capital leases is included with depreciation expense. In the event that property and
equipment are idle, as a result of excess capacity or the early termination, non-renewal or reduction in scope of a
turnkey screening operation, such assets are assessed for impairment on a periodic basis and when an indication
that impairment may exist.
Income Taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities
available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different
interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in
determining our tax expense and in evaluating our tax positions including evaluating uncertainties. We review our
tax positions quarterly and adjust the balances as new information becomes available.
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in
future years. Such assets arise because of temporary differences between the financial reporting and tax bases of
assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability
of these future tax deductions by assessing the adequacy of future expected taxable income from all sources,
including reversal of taxable temporary differences, forecasted operating earnings and available tax planning
strategies. These sources of income inherently rely on estimates. To provide insight, we use our historical
experience and our short and long-range business forecasts. We believe it is more likely than not that a portion of
58
59
the deferred income tax assets may expire unused and therefore have established a valuation allowance against
them. Although realization is not assured for the remaining deferred income tax assets, we believe it is more likely
than not that the deferred tax assets will be fully recoverable within the applicable statutory expiration periods.
However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly
reduced or available tax planning strategies are no longer viable.
Business Combinations. We allocate the fair value of purchase consideration to the tangible and intangible
assets acquired, and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities is 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, and trade names, useful lives and discount rates. Our 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 offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments
are recorded to earnings.
Impairment of Long-Lived Assets. Goodwill represents the excess purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair value. 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 often if there is an indicator of
impairment. Intangible assets other than goodwill are amortized over their useful lives unless these lives are
determined to be indefinite.
We assess qualitative factors of each of our 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. Such assessments indicated
that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount, including
goodwill. Thus, we have determined that it is not necessary to proceed with the two-step goodwill impairment test.
There was no goodwill impairment for each of the three fiscal years ended June 30, 2017. We evaluate long-lived
assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Impairment is considered to exist if the total estimated future cash
flows on an undiscounted basis are less than the carrying amount of the assets. If impairment does exist, we
measure the impairment loss and record it based on the discounted estimate of future cash flows. In estimating
future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows from other asset groups. Our estimate of future cash flows is based upon, among
other things, certain assumptions about expected future operating performance, growth rates and other factors.
Although we believe the assumptions and estimates we have made in the past have been reasonable and
appropriate, different assumptions and estimates could materially impact our reported financial results. More
conservative estimates of the anticipated future benefits from these businesses could result in impairment charges,
which would decrease net income and result in lower asset values on our balance sheet.
Stock-Based Compensation Expense. We account for stock-based compensation using fair value
recognition provisions. Thus, we record stock-based compensation as a charge to earnings net of the estimated
impact of forfeited awards. As such, we recognize stock-based compensation cost only for those stock-based awards
that are estimated to ultimately vest over their requisite vesting period, based on the vesting provisions of the
individual grants.
The process of estimating the fair value of stock-based compensation awards and recognizing stock-based
compensation cost over their requisite vesting period involves significant assumptions and judgments. We estimate
the fair value of stock option awards on the date of grant using the Black-Scholes option-valuation model which
requires that we make certain assumptions regarding: (i) the expected volatility in the market price of our Common
Stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the
award prior to exercise. We estimate the fair value of restricted stock and restricted stock unit awards on the date of
the grant using the market price of our Common Stock on that date. In addition, we are required to estimate the
expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to
vest. If actual forfeiture rates differ materially from our estimates, stock-based compensation expense could differ
significantly from the amounts we have recorded in the current period. We periodically review actual forfeiture
experience and revise our estimates, as necessary. We recognize the cumulative effect of changes in the estimated
forfeiture rate as compensation cost in earnings in the period of the revision. As a result, if we revise our
assumptions and estimates, our stock-based compensation expense could change materially in the future. Certain
shares of restricted stock and restricted stock units vest based upon the achievement of pre-established performance
criteria. We estimate the fair value of performance-based awards at the date of grant based upon the probability that
the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we update our
assessment of the probability that the specified performance criteria will be achieved and adjust our estimate of the
fair value of the performance-based awards if necessary. We amortize the fair values of performance-based awards
over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award.
See note 8 to the consolidated financial statements for a further discussion of stock-based compensation.
Legal and Other Contingencies. We are subject to various claims and legal proceedings. We review the
status of each significant legal dispute to which we are a party and assess our potential financial exposure, if any. If
the potential financial exposure from any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, we record a liability and an expense for the estimated loss. Significant judgment is required in
both the determination of probability and the determination as to whether an exposure is reasonably estimable.
Because of uncertainties related to these matters, accruals are based only on the best information available at the
time. As additional information becomes available, we reassess the potential liability related to our pending claims
and litigation and revise our estimates accordingly. Such revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and financial position.
Net Revenues
The table below and the discussion that follows are based upon the way we analyze our business. See note 14 to
the consolidated financial statements for additional information about business segments.
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
2015-2016
2016-2017
Net Sales % Change % Change
Security . . . . . . . . . . . . . . . . . . . . $481.1
255.7
Healthcare . . . . . . . . . . . . . . . . . .
221.4
Optoelectronics / Manufacturing . . . .
50% $411.2
27% 211.5
23% 207.0
(Dollars in millions)
50% $555.2
25% 200.1
25% 205.7
58%
21%
21%
Total Net Revenues . . . . . . . . . . . $958.2
$829.7
$961.0
(15)%
(17)%
(7)%
(13)%
35%
(5)%
(1)%
16%
Fiscal 2017 Compared with Fiscal 2016. Revenues for the Security division increased primarily as a result
of increased sales of cargo and vehicle inspection systems, including related service, primarily driven by
$94.0 million of revenue related to AS&E#, which was acquired in September 2016, a significant increase in sales
of our RTT# hold baggage product to international customers; and increased revenue from turnkey scanning
operations as a result of a full year of operations in our Albanian program, which commenced in the second quarter
of fiscal 2016, and our expanded operations within our Mexican program, which added several sites in the fourth
quarter of the current year.
60
61
the deferred income tax assets may expire unused and therefore have established a valuation allowance against
them. Although realization is not assured for the remaining deferred income tax assets, we believe it is more likely
than not that the deferred tax assets will be fully recoverable within the applicable statutory expiration periods.
However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly
reduced or available tax planning strategies are no longer viable.
Business Combinations. We allocate the fair value of purchase consideration to the tangible and intangible
assets acquired, and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities is 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, and trade names, useful lives and discount rates. Our 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 offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments
are recorded to earnings.
Impairment of Long-Lived Assets. Goodwill represents the excess purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair value. 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 often if there is an indicator of
impairment. Intangible assets other than goodwill are amortized over their useful lives unless these lives are
determined to be indefinite.
We assess qualitative factors of each of our 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. Such assessments indicated
that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount, including
goodwill. Thus, we have determined that it is not necessary to proceed with the two-step goodwill impairment test.
There was no goodwill impairment for each of the three fiscal years ended June 30, 2017. We evaluate long-lived
assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Impairment is considered to exist if the total estimated future cash
flows on an undiscounted basis are less than the carrying amount of the assets. If impairment does exist, we
measure the impairment loss and record it based on the discounted estimate of future cash flows. In estimating
future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows from other asset groups. Our estimate of future cash flows is based upon, among
other things, certain assumptions about expected future operating performance, growth rates and other factors.
Although we believe the assumptions and estimates we have made in the past have been reasonable and
appropriate, different assumptions and estimates could materially impact our reported financial results. More
conservative estimates of the anticipated future benefits from these businesses could result in impairment charges,
which would decrease net income and result in lower asset values on our balance sheet.
Stock-Based Compensation Expense. We account for stock-based compensation using fair value
recognition provisions. Thus, we record stock-based compensation as a charge to earnings net of the estimated
impact of forfeited awards. As such, we recognize stock-based compensation cost only for those stock-based awards
that are estimated to ultimately vest over their requisite vesting period, based on the vesting provisions of the
individual grants.
The process of estimating the fair value of stock-based compensation awards and recognizing stock-based
compensation cost over their requisite vesting period involves significant assumptions and judgments. We estimate
the fair value of stock option awards on the date of grant using the Black-Scholes option-valuation model which
requires that we make certain assumptions regarding: (i) the expected volatility in the market price of our Common
Stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the
award prior to exercise. We estimate the fair value of restricted stock and restricted stock unit awards on the date of
the grant using the market price of our Common Stock on that date. In addition, we are required to estimate the
expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to
vest. If actual forfeiture rates differ materially from our estimates, stock-based compensation expense could differ
significantly from the amounts we have recorded in the current period. We periodically review actual forfeiture
experience and revise our estimates, as necessary. We recognize the cumulative effect of changes in the estimated
forfeiture rate as compensation cost in earnings in the period of the revision. As a result, if we revise our
assumptions and estimates, our stock-based compensation expense could change materially in the future. Certain
shares of restricted stock and restricted stock units vest based upon the achievement of pre-established performance
criteria. We estimate the fair value of performance-based awards at the date of grant based upon the probability that
the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we update our
assessment of the probability that the specified performance criteria will be achieved and adjust our estimate of the
fair value of the performance-based awards if necessary. We amortize the fair values of performance-based awards
over the requisite service period adjusted for estimated forfeitures for each separately vesting tranche of the award.
See note 8 to the consolidated financial statements for a further discussion of stock-based compensation.
Legal and Other Contingencies. We are subject to various claims and legal proceedings. We review the
status of each significant legal dispute to which we are a party and assess our potential financial exposure, if any. If
the potential financial exposure from any claim or legal proceeding is considered probable and the amount can be
reasonably estimated, we record a liability and an expense for the estimated loss. Significant judgment is required in
both the determination of probability and the determination as to whether an exposure is reasonably estimable.
Because of uncertainties related to these matters, accruals are based only on the best information available at the
time. As additional information becomes available, we reassess the potential liability related to our pending claims
and litigation and revise our estimates accordingly. Such revisions in the estimates of the potential liabilities could
have a material impact on our results of operations and financial position.
Net Revenues
The table below and the discussion that follows are based upon the way we analyze our business. See note 14 to
the consolidated financial statements for additional information about business segments.
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
2015-2016
2016-2017
Net Sales % Change % Change
Security . . . . . . . . . . . . . . . . . . . . $481.1
255.7
Healthcare . . . . . . . . . . . . . . . . . .
221.4
Optoelectronics / Manufacturing . . . .
50% $411.2
27% 211.5
23% 207.0
(Dollars in millions)
50% $555.2
25% 200.1
25% 205.7
58%
21%
21%
Total Net Revenues . . . . . . . . . . . $958.2
$829.7
$961.0
(15)%
(17)%
(7)%
(13)%
35%
(5)%
(1)%
16%
Fiscal 2017 Compared with Fiscal 2016. Revenues for the Security division increased primarily as a result
of increased sales of cargo and vehicle inspection systems, including related service, primarily driven by
$94.0 million of revenue related to AS&E#, which was acquired in September 2016, a significant increase in sales
of our RTT# hold baggage product to international customers; and increased revenue from turnkey scanning
operations as a result of a full year of operations in our Albanian program, which commenced in the second quarter
of fiscal 2016, and our expanded operations within our Mexican program, which added several sites in the fourth
quarter of the current year.
60
61
The decrease in revenues in our Healthcare division was largely driven by the sale of a non-core European-
based cardiology business in the third quarter of the current fiscal year, which accounted for $8.0 of the change in
net revenues. Revenues from all other products and services decreased by less than 2%, in fiscal 2017, as strength in
second half fiscal 2017 revenues could not overcome the declines experienced in the first half of the fiscal year.
Revenues for the Optoelectronics and Manufacturing division decreased in fiscal 2017 primarily as a result of
a $13.3 million decrease in organic sales in our contract manufacturing business due to a reduction in unit volume
purchases from our OEM customers. This decrease was partially offset by $10.1 million of incremental revenues
from two small contract manufacturing businesses that were acquired during the third quarter of fiscal 2016 and a
$1.9 million increase within our commercial optoelectronics business.
Fiscal 2016 Compared with Fiscal 2015. Revenues for the Security division decreased primarily as a result
of a $66.4 million reduction in revenues associated with a Foreign Military Sale contract with the U.S. Department
of Defense (‘‘FMS Contract’’) as compared to the prior year. The delivery of equipment under the FMS Contract
was completed in fiscal 2015. This decrease was partially offset by revenues from the commencement of our
turnkey scanning operation in Albania during the year.
Revenues for the Healthcare division decreased across the majority of our product lines and regions. We
believe this contraction was due, in part, to a hospital spending environment adversely impacted by challenging
economic environments in many of our markets and problems encountered with new product launches.
Revenues for the Optoelectronics and Manufacturing division decreased in fiscal 2016 primarily as a result of
a $26.8 million decrease in organic sales in our contract manufacturing business due to a reduction in unit volume
purchases from our OEM customers, including an $11.5 million year-over-year reduction in sales to a single large
customer to which we still sell. This decrease was partially offset by $8.8 million of revenues from two small
contract manufacturing businesses that were acquired during the third quarter of fiscal 2016.
Gross Profit
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
Net Sales
(Dollars in millions)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . .
$325.4
34.0% $276.9
33.4% $323.5
33.7%
Fiscal 2017 Compared with Fiscal 2016. Gross profit increased 17% primarily as a result of the 16%
increase in sales. The overall gross margin was up slightly from fiscal 2016 due to customer mix, economies of
scale, operational efficiencies and the strengthening U.S. dollar.
Fiscal 2016 Compared with Fiscal 2015. Gross profit decreased 15% primarily as a result of the 13%
decrease in sales. Gross margin decreased due to lower sales within our Healthcare division, which carries the
highest gross margin of our three divisions, and an unfavorable product mix within our Security division. These
factors were partially offset by improved gross margin within our Optoelectronics and Manufacturing division due
to a more favorable product mix.
Operating Expenses
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
2015-2016
2016-2017
Net Sales % Change % Change
Selling, general and administrative . . $171.8
Research and development
51.6
Impairment, restructuring and other
. . . . . . .
17.9% $166.7
5.4% 49.8
(Dollars in millions)
20.1% $192.6
6.0% 50.9
20.0%
5.3%
(3)%
(3)%
charges . . . . . . . . . . . . . . . . . . .
9.8
1.0% 22.0
2.6% 46.7
4.9% 124%
Total operating expenses . . . . . . $233.2
24.3% $238.5
28.7% $290.2
30.2%
2%
16%
2%
112%
22%
Selling, General and Administrative
SG&A expenses consisted primarily of compensation paid to sales, marketing and administrative personnel,
professional service fees and marketing expenses.
Fiscal 2017 Compared with Fiscal 2016. The increase in SG&A expense was primarily driven by the
Security division to support the higher sales level in the division and the inclusion of such costs for AS&E#, which
was acquired in September 2016.
Fiscal 2016 Compared with Fiscal 2015. For fiscal 2016, SG&A expenses decreased by 3% primarily due
to a reduction in variable compensation as a result of lower sales, and a $5.8 million increase in the revaluation of
contingent acquisition obligations, which reduced SG&A expenses, compared to the prior year.
Research and Development
Our Security and Healthcare divisions have historically invested substantial amounts in R&D. We intend to
continue this trend in future years, although specific programs may or may not continue to be funded and funding
levels may fluctuate. R&D expenses included research related to new product development and product
enhancement expenditures.
Fiscal 2017 Compared with Fiscal 2016. R&D spending increased in fiscal 2017 as a result of the
acquisition of AS&E# by our Security division and a small increase within our Optoelectronics and Manufacturing
division. These increases in spending were partially offset by decreased spending by our organic operations within
our Security division and our Healthcare division.
Fiscal 2016 Compared with Fiscal 2015. R&D spending in fiscal 2016 was generally consistent with the
prior year.
Impairment, Restructuring and Other Charges
For the past several years we have endeavored to align our global capacity and infrastructure with demand by
our customers and fully integrate acquisitions, thereby improving our operational efficiency. These activities
included reducing excess workforce and capacity, consolidating and relocating certain manufacturing facilities and
reviewing the value of certain technologies and product lines. The overall objectives of the restructuring activities
were to lower costs and better utilize our existing manufacturing capacity. During fiscal 2015 through 2017, we
continued these efforts to further increase operating efficiencies. Our efforts have helped enhance our ability to
improve operating margins, retain and expand existing relationships with customers and attract new business. We
may utilize similar measures in the future to realign our operations to further increase our operating efficiencies.
The effect of these efforts may materially affect our future operating results.
62
63
The decrease in revenues in our Healthcare division was largely driven by the sale of a non-core European-
based cardiology business in the third quarter of the current fiscal year, which accounted for $8.0 of the change in
net revenues. Revenues from all other products and services decreased by less than 2%, in fiscal 2017, as strength in
second half fiscal 2017 revenues could not overcome the declines experienced in the first half of the fiscal year.
Revenues for the Optoelectronics and Manufacturing division decreased in fiscal 2017 primarily as a result of
a $13.3 million decrease in organic sales in our contract manufacturing business due to a reduction in unit volume
purchases from our OEM customers. This decrease was partially offset by $10.1 million of incremental revenues
from two small contract manufacturing businesses that were acquired during the third quarter of fiscal 2016 and a
$1.9 million increase within our commercial optoelectronics business.
Fiscal 2016 Compared with Fiscal 2015. Revenues for the Security division decreased primarily as a result
of a $66.4 million reduction in revenues associated with a Foreign Military Sale contract with the U.S. Department
of Defense (‘‘FMS Contract’’) as compared to the prior year. The delivery of equipment under the FMS Contract
was completed in fiscal 2015. This decrease was partially offset by revenues from the commencement of our
turnkey scanning operation in Albania during the year.
Revenues for the Healthcare division decreased across the majority of our product lines and regions. We
believe this contraction was due, in part, to a hospital spending environment adversely impacted by challenging
economic environments in many of our markets and problems encountered with new product launches.
Revenues for the Optoelectronics and Manufacturing division decreased in fiscal 2016 primarily as a result of
a $26.8 million decrease in organic sales in our contract manufacturing business due to a reduction in unit volume
purchases from our OEM customers, including an $11.5 million year-over-year reduction in sales to a single large
customer to which we still sell. This decrease was partially offset by $8.8 million of revenues from two small
contract manufacturing businesses that were acquired during the third quarter of fiscal 2016.
Gross Profit
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
Net Sales
(Dollars in millions)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . .
$325.4
34.0% $276.9
33.4% $323.5
33.7%
Fiscal 2017 Compared with Fiscal 2016. Gross profit increased 17% primarily as a result of the 16%
increase in sales. The overall gross margin was up slightly from fiscal 2016 due to customer mix, economies of
scale, operational efficiencies and the strengthening U.S. dollar.
Fiscal 2016 Compared with Fiscal 2015. Gross profit decreased 15% primarily as a result of the 13%
decrease in sales. Gross margin decreased due to lower sales within our Healthcare division, which carries the
highest gross margin of our three divisions, and an unfavorable product mix within our Security division. These
factors were partially offset by improved gross margin within our Optoelectronics and Manufacturing division due
to a more favorable product mix.
Operating Expenses
2015
% of
Net Sales
2016
% of
Net Sales
2017
% of
2015-2016
2016-2017
Net Sales % Change % Change
Selling, general and administrative . . $171.8
Research and development
51.6
Impairment, restructuring and other
. . . . . . .
17.9% $166.7
5.4% 49.8
(Dollars in millions)
20.1% $192.6
6.0% 50.9
20.0%
5.3%
(3)%
(3)%
charges . . . . . . . . . . . . . . . . . . .
9.8
1.0% 22.0
2.6% 46.7
4.9% 124%
Total operating expenses . . . . . . $233.2
24.3% $238.5
28.7% $290.2
30.2%
2%
16%
2%
112%
22%
Selling, General and Administrative
SG&A expenses consisted primarily of compensation paid to sales, marketing and administrative personnel,
professional service fees and marketing expenses.
Fiscal 2017 Compared with Fiscal 2016. The increase in SG&A expense was primarily driven by the
Security division to support the higher sales level in the division and the inclusion of such costs for AS&E#, which
was acquired in September 2016.
Fiscal 2016 Compared with Fiscal 2015. For fiscal 2016, SG&A expenses decreased by 3% primarily due
to a reduction in variable compensation as a result of lower sales, and a $5.8 million increase in the revaluation of
contingent acquisition obligations, which reduced SG&A expenses, compared to the prior year.
Research and Development
Our Security and Healthcare divisions have historically invested substantial amounts in R&D. We intend to
continue this trend in future years, although specific programs may or may not continue to be funded and funding
levels may fluctuate. R&D expenses included research related to new product development and product
enhancement expenditures.
Fiscal 2017 Compared with Fiscal 2016. R&D spending increased in fiscal 2017 as a result of the
acquisition of AS&E# by our Security division and a small increase within our Optoelectronics and Manufacturing
division. These increases in spending were partially offset by decreased spending by our organic operations within
our Security division and our Healthcare division.
Fiscal 2016 Compared with Fiscal 2015. R&D spending in fiscal 2016 was generally consistent with the
prior year.
Impairment, Restructuring and Other Charges
For the past several years we have endeavored to align our global capacity and infrastructure with demand by
our customers and fully integrate acquisitions, thereby improving our operational efficiency. These activities
included reducing excess workforce and capacity, consolidating and relocating certain manufacturing facilities and
reviewing the value of certain technologies and product lines. The overall objectives of the restructuring activities
were to lower costs and better utilize our existing manufacturing capacity. During fiscal 2015 through 2017, we
continued these efforts to further increase operating efficiencies. Our efforts have helped enhance our ability to
improve operating margins, retain and expand existing relationships with customers and attract new business. We
may utilize similar measures in the future to realign our operations to further increase our operating efficiencies.
The effect of these efforts may materially affect our future operating results.
62
63
Fiscal 2017 Compared with Fiscal 2016. During fiscal 2017, we incurred $46.7 million of impairment,
restructuring and other charges, which included: (i) a $17.5 million impairment charge for idle assets related to our
turnkey screening program in Mexico that we believe are permanently impaired; (ii) $9.4 million of impairment
charges for two product lines in our Security division that were abandoned, one, of which, was determined to be
redundant with a similar product acquired as part of our acquisition of AS&E#; (iii) $8.0 million of employee
termination costs related to the integration of AS&E#; (iv) $0.8 million related to a facility consolidated in our
Security division; (v) $5.6 million of transaction costs related to the Security division’s acquisitions of AS&E# and
the explosive trace detection business that was completed subsequent to the end of the fiscal year; (vi) $2.0 million
of employee termination costs and other costs related to a facility consolidation in our Healthcare division; and
(vii) $0.7 million of employee termination and other costs related to a facility consolidation in our Optoelectronics
and Manufacturing division.
Fiscal 2016 Compared with Fiscal 2015. During fiscal 2016, we incurred $22.0 million of impairment,
restructuring and other charges primarily as follows: (i) $5.2 million related to facility consolidations and
severance; (ii) the $6.8 million impairment of certain fixed assets and technology we believe are no longer usable or
saleable; (iii) $3.7 million of costs related to acquisitions; (iv) the write off of a $2.8 million minority investment
that we believe is permanently impaired; (v) $2.9 million related to legal settlements and related legal costs; and
(vi) $0.6 million of other costs. During fiscal 2015, we incurred $9.8 million of impairment, restructuring and other
charges as follows: (i) $5.4 million related to facility consolidations and severance charges incurred among all three
of our operating divisions; (ii) $3.8 million of costs incurred within our Security division related to contract issues
with the U. S. federal government; and (iii) $0.7 million of professional fees associated with litigation, which were
recorded in our Corporate segment.
Interest and Other
2015
2016
2017
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
$2.9
0.0
$ 9.6
(2.1)
$3.2
0.1
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . .
$3.3
$2.9
$ 7.5
Fiscal 2017 Compared with Fiscal 2016.
In fiscal 2017, interest expense was $9.6 million as compared to
$2.9 million in the comparable prior-year period. This increase was driven by higher levels of borrowing under our
revolving credit facility primarily driven by the acquisition of AS&E# in September 2016 and the Notes issued in
February 2017. Interest expense in fiscal 2017 includes $2.5 million of non-cash interest expense related to the
Notes (see note 7 to the consolidated financial statements for further discussion). In fiscal 2017, other income of
$2.1 million primarily represents the gain from the sale of a business within our Healthcare division.
Fiscal 2016 Compared with Fiscal 2015.
In fiscal 2016, our interest and other expense, net was
$2.9 million, compared to $3.3 million in fiscal 2015. Interest expense associated with higher levels of borrowing
under our revolving credit facility in fiscal year 2016 was offset by a significant reduction in outstanding letters of
credit under the credit facility.
Provision for Income Taxes
The effective tax rate for a particular period varies depending on a number of factors including (i) the mix of
income earned in various tax jurisdictions, each of which applies a unique range of income tax rates and income tax
credits, (ii) changes in previously established valuation allowances for deferred tax assets (changes are based upon
our current analysis of the likelihood that these deferred tax assets will be realized), (iii) the level of non-deductible
expenses, (iv) certain tax elections and (v) tax holidays granted to certain of our international subsidiaries.
Fiscal 2017 Compared with Fiscal 2016.
In fiscal 2017, our income tax expense was $4.7 million,
compared to $9.3 million for fiscal 2016, resulting in an effective tax rate of 18.2% in fiscal 2017 as compared to a
tax rate of 26.3% in fiscal 2016. Excluding the impact of adopting ASU 2016-09, Improvements to Employee
Share-Based Payment Accounting, our income tax expense in fiscal 2017 would have been $7.1 million for an
effective tax rate of 27.6%.
Fiscal 2016 Compared with Fiscal 2015.
In fiscal 2016, our income tax expense was $9.3 million,
compared to $23.7 million for fiscal 2015, resulting in an effective tax rate of 26.3% in fiscal 2016 as compared to a
tax rate of 26.7% in fiscal 2015.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our
credit facility. Cash and cash equivalents totaled $169.7 million at June 30, 2017, an increase of $65.3 million, or
63%, from $104.4 million at June 30, 2016. During fiscal 2017, we generated $62.8 million of cash flow from
operations. In February 2017, we issued $287.5 million of Notes. (See note 7 in the consolidated financial
statements for further discussion.) These proceeds, in addition to borrowings from our credit facility, were used for
the following: $17.1 million invested in capital expenditures, $191.2 million for the acquisition of businesses and
other assets and $58.5 million for the repurchase of our Common Stock, including net share settlement of equity
awards. If we continue to net settle equity awards, we will use additional cash to pay our tax withholding obligations
in connection with such settlements. We currently anticipate that our available funds, credit facilities and cash flow
from operations will be sufficient to meet our operational cash needs for the next 12 months and foreseeable future.
In addition, without repatriating earnings from non-U.S. subsidiaries, we anticipate that cash generated from
operations will be able to satisfy our obligations in the U.S., including our outstanding lines of credit, as accounting
earnings in the U.S. are not necessarily indicative of cash flows since earnings are generally reduced by non-cash
expenses including depreciation, amortization, and stock-based compensation.
We have a five-year revolving credit facility that allows us to borrow up to $525 million at London Interbank
Offered Rate (‘‘LIBOR’’) plus 1.25% depending upon our leverage ratio. As of June 30, 2017, there was
$103 million outstanding under the revolving credit facility and letters-of-credit outstanding totaled $18.3 million.
Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from
period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows.
During fiscal 2017, we generated cash from operations of $62.8 million compared to $59.2 million in the prior-year
period driven by the growth in the business.
Cash Used in Investing Activities. Net cash used in investing activities was $200.7 million during fiscal
2017 as compared to $43.5 million used during the prior year. This change was primarily related to the acquisition
of AS&E#. During fiscal 2017, we used cash of $191.2 million for the acquisitions of businesses as compared to
$19.9 million in the comparable prior-year period. Capital expenditures were relatively consistent in each year.
These uses of cash were partially offset by net proceeds of $12.8 million from the sale of a business.
Cash Provided by Financing Activities. Net cash provided by financing activities was $203.6 million during
fiscal 2017, compared to $41.8 million during the prior year. The changes in cash flows from financing activities
primarily relate to (i) borrowings and payments under debt obligations; (ii) the issuance of and/or repurchase of
Common Stock and (iii) employee stock plan activities. During fiscal 2017, we received net proceeds of
$279.8 million from the issuance of the Notes and repaid $22.0 million on our revolving credit facility, as compared
to $125.0 million borrowed on our revolving credit facility in the prior year. The net proceeds from borrowings in
the current year were primarily used to finance the acquisition of AS&E# and the repurchase of $58.5 million of our
Common Stock, including net share settlement of equity awards during fiscal 2017. During the prior-year period,
we primarily utilized net proceeds from borrowings of $122.8 million for the following: $19.9 million to finance
the acquisition of two small businesses; and $87.1 million to repurchase Common Stock, including net share
settlement of equity awards.
64
65
Fiscal 2017 Compared with Fiscal 2016. During fiscal 2017, we incurred $46.7 million of impairment,
restructuring and other charges, which included: (i) a $17.5 million impairment charge for idle assets related to our
turnkey screening program in Mexico that we believe are permanently impaired; (ii) $9.4 million of impairment
charges for two product lines in our Security division that were abandoned, one, of which, was determined to be
redundant with a similar product acquired as part of our acquisition of AS&E#; (iii) $8.0 million of employee
termination costs related to the integration of AS&E#; (iv) $0.8 million related to a facility consolidated in our
Security division; (v) $5.6 million of transaction costs related to the Security division’s acquisitions of AS&E# and
the explosive trace detection business that was completed subsequent to the end of the fiscal year; (vi) $2.0 million
of employee termination costs and other costs related to a facility consolidation in our Healthcare division; and
(vii) $0.7 million of employee termination and other costs related to a facility consolidation in our Optoelectronics
and Manufacturing division.
Fiscal 2016 Compared with Fiscal 2015. During fiscal 2016, we incurred $22.0 million of impairment,
restructuring and other charges primarily as follows: (i) $5.2 million related to facility consolidations and
severance; (ii) the $6.8 million impairment of certain fixed assets and technology we believe are no longer usable or
saleable; (iii) $3.7 million of costs related to acquisitions; (iv) the write off of a $2.8 million minority investment
that we believe is permanently impaired; (v) $2.9 million related to legal settlements and related legal costs; and
(vi) $0.6 million of other costs. During fiscal 2015, we incurred $9.8 million of impairment, restructuring and other
charges as follows: (i) $5.4 million related to facility consolidations and severance charges incurred among all three
of our operating divisions; (ii) $3.8 million of costs incurred within our Security division related to contract issues
with the U. S. federal government; and (iii) $0.7 million of professional fees associated with litigation, which were
recorded in our Corporate segment.
Interest and Other
2015
2016
2017
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
$2.9
0.0
$ 9.6
(2.1)
$3.2
0.1
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . .
$3.3
$2.9
$ 7.5
Fiscal 2017 Compared with Fiscal 2016.
In fiscal 2017, interest expense was $9.6 million as compared to
$2.9 million in the comparable prior-year period. This increase was driven by higher levels of borrowing under our
revolving credit facility primarily driven by the acquisition of AS&E# in September 2016 and the Notes issued in
February 2017. Interest expense in fiscal 2017 includes $2.5 million of non-cash interest expense related to the
Notes (see note 7 to the consolidated financial statements for further discussion). In fiscal 2017, other income of
$2.1 million primarily represents the gain from the sale of a business within our Healthcare division.
Fiscal 2016 Compared with Fiscal 2015.
In fiscal 2016, our interest and other expense, net was
$2.9 million, compared to $3.3 million in fiscal 2015. Interest expense associated with higher levels of borrowing
under our revolving credit facility in fiscal year 2016 was offset by a significant reduction in outstanding letters of
credit under the credit facility.
Provision for Income Taxes
The effective tax rate for a particular period varies depending on a number of factors including (i) the mix of
income earned in various tax jurisdictions, each of which applies a unique range of income tax rates and income tax
credits, (ii) changes in previously established valuation allowances for deferred tax assets (changes are based upon
our current analysis of the likelihood that these deferred tax assets will be realized), (iii) the level of non-deductible
expenses, (iv) certain tax elections and (v) tax holidays granted to certain of our international subsidiaries.
Fiscal 2017 Compared with Fiscal 2016.
In fiscal 2017, our income tax expense was $4.7 million,
compared to $9.3 million for fiscal 2016, resulting in an effective tax rate of 18.2% in fiscal 2017 as compared to a
tax rate of 26.3% in fiscal 2016. Excluding the impact of adopting ASU 2016-09, Improvements to Employee
Share-Based Payment Accounting, our income tax expense in fiscal 2017 would have been $7.1 million for an
effective tax rate of 27.6%.
Fiscal 2016 Compared with Fiscal 2015.
In fiscal 2016, our income tax expense was $9.3 million,
compared to $23.7 million for fiscal 2015, resulting in an effective tax rate of 26.3% in fiscal 2016 as compared to a
tax rate of 26.7% in fiscal 2015.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our
credit facility. Cash and cash equivalents totaled $169.7 million at June 30, 2017, an increase of $65.3 million, or
63%, from $104.4 million at June 30, 2016. During fiscal 2017, we generated $62.8 million of cash flow from
operations. In February 2017, we issued $287.5 million of Notes. (See note 7 in the consolidated financial
statements for further discussion.) These proceeds, in addition to borrowings from our credit facility, were used for
the following: $17.1 million invested in capital expenditures, $191.2 million for the acquisition of businesses and
other assets and $58.5 million for the repurchase of our Common Stock, including net share settlement of equity
awards. If we continue to net settle equity awards, we will use additional cash to pay our tax withholding obligations
in connection with such settlements. We currently anticipate that our available funds, credit facilities and cash flow
from operations will be sufficient to meet our operational cash needs for the next 12 months and foreseeable future.
In addition, without repatriating earnings from non-U.S. subsidiaries, we anticipate that cash generated from
operations will be able to satisfy our obligations in the U.S., including our outstanding lines of credit, as accounting
earnings in the U.S. are not necessarily indicative of cash flows since earnings are generally reduced by non-cash
expenses including depreciation, amortization, and stock-based compensation.
We have a five-year revolving credit facility that allows us to borrow up to $525 million at London Interbank
Offered Rate (‘‘LIBOR’’) plus 1.25% depending upon our leverage ratio. As of June 30, 2017, there was
$103 million outstanding under the revolving credit facility and letters-of-credit outstanding totaled $18.3 million.
Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from
period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows.
During fiscal 2017, we generated cash from operations of $62.8 million compared to $59.2 million in the prior-year
period driven by the growth in the business.
Cash Used in Investing Activities. Net cash used in investing activities was $200.7 million during fiscal
2017 as compared to $43.5 million used during the prior year. This change was primarily related to the acquisition
of AS&E#. During fiscal 2017, we used cash of $191.2 million for the acquisitions of businesses as compared to
$19.9 million in the comparable prior-year period. Capital expenditures were relatively consistent in each year.
These uses of cash were partially offset by net proceeds of $12.8 million from the sale of a business.
Cash Provided by Financing Activities. Net cash provided by financing activities was $203.6 million during
fiscal 2017, compared to $41.8 million during the prior year. The changes in cash flows from financing activities
primarily relate to (i) borrowings and payments under debt obligations; (ii) the issuance of and/or repurchase of
Common Stock and (iii) employee stock plan activities. During fiscal 2017, we received net proceeds of
$279.8 million from the issuance of the Notes and repaid $22.0 million on our revolving credit facility, as compared
to $125.0 million borrowed on our revolving credit facility in the prior year. The net proceeds from borrowings in
the current year were primarily used to finance the acquisition of AS&E# and the repurchase of $58.5 million of our
Common Stock, including net share settlement of equity awards during fiscal 2017. During the prior-year period,
we primarily utilized net proceeds from borrowings of $122.8 million for the following: $19.9 million to finance
the acquisition of two small businesses; and $87.1 million to repurchase Common Stock, including net share
settlement of equity awards.
64
65
Borrowings
Off Balance Sheet Arrangements
Outstanding lines of credit and current and long-term debt totaled $347.1 million at June 30, 2017, an increase
of $213.3 million from $133.8 million at June 30, 2016. As of June 30, 2017, we are in compliance with all
covenants under our various borrowing agreements. See note 7 to the consolidated financial statements for further
discussion.
As of June 30, 2017, we had no significant off balance sheet arrangements, as defined in Item 303(a)(4) of
Regulation S-K, other than those previously disclosed.
New Accounting Pronouncements
The following is a summary of our contractual obligations and commitments at June 30, 2017 (in thousands):
For information with respect to new accounting pronouncements and the impact of these pronouncements on
Contractual Obligations
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related obligations . . . . . . . . . . . . . . .
Defined benefit plan obligation . . . . . . . . . . . . . . .
Payments Due by Period
Total
$347,146
30,209
42,895
95,705
10,462
Less than
1 year
$105,396
8,759
42,847
84,303
145
1-3 years
3-5 years
$ 2,839
11,679
33
9,152
1,805
$
86
7,762
—
2,250
2,340
After
5 years
$238,825
2,009
15
—
6,172
Total contractual obligations . . . . . . . . . . . . . . . . .
$526,417
$241,450
$25,508
$12,438
$247,021
Other Commercial Commitments—letters of credit
.
$ 64,342
$ 46,602
$10,209
$
161
$
7,370
We anticipate that cash generated from our operations, in addition to existing cash borrowing arrangements
and future access to capital markets should be sufficient to meet our cash requirements for the foreseeable future.
However, our future capital requirements will depend on many factors, including future business acquisitions,
capital expenditures, litigation, stock repurchases and levels of research and development spending, among other
factors. The adequacy of available funds will depend on many factors, including the success of our businesses in
generating cash, continued compliance with financial covenants contained in our credit facility and the health of
capital markets in general, among other factors.
Cash Held by Foreign Subsidiaries
Our cash, cash equivalents, and investments totaled $169.7 million at June 30, 2017. Of this amount,
approximately 99% was held by our foreign subsidiaries and subject to repatriation tax considerations. These
foreign funds were located primarily in Mexico, Malaysia and the United Kingdom, and to a lesser extent in India,
Singapore, Germany and China among others. We intend to permanently reinvest a significant portion of our
earnings from foreign operations, and we currently do not anticipate that we will need this cash in foreign countries
to fund our U.S. operations. In the event that funds from foreign operations are needed to fund operations in the
United States and if U.S. taxes have not been previously provided on the related earnings, we would provide for and
pay additional U.S. taxes at the time we change our intention with regard to the reinvestment of those earnings.
Stock Repurchase Program
In April 2016, our Board of Directors authorized a stock repurchase program totaling 1.0 million shares. This
was in addition to the previously-approved program to repurchase up to 4.5 million shares. During fiscal 2017, we
repurchased 642,277 shares under these programs. As of June 30, 2017, 872,481 shares were available for
additional repurchase under the current program. Upon repurchase, the shares are restored to the status of
authorized but unissued shares and we record them as a reduction in the number of shares of Common Stock issued
and outstanding in our consolidated financial statements.
our consolidated financial statements, see note 1 to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to certain market risks, which are inherent in our financial instruments and arise from
transactions entered into in the normal course of business. We may enter into derivative financial instrument
transactions in order to manage or reduce market risk in connection with specific foreign-currency-denominated
transactions. We do not enter into derivative financial instrument transactions for speculative purposes.
We are subject to interest rate risk on our borrowings under our bank lines of credit. Consequently, our interest
expense would fluctuate with changes in the general level of these interest rates if we were to borrow any amounts
under the credit facility.
Foreign Currency
Our international operations are subject to certain opportunities and risks, including foreign currency
fluctuations and governmental actions. We closely monitor our operations in each country and seek to adopt
appropriate strategies that are responsive to changing economic and political environments, and to fluctuations in
foreign currencies. We conduct business in more than 20 countries. Due to our global operations, weaknesses in the
currencies of some of these countries are often offset by strengths in others. Foreign currency financial statements
are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are
translated at average rates during the reporting period. We include gains and losses resulting from foreign currency
transactions in income, while we exclude those resulting from translation of financial statements from income and
include them as a component of accumulated other comprehensive loss. Transaction gains and losses, which were
included in our consolidated statement of operations, amounted to a gain (loss) of approximately $2.1 million,
$(0.8) million and $2.0 million for the fiscal years ended June 30, 2015, 2016 and 2017, respectively. Furthermore,
a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net
increase in our operating income of approximately $11.0 million in fiscal 2017. Conversely, a 10% depreciation of
the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating
income of approximately $11.0 million in fiscal 2017.
Importance of International Markets
International markets provide us with significant growth opportunities. However, the following events, among
others, could adversely affect our financial results in subsequent periods: periodic economic downturns in different
regions of the world, changes in trade policies or tariffs, civil or military conflict and other political instability. We
continue to perform ongoing credit evaluations of our customers’ financial condition. We monitor economic and
currency conditions around the world to evaluate whether there may be any significant effect on our international
sales in the future. Due to our overseas investments and the necessity of dealing with local currencies in our foreign
business transactions, we are at risk with respect to foreign currency fluctuations.
66
67
Borrowings
Off Balance Sheet Arrangements
Outstanding lines of credit and current and long-term debt totaled $347.1 million at June 30, 2017, an increase
of $213.3 million from $133.8 million at June 30, 2016. As of June 30, 2017, we are in compliance with all
covenants under our various borrowing agreements. See note 7 to the consolidated financial statements for further
discussion.
As of June 30, 2017, we had no significant off balance sheet arrangements, as defined in Item 303(a)(4) of
Regulation S-K, other than those previously disclosed.
New Accounting Pronouncements
The following is a summary of our contractual obligations and commitments at June 30, 2017 (in thousands):
For information with respect to new accounting pronouncements and the impact of these pronouncements on
Contractual Obligations
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related obligations . . . . . . . . . . . . . . .
Defined benefit plan obligation . . . . . . . . . . . . . . .
Payments Due by Period
Total
$347,146
30,209
42,895
95,705
10,462
Less than
1 year
$105,396
8,759
42,847
84,303
145
1-3 years
3-5 years
$ 2,839
11,679
33
9,152
1,805
$
86
7,762
—
2,250
2,340
After
5 years
$238,825
2,009
15
—
6,172
Total contractual obligations . . . . . . . . . . . . . . . . .
$526,417
$241,450
$25,508
$12,438
$247,021
Other Commercial Commitments—letters of credit
.
$ 64,342
$ 46,602
$10,209
$
161
$
7,370
We anticipate that cash generated from our operations, in addition to existing cash borrowing arrangements
and future access to capital markets should be sufficient to meet our cash requirements for the foreseeable future.
However, our future capital requirements will depend on many factors, including future business acquisitions,
capital expenditures, litigation, stock repurchases and levels of research and development spending, among other
factors. The adequacy of available funds will depend on many factors, including the success of our businesses in
generating cash, continued compliance with financial covenants contained in our credit facility and the health of
capital markets in general, among other factors.
Cash Held by Foreign Subsidiaries
Our cash, cash equivalents, and investments totaled $169.7 million at June 30, 2017. Of this amount,
approximately 99% was held by our foreign subsidiaries and subject to repatriation tax considerations. These
foreign funds were located primarily in Mexico, Malaysia and the United Kingdom, and to a lesser extent in India,
Singapore, Germany and China among others. We intend to permanently reinvest a significant portion of our
earnings from foreign operations, and we currently do not anticipate that we will need this cash in foreign countries
to fund our U.S. operations. In the event that funds from foreign operations are needed to fund operations in the
United States and if U.S. taxes have not been previously provided on the related earnings, we would provide for and
pay additional U.S. taxes at the time we change our intention with regard to the reinvestment of those earnings.
Stock Repurchase Program
In April 2016, our Board of Directors authorized a stock repurchase program totaling 1.0 million shares. This
was in addition to the previously-approved program to repurchase up to 4.5 million shares. During fiscal 2017, we
repurchased 642,277 shares under these programs. As of June 30, 2017, 872,481 shares were available for
additional repurchase under the current program. Upon repurchase, the shares are restored to the status of
authorized but unissued shares and we record them as a reduction in the number of shares of Common Stock issued
and outstanding in our consolidated financial statements.
our consolidated financial statements, see note 1 to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to certain market risks, which are inherent in our financial instruments and arise from
transactions entered into in the normal course of business. We may enter into derivative financial instrument
transactions in order to manage or reduce market risk in connection with specific foreign-currency-denominated
transactions. We do not enter into derivative financial instrument transactions for speculative purposes.
We are subject to interest rate risk on our borrowings under our bank lines of credit. Consequently, our interest
expense would fluctuate with changes in the general level of these interest rates if we were to borrow any amounts
under the credit facility.
Foreign Currency
Our international operations are subject to certain opportunities and risks, including foreign currency
fluctuations and governmental actions. We closely monitor our operations in each country and seek to adopt
appropriate strategies that are responsive to changing economic and political environments, and to fluctuations in
foreign currencies. We conduct business in more than 20 countries. Due to our global operations, weaknesses in the
currencies of some of these countries are often offset by strengths in others. Foreign currency financial statements
are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are
translated at average rates during the reporting period. We include gains and losses resulting from foreign currency
transactions in income, while we exclude those resulting from translation of financial statements from income and
include them as a component of accumulated other comprehensive loss. Transaction gains and losses, which were
included in our consolidated statement of operations, amounted to a gain (loss) of approximately $2.1 million,
$(0.8) million and $2.0 million for the fiscal years ended June 30, 2015, 2016 and 2017, respectively. Furthermore,
a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net
increase in our operating income of approximately $11.0 million in fiscal 2017. Conversely, a 10% depreciation of
the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating
income of approximately $11.0 million in fiscal 2017.
Importance of International Markets
International markets provide us with significant growth opportunities. However, the following events, among
others, could adversely affect our financial results in subsequent periods: periodic economic downturns in different
regions of the world, changes in trade policies or tariffs, civil or military conflict and other political instability. We
continue to perform ongoing credit evaluations of our customers’ financial condition. We monitor economic and
currency conditions around the world to evaluate whether there may be any significant effect on our international
sales in the future. Due to our overseas investments and the necessity of dealing with local currencies in our foreign
business transactions, we are at risk with respect to foreign currency fluctuations.
66
67
Inflation
We do not believe that inflation has had a material impact on our results of operations.
Use of Derivatives
Our use of derivatives consists primarily of an interest swap agreement. As discussed in note 1 to the
consolidated financial statements, we had an interest rate swap of $3.7 million outstanding as of June 30, 2017.
Interest Rate Risk
The principal maturity and estimated value of our long-term debt exposure as of June 30, 2017 were as follows
(in thousands):
Convertible senior notes . . . . .
Cash interest rate on convertible
notes . . . . . . . . . . . . . . . .
Secured loans and capital lease
obligations . . . . . . . . . . . .
Average interest rate of secured
loans and capital lease
obligations . . . . . . . . . . . .
Maturity
2018
$ —
2019
$ —
2020
2021
2022
2023 and
thereafter
Total
Fair
Value
$ —
$ —
$287,500
$ —
$287,500
$287,500
1.25%
1.25% 1.25% 1.25%
1.25%
N/A
1.25%
1.25%
$2,397
$2,074
$ 764
$ 82
$
4
$ —
$
5,321
$
5,321
2.4%
2.4%
2.5%
3.0%
3.3%
—%
2.4%
2.4%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We make reference here to the Index to consolidated financial statements that appears on page F-1 of this
report. The Report of Independent Registered Public Accounting Firm from Moss Adams LLP, the Consolidated
Financial Statements, the Notes to Consolidated Financial Statements, Schedule II—Valuation and Qualifying
Accounts and Supplementary Data—Unaudited Quarterly Results listed in the Index to Consolidated Financial
Statements, which appear beginning on page F-2 of this report, are incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2017, the end of the period covered by this report, our management, including our Chief
Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). As discussed below, our
management identified a material weakness in our internal control over financial reporting. Based upon
management’s review and evaluation, as a result of this material weakness, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our
disclosure controls and procedures were not effective to provide reasonable assurance that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission and is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Notwithstanding this material weakness, management has concluded that our consolidated financial
statements included in this Annual Report fairly present, in all material respects, our financial position, results of
operations, and cash flows for the periods presented in conformity with U.S. GAAP.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act) for the Company. Under the
supervision and with the participation of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework and criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in 2013. During that evaluation, we identified a
material weakness of internal controls over non-routine transactions, including business combinations. While
management believes that this deficiency did not result in any material concerns related to the accuracy and
timeliness of our underlying substantive work performed and analysis prepared, we determined that the precision of
the design and the operation of management review controls over non-routine transactions were not sufficiently
documented or evidenced. Therefore, management concluded that our internal control over financial reporting was
not effective as of June 30, 2017.
Moss Adams LLP, an independent registered public accounting firm, has audited and reported on the
consolidated financial statements of OSI Systems, Inc. and on the effectiveness of our internal control over
financial reporting. The report of Moss Adams LLP is contained in this annual report.
Remediation Efforts to Address Material Weakness
We are in the process of designing and implementing certain remediation measures to address the material
weakness and enhance our internal control over financial reporting. We plan to take the following actions to
improve the design and operating effectiveness of our internal control over financial reporting:
• review the internal control environment to ensure personnel are trained and knowledgeable about the
design, operation and evidence of internal controls;
• enhance the design of existing control activities to further identify our level of precision related to
management review controls; and
• implement additional control activities to ensure that controls are adequate and operate at an appropriate
level of precision.
Changes in Internal Control over Financial Reporting
Internal controls within the operations of AS&E have been included within the scope of management’s
assessment of the effectiveness of internal control over financial reporting as of June 30, 2017, as it was acquired in
a purchase business combination on September 9, 2016. Management’s assessment was completed during the
fourth quarter of fiscal 2017. There were no other changes in our internal control over financial reporting during the
fourth quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Subsequent to June 30, 2017, we implemented certain of the changes identified
above in an effort to remediate the identified material weakness.
68
69
Inflation
We do not believe that inflation has had a material impact on our results of operations.
Use of Derivatives
Our use of derivatives consists primarily of an interest swap agreement. As discussed in note 1 to the
consolidated financial statements, we had an interest rate swap of $3.7 million outstanding as of June 30, 2017.
Interest Rate Risk
The principal maturity and estimated value of our long-term debt exposure as of June 30, 2017 were as follows
(in thousands):
Convertible senior notes . . . . .
Cash interest rate on convertible
notes . . . . . . . . . . . . . . . .
Secured loans and capital lease
obligations . . . . . . . . . . . .
Average interest rate of secured
loans and capital lease
obligations . . . . . . . . . . . .
Maturity
2018
$ —
2019
$ —
2020
2021
2022
2023 and
thereafter
Total
Fair
Value
$ —
$ —
$287,500
$ —
$287,500
$287,500
1.25%
1.25% 1.25% 1.25%
1.25%
N/A
1.25%
1.25%
$2,397
$2,074
$ 764
$ 82
$
4
$ —
$
5,321
$
5,321
2.4%
2.4%
2.5%
3.0%
3.3%
—%
2.4%
2.4%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We make reference here to the Index to consolidated financial statements that appears on page F-1 of this
report. The Report of Independent Registered Public Accounting Firm from Moss Adams LLP, the Consolidated
Financial Statements, the Notes to Consolidated Financial Statements, Schedule II—Valuation and Qualifying
Accounts and Supplementary Data—Unaudited Quarterly Results listed in the Index to Consolidated Financial
Statements, which appear beginning on page F-2 of this report, are incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2017, the end of the period covered by this report, our management, including our Chief
Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). As discussed below, our
management identified a material weakness in our internal control over financial reporting. Based upon
management’s review and evaluation, as a result of this material weakness, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our
disclosure controls and procedures were not effective to provide reasonable assurance that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission and is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Notwithstanding this material weakness, management has concluded that our consolidated financial
statements included in this Annual Report fairly present, in all material respects, our financial position, results of
operations, and cash flows for the periods presented in conformity with U.S. GAAP.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act) for the Company. Under the
supervision and with the participation of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework and criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in 2013. During that evaluation, we identified a
material weakness of internal controls over non-routine transactions, including business combinations. While
management believes that this deficiency did not result in any material concerns related to the accuracy and
timeliness of our underlying substantive work performed and analysis prepared, we determined that the precision of
the design and the operation of management review controls over non-routine transactions were not sufficiently
documented or evidenced. Therefore, management concluded that our internal control over financial reporting was
not effective as of June 30, 2017.
Moss Adams LLP, an independent registered public accounting firm, has audited and reported on the
consolidated financial statements of OSI Systems, Inc. and on the effectiveness of our internal control over
financial reporting. The report of Moss Adams LLP is contained in this annual report.
Remediation Efforts to Address Material Weakness
We are in the process of designing and implementing certain remediation measures to address the material
weakness and enhance our internal control over financial reporting. We plan to take the following actions to
improve the design and operating effectiveness of our internal control over financial reporting:
• review the internal control environment to ensure personnel are trained and knowledgeable about the
design, operation and evidence of internal controls;
• enhance the design of existing control activities to further identify our level of precision related to
management review controls; and
• implement additional control activities to ensure that controls are adequate and operate at an appropriate
level of precision.
Changes in Internal Control over Financial Reporting
Internal controls within the operations of AS&E have been included within the scope of management’s
assessment of the effectiveness of internal control over financial reporting as of June 30, 2017, as it was acquired in
a purchase business combination on September 9, 2016. Management’s assessment was completed during the
fourth quarter of fiscal 2017. There were no other changes in our internal control over financial reporting during the
fourth quarter of fiscal 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Subsequent to June 30, 2017, we implemented certain of the changes identified
above in an effort to remediate the identified material weakness.
68
69
Limitations on Effectiveness of Controls and Procedures
PART III
In designing and evaluating our controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
70
71
Limitations on Effectiveness of Controls and Procedures
PART III
In designing and evaluating our controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2017.
70
71
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
PART IV
1. Financial Statements. Please see the accompanying Index to Consolidated Financial Statements,
which appears on page F-1 of the report. The Report of Independent Registered Public Accounting Firm, the
Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by
reference into Item 8 above.
2. Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts
Supplementary Data—Unaudited Quarterly Results
No other financial statement schedules are presented as the required information is either not applicable
or included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. Reference is made to item 15(b) below.
(b) Exhibits. The exhibits listed on the accompanying Exhibit Index immediately preceding the signature
page are filed as part of, or are incorporated by reference into, this report.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
OSI SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm—Moss Adams LLP . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Data—Unaudited Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-45
F-46
72
F-1
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
PART IV
1. Financial Statements. Please see the accompanying Index to Consolidated Financial Statements,
which appears on page F-1 of the report. The Report of Independent Registered Public Accounting Firm, the
Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by
reference into Item 8 above.
2. Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts
Supplementary Data—Unaudited Quarterly Results
No other financial statement schedules are presented as the required information is either not applicable
or included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. Reference is made to item 15(b) below.
(b) Exhibits. The exhibits listed on the accompanying Exhibit Index immediately preceding the signature
page are filed as part of, or are incorporated by reference into, this report.
(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
OSI SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm—Moss Adams LLP . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Data—Unaudited Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-45
F-46
72
F-1
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of OSI Systems, Inc. and Subsidiaries as of June 30, 2016 and 2017, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended June 30,
2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule for each of the years in the three-year period ended June 30, 2017, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. In our opinion, because of the effect of the aforementioned material
weakness on the achievement of the objectives on the control criteria, the Company has not maintained effective
internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards
Update 2016-09, Improvements to Employee Share-based Payment Accounting, which resulted in a $3.8 million
cumulative-effect adjustment to retained earnings related to previously unrecognized excess tax benefits.
/s/ Moss Adams LLP
Los Angeles, California
September 6, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
OSI Systems, Inc.
We have audited the accompanying consolidated balance sheets of OSI Systems, Inc. and Subsidiaries (the
‘‘Company’’) as of June 30, 2016 and 2017, and the related consolidated statements of operations, comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2017. In
connection with our audits of the consolidated financial statements, we have also audited the consolidated financial
statement schedule of valuation and qualifying accounts for each of the years in the three-year period ended
June 30, 2017. We also have audited the Company’s internal control over financial reporting as of June 30, 2017,
based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these
consolidated financial statements and financial statement schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.
Our responsibility is to express an opinion on these consolidated financial statements and financial statement
schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. A material weakness related to the
Company’s design and operation of management review controls over non-routine transactions, including business
combinations, has been identified and included in management’s assessment in Item 9A. This material weakness
was considered in determining the nature, timing, and extent of the audit tests applied in our audit of the Company’s
consolidated financial statements, as of and for the year ended June 30, 2017, and our opinion on such consolidated
financial statements was not affected.
F-2
F-3
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of OSI Systems, Inc. and Subsidiaries as of June 30, 2016 and 2017, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended June 30,
2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule for each of the years in the three-year period ended June 30, 2017, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. In our opinion, because of the effect of the aforementioned material
weakness on the achievement of the objectives on the control criteria, the Company has not maintained effective
internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards
Update 2016-09, Improvements to Employee Share-based Payment Accounting, which resulted in a $3.8 million
cumulative-effect adjustment to retained earnings related to previously unrecognized excess tax benefits.
/s/ Moss Adams LLP
Los Angeles, California
September 6, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
OSI Systems, Inc.
We have audited the accompanying consolidated balance sheets of OSI Systems, Inc. and Subsidiaries (the
‘‘Company’’) as of June 30, 2016 and 2017, and the related consolidated statements of operations, comprehensive
income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2017. In
connection with our audits of the consolidated financial statements, we have also audited the consolidated financial
statement schedule of valuation and qualifying accounts for each of the years in the three-year period ended
June 30, 2017. We also have audited the Company’s internal control over financial reporting as of June 30, 2017,
based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these
consolidated financial statements and financial statement schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.
Our responsibility is to express an opinion on these consolidated financial statements and financial statement
schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim
financial statements will not be prevented or detected on a timely basis. A material weakness related to the
Company’s design and operation of management review controls over non-routine transactions, including business
combinations, has been identified and included in management’s assessment in Item 9A. This material weakness
was considered in determining the nature, timing, and extent of the audit tests applied in our audit of the Company’s
consolidated financial statements, as of and for the year ended June 30, 2017, and our opinion on such consolidated
financial statements was not affected.
F-2
F-3
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
June 30,
2016
2017
Year Ended June 30,
2015
2016
2017
CURRENT ASSETS:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$104,370
141,716
273,288
35,944
$ 169,650
206,526
248,510
28,314
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
555,318
183,114
122,819
56,283
43,475
30,714
653,000
141,539
242,129
118,450
34,897
40,072
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$991,723
$1,230,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$125,000
2,759
69,490
29,203
55,408
85,975
367,835
6,054
29,160
47,828
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
450,877
$ 103,000
2,396
76,121
34,621
37,934
92,062
346,134
241,750
20,681
52,309
660,874
Commitments and contingencies (note 10)
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, 18,912,157 and 18,689,568 shares at June 30, 2016 and 2017,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
219,114
338,988
(17,256)
222,529
363,872
(17,188)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
540,846
569,213
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
$991,723
$1,230,087
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$707,700
250,502
$579,345
250,315
$655,840
305,111
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
958,202
829,660
960,951
Cost of goods sold:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
482,401
150,448
407,880
144,921
466,293
171,157
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
632,849
552,801
637,450
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325,353
276,859
323,501
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . . . . . . . . . . . . . .
171,756
51,639
9,850
166,655
49,816
22,014
192,560
50,951
46,698
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233,245
238,485
290,209
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92,108
(3,255)
88,853
23,702
38,374
(2,879)
35,495
9,338
33,292
(7,541)
25,751
4,675
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,151
$ 26,157
$ 21,076
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,799
20,526
19,427
20,076
18,894
19,689
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
F-4
F-5
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
June 30,
2016
2017
Year Ended June 30,
2015
2016
2017
CURRENT ASSETS:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$104,370
141,716
273,288
35,944
$ 169,650
206,526
248,510
28,314
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
555,318
183,114
122,819
56,283
43,475
30,714
653,000
141,539
242,129
118,450
34,897
40,072
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$991,723
$1,230,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$125,000
2,759
69,490
29,203
55,408
85,975
367,835
6,054
29,160
47,828
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
450,877
$ 103,000
2,396
76,121
34,621
37,934
92,062
346,134
241,750
20,681
52,309
660,874
Commitments and contingencies (note 10)
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, 18,912,157 and 18,689,568 shares at June 30, 2016 and 2017,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
219,114
338,988
(17,256)
222,529
363,872
(17,188)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
540,846
569,213
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
$991,723
$1,230,087
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$707,700
250,502
$579,345
250,315
$655,840
305,111
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
958,202
829,660
960,951
Cost of goods sold:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
482,401
150,448
407,880
144,921
466,293
171,157
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
632,849
552,801
637,450
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325,353
276,859
323,501
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . . . . . . . . . . . . . .
171,756
51,639
9,850
166,655
49,816
22,014
192,560
50,951
46,698
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233,245
238,485
290,209
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92,108
(3,255)
88,853
23,702
38,374
(2,879)
35,495
9,338
33,292
(7,541)
25,751
4,675
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,151
$ 26,157
$ 21,076
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,799
20,526
19,427
20,076
18,894
19,689
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
F-4
F-5
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands, except share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Year Ended June 30,
2015
2016
2017
$65,151
$26,157
$21,076
Foreign currency translation adjustment
Other
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,436)
73
(6,850)
(142)
(433)
501
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
$ (7,363) $ (6,992) $
68
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$57,788
$19,165
$21,144
Balance—June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Net tax benefit of stock options exercised/forfeited . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss
Number of
Shares
19,942,923
38,907
262,221
—
37,334
—
(454,635)
(110,243)
—
—
Common
Amount
$287,434
1,603
—
3,617
1,995
22,501
(30,744)
(7,194)
—
—
Retained
Earnings
$247,680
—
—
—
—
—
—
—
65,151
—
Accumulated
Other
Comprehensive
Income (Loss)
$ (2,901)
—
—
—
—
—
—
—
—
(7,363)
Total
$532,213
1,603
—
3,617
1,995
22,501
(30,744)
(7,194)
65,151
(7,363)
Balance—June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
19,716,507
$279,212
$312,831
$(10,264)
$581,779
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Net tax benefit of stock options exercised/forfeited . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
107,059
417,896
—
58,709
—
(1,201,402)
(186,612)
—
—
3,004
—
89
3,133
20,759
(73,368)
(13,715)
—
—
—
—
—
—
—
—
—
26,157
—
—
—
—
—
—
—
—
—
(6,992)
3,004
—
89
3,133
20,759
(73,368)
(13,715)
26,157
(6,992)
Balance—June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
18,912,157
$219,114
$338,988
$(17,256)
$540,846
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
RSU obligation under business combination . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
. . . . . . . . . . . . .
Equity component of convertible debt
Accounting change for stock based compensation . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . .
168,564
338,100
63,864
—
—
(642,277)
(150,840)
—
—
—
—
4,498
—
3,159
26,132
1,400
(48,453)
(10,084)
26,763
—
—
—
—
—
—
—
—
—
—
—
3,808
21,076
—
—
—
—
—
—
—
—
—
—
—
68
4,498
—
3,159
26,132
1,400
(48,453)
(10,084)
26,763
3,808
21,076
68
Balance—June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
18,689,568
$222,529
$363,872
$(17,188)
$569,213
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
F-6
F-7
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands, except share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Year Ended June 30,
2015
2016
2017
$65,151
$26,157
$21,076
Foreign currency translation adjustment
Other
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,436)
73
(6,850)
(142)
(433)
501
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
$ (7,363) $ (6,992) $
68
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$57,788
$19,165
$21,144
Balance—June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Net tax benefit of stock options exercised/forfeited . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss
Number of
Shares
19,942,923
38,907
262,221
—
37,334
—
(454,635)
(110,243)
—
—
Common
Amount
$287,434
1,603
—
3,617
1,995
22,501
(30,744)
(7,194)
—
—
Retained
Earnings
$247,680
—
—
—
—
—
—
—
65,151
—
Accumulated
Other
Comprehensive
Income (Loss)
$ (2,901)
—
—
—
—
—
—
—
—
(7,363)
Total
$532,213
1,603
—
3,617
1,995
22,501
(30,744)
(7,194)
65,151
(7,363)
Balance—June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
19,716,507
$279,212
$312,831
$(10,264)
$581,779
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Net tax benefit of stock options exercised/forfeited . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
107,059
417,896
—
58,709
—
(1,201,402)
(186,612)
—
—
3,004
—
89
3,133
20,759
(73,368)
(13,715)
—
—
—
—
—
—
—
—
—
26,157
—
—
—
—
—
—
—
—
—
(6,992)
3,004
—
89
3,133
20,759
(73,368)
(13,715)
26,157
(6,992)
Balance—June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
18,912,157
$219,114
$338,988
$(17,256)
$540,846
Exercise of stock options . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted shares . . . . . . . . . . . . . . . . . . . .
Shares issued under employee stock purchase program . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
RSU obligation under business combination . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards .
. . . . . . . . . . . . .
Equity component of convertible debt
Accounting change for stock based compensation . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . .
168,564
338,100
63,864
—
—
(642,277)
(150,840)
—
—
—
—
4,498
—
3,159
26,132
1,400
(48,453)
(10,084)
26,763
—
—
—
—
—
—
—
—
—
—
—
3,808
21,076
—
—
—
—
—
—
—
—
—
—
—
68
4,498
—
3,159
26,132
1,400
(48,453)
(10,084)
26,763
3,808
21,076
68
Balance—June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
18,689,568
$222,529
$363,872
$(17,188)
$569,213
See accompanying notes to Consolidated Financial Statements.
See accompanying notes to Consolidated Financial Statements.
F-6
F-7
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 2017
Year Ended June 30,
2015
2016
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$ 65,151
$ 26,157
$ 21,076
activities, net of effects from acquisitions:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount and issuance costs . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposition of business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . .
58,976
22,501
340
—
(5,956)
—
—
3,893
7,358
249
(8,135)
(15,117)
(22,051)
(12,128)
10,022
57,922
20,759
2,079
—
(13,224)
9,674
—
434
36,881
(37,696)
(1,701)
6,831
(10,955)
(16,538)
(21,405)
68,235
26,132
2,086
2,844
(24,222)
27,047
(2,110)
(1,346)
(44,462)
30,808
5,609
2,657
(33,552)
(18,736)
713
Net cash provided by operating activities . . . . . . . . . . . . . . . .
105,103
59,218
62,779
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible and other assets . . . . . . . . . . . . . . . . . . . . . . . . .
(15,286)
(13,919)
—
(6,228)
(17,688)
(19,921)
—
(5,870)
(17,096)
(191,238)
12,793
(5,147)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
(35,433)
(43,479)
(200,688)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on bank lines of credit . . . . . . . . . . . . . . . . . .
Proceeds from long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock purchase plan . . .
Repurchase of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards . . . . . . . . . . . . . .
(24,000)
1,561
(3,247)
3,598
(30,744)
(7,194)
125,000
691
(2,917)
6,137
(73,368)
(13,715)
(22,000)
280,541
(4,077)
7,657
(48,453)
(10,084)
Net cash provided by (used in) financing activities . . . . . . . . . .
(60,026)
41,828
203,584
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(882)
(790)
(395)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
8,762
38,831
56,777
47,593
65,280
104,370
Cash and cash equivalents—end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,593
$104,370
$ 169,650
Supplemental disclosure of cash flow information:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,802
$ 31,266
$
2,378
$ 26,671
$
5,185
$ 25,066
See accompanying notes to Consolidated Financial Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 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 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, diagnostic
cardiology, and anesthesia delivery and ventilation 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 amongst others.
Through our Optoelectronics and Manufacturing segment, 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 diagnostic
products, telecommunications, computer peripherals, industrial automation systems, automotive diagnostic
systems, and consumer products. This division provides products and services to OEM customers and end users as
well as to our Security and Healthcare divisions.
Consolidation—The consolidated financial statements include the accounts of OSI Systems, Inc. and our
wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in joint ventures over which we have significant influence but do not have
voting control are accounted for using the equity method. Investments over which we do not have significant
influence are accounted for using the cost method.
Use of Estimates—The preparation of financial statements in conformity with U.S. 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, market values for inventories reported at lower of cost or market, stock-based employee
compensation expense, income taxes, accrued product warranty costs, and the recoverability, useful lives and
valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in
F-8
F-9
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 2017
Year Ended June 30,
2015
2016
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$ 65,151
$ 26,157
$ 21,076
activities, net of effects from acquisitions:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount and issuance costs . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposition of business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . .
58,976
22,501
340
—
(5,956)
—
—
3,893
7,358
249
(8,135)
(15,117)
(22,051)
(12,128)
10,022
57,922
20,759
2,079
—
(13,224)
9,674
—
434
36,881
(37,696)
(1,701)
6,831
(10,955)
(16,538)
(21,405)
68,235
26,132
2,086
2,844
(24,222)
27,047
(2,110)
(1,346)
(44,462)
30,808
5,609
2,657
(33,552)
(18,736)
713
Net cash provided by operating activities . . . . . . . . . . . . . . . .
105,103
59,218
62,779
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible and other assets . . . . . . . . . . . . . . . . . . . . . . . . .
(15,286)
(13,919)
—
(6,228)
(17,688)
(19,921)
—
(5,870)
(17,096)
(191,238)
12,793
(5,147)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
(35,433)
(43,479)
(200,688)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on bank lines of credit . . . . . . . . . . . . . . . . . .
Proceeds from long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options and employee stock purchase plan . . .
Repurchase of common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of equity awards . . . . . . . . . . . . . .
(24,000)
1,561
(3,247)
3,598
(30,744)
(7,194)
125,000
691
(2,917)
6,137
(73,368)
(13,715)
(22,000)
280,541
(4,077)
7,657
(48,453)
(10,084)
Net cash provided by (used in) financing activities . . . . . . . . . .
(60,026)
41,828
203,584
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(882)
(790)
(395)
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
8,762
38,831
56,777
47,593
65,280
104,370
Cash and cash equivalents—end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 47,593
$104,370
$ 169,650
Supplemental disclosure of cash flow information:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,802
$ 31,266
$
2,378
$ 26,671
$
5,185
$ 25,066
See accompanying notes to Consolidated Financial Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 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 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, diagnostic
cardiology, and anesthesia delivery and ventilation 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 amongst others.
Through our Optoelectronics and Manufacturing segment, 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 diagnostic
products, telecommunications, computer peripherals, industrial automation systems, automotive diagnostic
systems, and consumer products. This division provides products and services to OEM customers and end users as
well as to our Security and Healthcare divisions.
Consolidation—The consolidated financial statements include the accounts of OSI Systems, Inc. and our
wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in joint ventures over which we have significant influence but do not have
voting control are accounted for using the equity method. Investments over which we do not have significant
influence are accounted for using the cost method.
Use of Estimates—The preparation of financial statements in conformity with U.S. 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, market values for inventories reported at lower of cost or market, stock-based employee
compensation expense, income taxes, accrued product warranty costs, and the recoverability, useful lives and
valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in
F-8
F-9
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
estimates are reflected in the periods during which they become known. Actual amounts will differ from these
estimates and could differ materially.
Accounting changes—In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting, which simplifies the accounting for income taxes, among other changes, related to
stock-based compensation. We adopted this ASU effective April 1, 2017. Upon adoption of this ASU, we
recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. An
income tax benefit of approximately $2.4 million and $3.8 million cumulative-effect adjustment to retained
earnings was recognized in fiscal 2017 as a result of the adoption of ASU 2016-09.
Cash Equivalents—We consider all highly liquid investments purchased with maturities of approximately
three months or less as of the acquisition date to be cash equivalents.
Accounts Receivable—We monitor collections and payments from our customers and we maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.
We also assess current economic trends that might impact the level of credit losses in the future. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required.
Components of accounts receivable consisted of (in thousands):
Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .
$148,767
(7,051)
$216,089
(9,563)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$141,716
$206,526
June 30,
2016
2017
Inventories—Inventories are generally stated at the lower of cost (first-in, first-out) or market. We write down
inventory for slow-moving and obsolete inventory based on assessments of future demands, market conditions and
customers who may be experiencing financial difficulties. If these factors are less favorable than those projected,
additional inventory write-downs may be required.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using
the straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage
value. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the
useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization
of property and equipment under capital leases is included with depreciation expense. In the event that property and
equipment are idle, as a result of excess capacity or the early termination, non-renewal or reduction in scope of a
turnkey screening operation, such assets are assessed for impairment on a periodic basis or if any indicators of
impairment exist. As more fully described in note 6, during the fourth quarter of fiscal 2017, we determined that
certain fixed assets related to our turnkey security screening program in Mexico that are not in use were
permanently impaired.
Goodwill and Other Intangible Assets and Valuation of Long-Lived Assets—Goodwill represents the excess
purchase price over the fair value of the net assets acquired in business combinations. 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 often if there is an indicator of
impairment. We assess qualitative factors of each 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. The assessments
conducted as of December 31, 2016 indicated that it is not more likely than not that the fair values of two of our
three reporting units are less than their carrying amounts, including goodwill. Thus, we have determined that it is
not necessary to proceed with the two-step goodwill impairment test and that there is no goodwill impairment for
these two reporting units.
For the third reporting unit, the results of our assessment of qualitative factors were not conclusive, thus, we
proceeded with the two-step goodwill impairment test. First, we determined if the carrying amount of this reporting
unit exceeds its fair value. The fair value of the reporting unit was calculated using the income approach. Under the
income approach, the fair value of the reporting unit was calculated by estimating the present value of associated
future cash flows. Upon completion of step one of this test, the analysis indicated that the estimated fair value of the
third reporting unit substantially exceeded the carry amounts, plus goodwill, of the reporting unit. We applied a
hypothetical 10 percent decrease to the fair value of the reporting unit, which at December 31, 2016, would not have
triggered additional impairment testing and analysis. There was no goodwill impairment for this reporting unit.
We evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Impairment is considered to exist if the total
estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment
does exist, we measure the impairment loss and record it based on the discounted estimate of future cash flows. In
estimating future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows from other asset groups. Our estimate of future cash flows is based upon,
among other things, certain assumptions about expected future operating performance, growth rates and other
factors.
Income Taxes—Deferred income taxes are provided for temporary differences between the financial
statement and income tax basis of our assets and liabilities, based on enacted tax rates. A valuation allowance is
provided when it is more likely than not that some portion or all of the deferred income tax assets will not be
realized. Income tax accounting standards prescribe a two-step process for the financial statement measurement
and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the
determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be
sustained upon examination, based on the technical merits of the position. The second step requires that any tax
position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial
statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. See note 9 for additional information.
Fair Value of Financial Instruments—Our 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 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.
F-10
F-11
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
estimates are reflected in the periods during which they become known. Actual amounts will differ from these
estimates and could differ materially.
Accounting changes—In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting, which simplifies the accounting for income taxes, among other changes, related to
stock-based compensation. We adopted this ASU effective April 1, 2017. Upon adoption of this ASU, we
recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. An
income tax benefit of approximately $2.4 million and $3.8 million cumulative-effect adjustment to retained
earnings was recognized in fiscal 2017 as a result of the adoption of ASU 2016-09.
Cash Equivalents—We consider all highly liquid investments purchased with maturities of approximately
three months or less as of the acquisition date to be cash equivalents.
Accounts Receivable—We monitor collections and payments from our customers and we maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.
We also assess current economic trends that might impact the level of credit losses in the future. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required.
Components of accounts receivable consisted of (in thousands):
Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . .
$148,767
(7,051)
$216,089
(9,563)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$141,716
$206,526
June 30,
2016
2017
Inventories—Inventories are generally stated at the lower of cost (first-in, first-out) or market. We write down
inventory for slow-moving and obsolete inventory based on assessments of future demands, market conditions and
customers who may be experiencing financial difficulties. If these factors are less favorable than those projected,
additional inventory write-downs may be required.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using
the straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage
value. Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the
useful life of the asset or the lease term. Leased capital assets are included in property and equipment. Amortization
of property and equipment under capital leases is included with depreciation expense. In the event that property and
equipment are idle, as a result of excess capacity or the early termination, non-renewal or reduction in scope of a
turnkey screening operation, such assets are assessed for impairment on a periodic basis or if any indicators of
impairment exist. As more fully described in note 6, during the fourth quarter of fiscal 2017, we determined that
certain fixed assets related to our turnkey security screening program in Mexico that are not in use were
permanently impaired.
Goodwill and Other Intangible Assets and Valuation of Long-Lived Assets—Goodwill represents the excess
purchase price over the fair value of the net assets acquired in business combinations. 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 often if there is an indicator of
impairment. We assess qualitative factors of each 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. The assessments
conducted as of December 31, 2016 indicated that it is not more likely than not that the fair values of two of our
three reporting units are less than their carrying amounts, including goodwill. Thus, we have determined that it is
not necessary to proceed with the two-step goodwill impairment test and that there is no goodwill impairment for
these two reporting units.
For the third reporting unit, the results of our assessment of qualitative factors were not conclusive, thus, we
proceeded with the two-step goodwill impairment test. First, we determined if the carrying amount of this reporting
unit exceeds its fair value. The fair value of the reporting unit was calculated using the income approach. Under the
income approach, the fair value of the reporting unit was calculated by estimating the present value of associated
future cash flows. Upon completion of step one of this test, the analysis indicated that the estimated fair value of the
third reporting unit substantially exceeded the carry amounts, plus goodwill, of the reporting unit. We applied a
hypothetical 10 percent decrease to the fair value of the reporting unit, which at December 31, 2016, would not have
triggered additional impairment testing and analysis. There was no goodwill impairment for this reporting unit.
We evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Impairment is considered to exist if the total
estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment
does exist, we measure the impairment loss and record it based on the discounted estimate of future cash flows. In
estimating future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows from other asset groups. Our estimate of future cash flows is based upon,
among other things, certain assumptions about expected future operating performance, growth rates and other
factors.
Income Taxes—Deferred income taxes are provided for temporary differences between the financial
statement and income tax basis of our assets and liabilities, based on enacted tax rates. A valuation allowance is
provided when it is more likely than not that some portion or all of the deferred income tax assets will not be
realized. Income tax accounting standards prescribe a two-step process for the financial statement measurement
and recognition of a tax position taken or expected to be taken in a tax return. The first step involves the
determination of whether it is more likely than not (greater than 50 percent likelihood) that a tax position will be
sustained upon examination, based on the technical merits of the position. The second step requires that any tax
position that meets the more-likely-than-not recognition threshold be measured and recognized in the financial
statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. See note 9 for additional information.
Fair Value of Financial Instruments—Our 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 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.
F-10
F-11
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
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 the 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
whose valuation techniques are unobservable and significant to the fair value measurement. There were no assets
where ‘‘Level 3’’ valuation techniques were used. As further discussed in note 10 to the condensed consolidated
financial statements, our contingent payment obligations related to acquisitions are valued using ‘‘Level 3’’
valuation techniques. Such obligations are measured at fair value on a recurring basis. The fair values of our
financial assets and liabilities as of June 30, 2016 and 2017 are categorized as follows (in thousands):
June 30, 2016
June 30, 2017
Level 1 Level 2
Level 3
Total
Level 1 Level 2
Level 3
Total
Assets:
Equity securities . . . . . . . . . . . . . . $354 $ — $ — $
Insurance company contracts . . . . . . — 21,353
(31)
Interest rate contract
354 $254 $ —
— 21,353 — 26,940
20
(31) —
—
. . . . . . . . . . . —
— $
254
— 26,940
20
—
Total assets . . . . . . . . . . . . . . . . . . . $354 $21,322 $ — $21,676 $254 $26,960 $ — $27,214
Liabilities—Contingent payment
obligations . . . . . . . . . . . . . . . . . . $— $ — $17,117 $17,117 $— $ — $11,840 $11,840
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.
Revenue Recognition—Product Sales. We recognize revenue from sales of products upon shipment when title
and risk of loss passes, and when terms are fixed and collection is probable. In instances where terms of a product
sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the acceptance
criteria, unless customer acceptance terms are perfunctory or inconsequential.
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 when 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.
Multiple-Deliverable Arrangements. We enter into certain agreements with customers for the all-inclusive
sale of capital equipment that contain multiple elements that may include civil works to prepare a site for the
installation of equipment, the manufacture and delivery of equipment, the installation and integration of equipment,
the training of customer personnel to operate the equipment and the after-market service of the equipment. The
timing for each of these deliverables can range from a short amount of time and be completed entirely within a
single reporting period to over several reporting periods depending upon the after-market service period. The
general timing of revenue recognition for each deliverable 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 as service revenue within a multiple-deliverable arrangement typically is
recognized evenly over the post-warranty period of the service deliverable.
Multiple-deliverable arrangements require that the arrangement consideration be allocated to each deliverable
based on its relative selling price and recognized as revenue when the revenue recognition criteria for each
deliverable has been met. The arrangement is separated into more than one unit of accounting if both of the
following criteria are met: (i) the delivered item has value to the customer on a stand-alone basis; and (ii) if the
arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within our control. If these criteria are not met, the
arrangement is accounted for as one unit of accounting and the recognition of revenue is deferred until delivery is
complete or is recognized ratably over the contract period as appropriate. If these criteria are met, consideration is
allocated at inception of the arrangement to all deliverables on the basis of the relative selling price. We have
generally met these criteria as all of the deliverables in our multiple-deliverable arrangements have stand-alone
value in that either the customer can resell that item or another vendor sells that item separately. We typically do not
offer a general right of return in regards to our multiple-deliverable arrangements.
The selling price of each deliverable is determined by establishing vendor-specific objective evidence
(‘‘VSOE’’), third party evidence (‘‘TPE’’) or best estimate of selling price (‘‘BESP’’) for each delivered item.
Generally, either VSOE or TPE is determinable; however, in the few instances where neither VSOE nor TPE is
determinable, we utilize our BESP in order to allocate consideration to those deliverables. BESP for our product
deliverables is determined by utilizing a weighted average price approach. BESP for our service deliverables is
determined primarily by utilizing a cost plus margin approach, and in some instances uses an average price per hour.
We often provide a guarantee to support our performance under multiple-deliverable arrangements; and 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.
Proportional Performance.
In connection with the agreement with the Servicio de Administraci´on
Tributaria (‘‘SAT’’) in Mexico, revenue is recognized based upon proportional performance, measured by the actual
number of labor hours incurred divided by the total estimated number of labor hours for the project. The impact of
changes in the estimated labor hours to service the agreement is reflected in the period during which the change
becomes known. In the SAT agreement, customer billings may be submitted for several separate deliverables,
including monthly services, activation of services, training of customer personnel and consultation on the design
and location of security scanning operations, among others. In the event that payments received from the customer
exceed revenue recognition, deferred revenue is recorded.
Concurrent with the revenue recognition, we accrue reserves for estimated product return and warranty costs.
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 recognition. Critical
judgments also include estimates of warranty reserves, which are established based on historical experience and
knowledge of the product under warranty.
F-12
F-13
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
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 the 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
whose valuation techniques are unobservable and significant to the fair value measurement. There were no assets
where ‘‘Level 3’’ valuation techniques were used. As further discussed in note 10 to the condensed consolidated
financial statements, our contingent payment obligations related to acquisitions are valued using ‘‘Level 3’’
valuation techniques. Such obligations are measured at fair value on a recurring basis. The fair values of our
financial assets and liabilities as of June 30, 2016 and 2017 are categorized as follows (in thousands):
June 30, 2016
June 30, 2017
Level 1 Level 2
Level 3
Total
Level 1 Level 2
Level 3
Total
Assets:
Equity securities . . . . . . . . . . . . . . $354 $ — $ — $
Insurance company contracts . . . . . . — 21,353
(31)
Interest rate contract
354 $254 $ —
— 21,353 — 26,940
20
(31) —
—
. . . . . . . . . . . —
— $
254
— 26,940
20
—
Total assets . . . . . . . . . . . . . . . . . . . $354 $21,322 $ — $21,676 $254 $26,960 $ — $27,214
Liabilities—Contingent payment
obligations . . . . . . . . . . . . . . . . . . $— $ — $17,117 $17,117 $— $ — $11,840 $11,840
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.
Revenue Recognition—Product Sales. We recognize revenue from sales of products upon shipment when title
and risk of loss passes, and when terms are fixed and collection is probable. In instances where terms of a product
sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the acceptance
criteria, unless customer acceptance terms are perfunctory or inconsequential.
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 when 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.
Multiple-Deliverable Arrangements. We enter into certain agreements with customers for the all-inclusive
sale of capital equipment that contain multiple elements that may include civil works to prepare a site for the
installation of equipment, the manufacture and delivery of equipment, the installation and integration of equipment,
the training of customer personnel to operate the equipment and the after-market service of the equipment. The
timing for each of these deliverables can range from a short amount of time and be completed entirely within a
single reporting period to over several reporting periods depending upon the after-market service period. The
general timing of revenue recognition for each deliverable 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 as service revenue within a multiple-deliverable arrangement typically is
recognized evenly over the post-warranty period of the service deliverable.
Multiple-deliverable arrangements require that the arrangement consideration be allocated to each deliverable
based on its relative selling price and recognized as revenue when the revenue recognition criteria for each
deliverable has been met. The arrangement is separated into more than one unit of accounting if both of the
following criteria are met: (i) the delivered item has value to the customer on a stand-alone basis; and (ii) if the
arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within our control. If these criteria are not met, the
arrangement is accounted for as one unit of accounting and the recognition of revenue is deferred until delivery is
complete or is recognized ratably over the contract period as appropriate. If these criteria are met, consideration is
allocated at inception of the arrangement to all deliverables on the basis of the relative selling price. We have
generally met these criteria as all of the deliverables in our multiple-deliverable arrangements have stand-alone
value in that either the customer can resell that item or another vendor sells that item separately. We typically do not
offer a general right of return in regards to our multiple-deliverable arrangements.
The selling price of each deliverable is determined by establishing vendor-specific objective evidence
(‘‘VSOE’’), third party evidence (‘‘TPE’’) or best estimate of selling price (‘‘BESP’’) for each delivered item.
Generally, either VSOE or TPE is determinable; however, in the few instances where neither VSOE nor TPE is
determinable, we utilize our BESP in order to allocate consideration to those deliverables. BESP for our product
deliverables is determined by utilizing a weighted average price approach. BESP for our service deliverables is
determined primarily by utilizing a cost plus margin approach, and in some instances uses an average price per hour.
We often provide a guarantee to support our performance under multiple-deliverable arrangements; and 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.
Proportional Performance.
In connection with the agreement with the Servicio de Administraci´on
Tributaria (‘‘SAT’’) in Mexico, revenue is recognized based upon proportional performance, measured by the actual
number of labor hours incurred divided by the total estimated number of labor hours for the project. The impact of
changes in the estimated labor hours to service the agreement is reflected in the period during which the change
becomes known. In the SAT agreement, customer billings may be submitted for several separate deliverables,
including monthly services, activation of services, training of customer personnel and consultation on the design
and location of security scanning operations, among others. In the event that payments received from the customer
exceed revenue recognition, deferred revenue is recorded.
Concurrent with the revenue recognition, we accrue reserves for estimated product return and warranty costs.
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 recognition. Critical
judgments also include estimates of warranty reserves, which are established based on historical experience and
knowledge of the product under warranty.
F-12
F-13
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Freight—We record shipping and handling fees that we charge to our customers as revenue and related costs
as cost of goods sold.
statement of operations, amounted to a gain (loss) of approximately $2.1 million, $(0.8) million and $2.0 million for
the fiscal years ended June 30, 2015, 2016 and 2017, respectively.
Research and Development Costs—Research and development costs are those costs related to the
development of a new product, process or service, or significant improvement to an existing product, process or
service. Such costs are charged to operations as incurred.
Stock-Based Compensation—Stock-based compensation cost is measured at the grant date based on the
estimated fair value of the award and is recognized as expense over the employee’s requisite service period for all
stock-based awards granted or modified. Certain restricted awards vest based on the achievement of pre-established
performance criteria. The fair value of performance-based awards is estimated at the date of grant based upon the
probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we
update our assessment of the probability that the specified performance criteria will be achieved and adjust the
estimate of the fair value of the performance-based awards if necessary. We amortize the fair value of performance-
based awards over the requisite service period for each separately vesting tranche of the award. See note 8 to the
consolidated financial statements.
Impairment, Restructuring and Other Charges—We account for certain charges related to restructuring
activities, litigation, acquisition-related costs and other non-routine charges as Impairment, restructuring and other
charges in the consolidated financial statements. See note 6 for additional information about these charges.
Credit Risk and Concentration—Financial instruments that are potentially subject to concentrations of credit
risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. We restrict
investments in cash equivalents to financial institutions with high credit standing. Credit risk on accounts receivable
is minimized as a result of the large and diverse nature of our company’s worldwide customer base. As of June 30,
2016 and 2017, no customer accounted for greater than 10% of accounts receivable. SAT accounted for 12%, 14%
and 12% of revenues for the fiscal years ended June 30, 2015, 2016 and 2017, respectively. We perform ongoing
credit evaluations of our customers’ financial condition and maintain allowances for potential credit losses.
Our cash and cash equivalents totaled $104.4 and $169.7 million at June 30, 2016 and 2017, respectively. Of
these amounts, approximately 96% and 99% was held by our foreign subsidiaries at June 30, 2016 and 2017,
respectively.
We rely primarily on one vendor that provides key components to the Optoelectronics and Manufacturing
division. While management believes that relying on key vendors improves the efficiency and reliability of business
operations, relying on any one vendor for a significant aspect of business can have a significant negative impact on
revenue and profitability if that vendor fails to perform at acceptable service levels for any reason, including
financial difficulties of the vendor.
Foreign Currency Translation and Transactions—We transact business in various foreign currencies. In
countries where the functional currency of the underlying operations has been determined to be the local country’s
currency, revenues and expenses of operations outside the United States are translated into United States dollars
using average exchange rates while assets and liabilities of operations outside the United States are translated into
United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are
included in stockholders’ equity as a component of accumulated other comprehensive income (loss) in the
accompanying consolidated balance sheets. Transaction gains and losses, which were included in our consolidated
Business Combinations—Under ASC 805, the acquisition method of accounting requires us to record assets
acquired and liabilities assumed from 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 net assets acquired 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, as additional information becomes available
for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to earnings.
Earnings per Share—Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings
per share is computed 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 and restricted stock or units awards under the treasury stock
method. During the fiscal year ending June 30, 2015, the number of stock options and stock awards excluded from
the calculation because they were antidilutive was de minimis. Stock option and stock awards to purchase
0.1 million shares of Common Stock for the fiscal years ending June 30, 2016 and June 30, 2017, respectively, were
excluded for the calculation because to do so would have been antidilutive.
The following table sets forth the computation of basic and diluted earnings per share for the fiscal years
ended June 30 (in thousands, except earnings per share data):
2015
2016
2017
Net income available to common stockholders . . . . . . . . .
$65,151
$26,157
$21,076
Weighted average shares outstanding—basic . . . . . . . . . .
Dilutive effect of equity awards . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding—diluted . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . .
19,799
727
20,526
19,427
649
20,076
18,894
795
19,689
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Warranty Provision—We offer our customers warranties on many of the products that we sell. 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, we record a provision for estimated warranty
expenses with a corresponding increase in cost of goods sold. We periodically adjust this provision based on
historical experience and anticipated expenses. We charge actual expenses of repairs under warranty, including
parts and labor, to this provision when incurred. The warranty provision is included in the Other accrued expenses
F-14
F-15
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Freight—We record shipping and handling fees that we charge to our customers as revenue and related costs
as cost of goods sold.
statement of operations, amounted to a gain (loss) of approximately $2.1 million, $(0.8) million and $2.0 million for
the fiscal years ended June 30, 2015, 2016 and 2017, respectively.
Research and Development Costs—Research and development costs are those costs related to the
development of a new product, process or service, or significant improvement to an existing product, process or
service. Such costs are charged to operations as incurred.
Stock-Based Compensation—Stock-based compensation cost is measured at the grant date based on the
estimated fair value of the award and is recognized as expense over the employee’s requisite service period for all
stock-based awards granted or modified. Certain restricted awards vest based on the achievement of pre-established
performance criteria. The fair value of performance-based awards is estimated at the date of grant based upon the
probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we
update our assessment of the probability that the specified performance criteria will be achieved and adjust the
estimate of the fair value of the performance-based awards if necessary. We amortize the fair value of performance-
based awards over the requisite service period for each separately vesting tranche of the award. See note 8 to the
consolidated financial statements.
Impairment, Restructuring and Other Charges—We account for certain charges related to restructuring
activities, litigation, acquisition-related costs and other non-routine charges as Impairment, restructuring and other
charges in the consolidated financial statements. See note 6 for additional information about these charges.
Credit Risk and Concentration—Financial instruments that are potentially subject to concentrations of credit
risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. We restrict
investments in cash equivalents to financial institutions with high credit standing. Credit risk on accounts receivable
is minimized as a result of the large and diverse nature of our company’s worldwide customer base. As of June 30,
2016 and 2017, no customer accounted for greater than 10% of accounts receivable. SAT accounted for 12%, 14%
and 12% of revenues for the fiscal years ended June 30, 2015, 2016 and 2017, respectively. We perform ongoing
credit evaluations of our customers’ financial condition and maintain allowances for potential credit losses.
Our cash and cash equivalents totaled $104.4 and $169.7 million at June 30, 2016 and 2017, respectively. Of
these amounts, approximately 96% and 99% was held by our foreign subsidiaries at June 30, 2016 and 2017,
respectively.
We rely primarily on one vendor that provides key components to the Optoelectronics and Manufacturing
division. While management believes that relying on key vendors improves the efficiency and reliability of business
operations, relying on any one vendor for a significant aspect of business can have a significant negative impact on
revenue and profitability if that vendor fails to perform at acceptable service levels for any reason, including
financial difficulties of the vendor.
Foreign Currency Translation and Transactions—We transact business in various foreign currencies. In
countries where the functional currency of the underlying operations has been determined to be the local country’s
currency, revenues and expenses of operations outside the United States are translated into United States dollars
using average exchange rates while assets and liabilities of operations outside the United States are translated into
United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are
included in stockholders’ equity as a component of accumulated other comprehensive income (loss) in the
accompanying consolidated balance sheets. Transaction gains and losses, which were included in our consolidated
Business Combinations—Under ASC 805, the acquisition method of accounting requires us to record assets
acquired and liabilities assumed from 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 net assets acquired 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, as additional information becomes available
for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to earnings.
Earnings per Share—Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings
per share is computed 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 and restricted stock or units awards under the treasury stock
method. During the fiscal year ending June 30, 2015, the number of stock options and stock awards excluded from
the calculation because they were antidilutive was de minimis. Stock option and stock awards to purchase
0.1 million shares of Common Stock for the fiscal years ending June 30, 2016 and June 30, 2017, respectively, were
excluded for the calculation because to do so would have been antidilutive.
The following table sets forth the computation of basic and diluted earnings per share for the fiscal years
ended June 30 (in thousands, except earnings per share data):
2015
2016
2017
Net income available to common stockholders . . . . . . . . .
$65,151
$26,157
$21,076
Weighted average shares outstanding—basic . . . . . . . . . .
Dilutive effect of equity awards . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding—diluted . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . .
19,799
727
20,526
19,427
649
20,076
18,894
795
19,689
$
$
3.29
3.17
$
$
1.35
1.30
$
$
1.12
1.07
Warranty Provision—We offer our customers warranties on many of the products that we sell. 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, we record a provision for estimated warranty
expenses with a corresponding increase in cost of goods sold. We periodically adjust this provision based on
historical experience and anticipated expenses. We charge actual expenses of repairs under warranty, including
parts and labor, to this provision when incurred. The warranty provision is included in the Other accrued expenses
F-14
F-15
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
and current liabilities in the consolidated balance sheets, whose activity for each of the three fiscal years ended
June 30, 2017 is summarized in the following table (in thousands)
Warranty provision as of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,923
6,043
(5,228)
$12,738
12,296
(9,086)
$15,948
5,793
(6,563)
Warranty provision as of June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,178
Recent Accounting Updates Not Yet Adopted—In May 2014, the Financial Accounting Standards Board
(‘‘FASB’’) issued an accounting standards update (‘‘ASU’’) amending revenue recognition requirements for
multiple-deliverable revenue arrangements. This update provides guidance on how revenue is recognized for the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for the goods or services. This determination is made in five steps: (i) identify the
contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. The ASU is effective for fiscal years beginning after
December 15, 2017 and for interim reporting periods within such fiscal years. Earlier adoption is permitted only for
fiscal years beginning after December 15, 2016, including interim reporting periods within such fiscal years. In
May 2016, FASB issued a narrow scope improvement to this ASU, specifically to clarify two aspects—identifying
performance obligations and licensing implementation guidance. We are in the process of selecting a transition
method and our preliminary evaluation of the impact of this ASU indicates that it will not have a material impact on
the timing of revenue recognition.
In January 2016, FASB issued an ASU which affects the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.
This guidance retains the current accounting for classifying and measuring investments in debt securities and loans,
but requires equity investments to be measured at fair value with subsequent changes recognized in net income,
except for those accounted for under the equity method or requiring consolidation. The guidance also changes the
accounting for investments without a readily determinable fair value and that do not qualify for the practical
expedient permitted by the guidance to estimate fair value. A policy election can be made for these investments
whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or
changes in observable prices of identical or similar investments. This ASU is effective for fiscal years beginning
after December 15, 2017, and interim periods within that reporting period. Early application is 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.
In February 2016, the FASB issued an ASU which affects the accounting for leases. The guidance requires
lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with
terms of more than 12 months. The amendment also will require qualitative and quantitative disclosures designed to
give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.
This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that reporting
period. Early application is permitted. We have not yet adopted this update and are currently evaluating the impact it
may have on our financial condition and results of operations.
In August 2016, the FASB issued an ASU to address the diverse classifications being applied to cash receipts
and payments in the cash flow statement. This ASU addresses eight specific cash flow issues to reduce diversity in
practice. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within such
fiscal years. We have not yet adopted this ASU and are currently evaluating the impact it may have on our financial
condition and results of operations.
Subsequent Events—On July 7, 2017 we completed the acquisition of the global explosive trace detection
business from Smiths Group plc. We financed the total estimated purchase price of $80.5 million with a
combination of cash on hand and borrowings under our existing revolving bank line of credit. As of the issuance of
these consolidated financial statements, we do not have the information available to provide disclosures required by
ASC 805 for this acquisition.
On July 24, 2017, we entered into a purchase agreement to acquire the facility in Billerica, MA currently
leased by our AS&E# subsidiary. The approximate purchase price of $20 million is expected to be financed with a
combination of cash on hand, borrowings under our existing revolving bank line of credit and/or other third-party
financing. We expect the purchase to be completed during the first quarter of fiscal 2018.
2. ACQUISITION ACTVITY
On September 9, 2016, we acquired by merger 100 percent ownership interest of American Science and
Engineering, Inc. (‘‘AS&E#’’), a leading provider of detection solutions for advanced cargo, parcel and personnel
inspection. AS&E#’s operations are included in our Security division. We financed the total estimated purchase
price of $266 million with a combination of cash on hand and borrowings under our existing revolving bank line of
credit, as well as the issuance of OSI Systems, Inc. RSUs to replace RSUs previously issued by AS&E#. We have
estimated that $1.4 million of the fair value of these replacement RSU awards pertain to the precombination service
period, and therefore, this amount has been included in the total estimated purchase price. Immediately following
the close of the acquisition, we used $69 million of AS&E#’s existing cash on hand to pay down the revolving bank
line of credit.
We are in process of finalizing the valuation of certain assets acquired and liabilities assumed. As the amounts
recorded for these assets and liabilities are preliminary in nature, they are subject to adjustment as additional
information is obtained about the facts and circumstances that existed at the acquisition date. The final
determination of fair values of certain reserves, other accrued expenses, deferred revenue, intangible assets,
goodwill and deferred income taxes will be completed within the measurement period of up to one year from the
acquisition date as permitted under GAAP, which expires during the first quarter of fiscal 2018. Any potential
adjustments made could be material in relation to these preliminary values.
F-16
F-17
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
and current liabilities in the consolidated balance sheets, whose activity for each of the three fiscal years ended
June 30, 2017 is summarized in the following table (in thousands)
Warranty provision as of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty claims provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,923
6,043
(5,228)
$12,738
12,296
(9,086)
$15,948
5,793
(6,563)
Warranty provision as of June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,178
Recent Accounting Updates Not Yet Adopted—In May 2014, the Financial Accounting Standards Board
(‘‘FASB’’) issued an accounting standards update (‘‘ASU’’) amending revenue recognition requirements for
multiple-deliverable revenue arrangements. This update provides guidance on how revenue is recognized for the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for the goods or services. This determination is made in five steps: (i) identify the
contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. The ASU is effective for fiscal years beginning after
December 15, 2017 and for interim reporting periods within such fiscal years. Earlier adoption is permitted only for
fiscal years beginning after December 15, 2016, including interim reporting periods within such fiscal years. In
May 2016, FASB issued a narrow scope improvement to this ASU, specifically to clarify two aspects—identifying
performance obligations and licensing implementation guidance. We are in the process of selecting a transition
method and our preliminary evaluation of the impact of this ASU indicates that it will not have a material impact on
the timing of revenue recognition.
In January 2016, FASB issued an ASU which affects the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments.
This guidance retains the current accounting for classifying and measuring investments in debt securities and loans,
but requires equity investments to be measured at fair value with subsequent changes recognized in net income,
except for those accounted for under the equity method or requiring consolidation. The guidance also changes the
accounting for investments without a readily determinable fair value and that do not qualify for the practical
expedient permitted by the guidance to estimate fair value. A policy election can be made for these investments
whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or
changes in observable prices of identical or similar investments. This ASU is effective for fiscal years beginning
after December 15, 2017, and interim periods within that reporting period. Early application is 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.
In February 2016, the FASB issued an ASU which affects the accounting for leases. The guidance requires
lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with
terms of more than 12 months. The amendment also will require qualitative and quantitative disclosures designed to
give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.
This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that reporting
period. Early application is permitted. We have not yet adopted this update and are currently evaluating the impact it
may have on our financial condition and results of operations.
In August 2016, the FASB issued an ASU to address the diverse classifications being applied to cash receipts
and payments in the cash flow statement. This ASU addresses eight specific cash flow issues to reduce diversity in
practice. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within such
fiscal years. We have not yet adopted this ASU and are currently evaluating the impact it may have on our financial
condition and results of operations.
Subsequent Events—On July 7, 2017 we completed the acquisition of the global explosive trace detection
business from Smiths Group plc. We financed the total estimated purchase price of $80.5 million with a
combination of cash on hand and borrowings under our existing revolving bank line of credit. As of the issuance of
these consolidated financial statements, we do not have the information available to provide disclosures required by
ASC 805 for this acquisition.
On July 24, 2017, we entered into a purchase agreement to acquire the facility in Billerica, MA currently
leased by our AS&E# subsidiary. The approximate purchase price of $20 million is expected to be financed with a
combination of cash on hand, borrowings under our existing revolving bank line of credit and/or other third-party
financing. We expect the purchase to be completed during the first quarter of fiscal 2018.
2. ACQUISITION ACTVITY
On September 9, 2016, we acquired by merger 100 percent ownership interest of American Science and
Engineering, Inc. (‘‘AS&E#’’), a leading provider of detection solutions for advanced cargo, parcel and personnel
inspection. AS&E#’s operations are included in our Security division. We financed the total estimated purchase
price of $266 million with a combination of cash on hand and borrowings under our existing revolving bank line of
credit, as well as the issuance of OSI Systems, Inc. RSUs to replace RSUs previously issued by AS&E#. We have
estimated that $1.4 million of the fair value of these replacement RSU awards pertain to the precombination service
period, and therefore, this amount has been included in the total estimated purchase price. Immediately following
the close of the acquisition, we used $69 million of AS&E#’s existing cash on hand to pay down the revolving bank
line of credit.
We are in process of finalizing the valuation of certain assets acquired and liabilities assumed. As the amounts
recorded for these assets and liabilities are preliminary in nature, they are subject to adjustment as additional
information is obtained about the facts and circumstances that existed at the acquisition date. The final
determination of fair values of certain reserves, other accrued expenses, deferred revenue, intangible assets,
goodwill and deferred income taxes will be completed within the measurement period of up to one year from the
acquisition date as permitted under GAAP, which expires during the first quarter of fiscal 2018. Any potential
adjustments made could be material in relation to these preliminary values.
F-16
F-17
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following is a preliminary estimate of the assets acquired and the liabilities assumed by us in the
The condensed consolidated statements of operations include $94.0 million of revenue and $8.7 million of
acquisition, reconciled to total estimated purchase consideration (in thousands):
pre-tax income from AS&E# for the period from September 10, 2016 to June 30, 2017.
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues—current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues—long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79,195
24,607
27,495
7,450
5,337
74,800
201
(5,044)
(4,723)
(11,281)
(13,784)
(7,279)
(3,225)
(9,580)
(14,004)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,165
115,838
Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$266,003
The goodwill is largely attributable to expected synergies between us and AS&E# and the assembled
workforce of AS&E#.
Intangible assets are recorded at estimated fair value, as determined by management based on available
information, which includes a valuation prepared by an independent third party. The fair value attributed to the
intangible assets acquired was based on estimates, assumptions and other information compiled by management,
including independent valuations that utilized established valuation techniques. The value attributed to goodwill
and intangible assets is not 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
Lives
Gross
Carrying
Value
Amortizable assets:
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships/backlog . . . . . . . . . . . . . . . . . . . . . . . . . .
10 years
7 years
Total amortizable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-amortizable assets:
Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
In-process research and development (‘‘IPR&D’’)
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,750
27,550
59,300
12,300
3,200
$74,800
The following unaudited pro forma results of operations are prepared for comparative purposes only and do
not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the
earliest period presented or the results which may occur in the future. The following unaudited pro forma results of
operations assume the AS&E# acquisition had occurred on July 1, 2015 (in thousands):
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . .
$1,080,859
86,921
$
$928,679
2,223
$
$978,706
5,856
$
2015
2016
2017
Significant pro forma adjustments incorporated into the unaudited pro forma results above include the
recognition of additional amortization expense related to acquired intangible assets and additional interest expense
related to debt incurred to finance the acquisition. In addition, significant non-recurring adjustments include the
elimination and shift to the comparable periods in the prior year of non-recurring acquisition-related expenses and
employee termination costs related to the integration of AS&E# into the operations of our Security division. Total
eliminations for these items during fiscal year ending 2016 and 2017, were $28.6 million and $13.9 million,
respectively, and these have been added to the comparable periods in the prior year.
3.
INVENTORIES
Inventory consisted of the following (in thousands):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$133,540
47,460
92,288
$129,645
65,454
53,411
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$273,288
$248,510
June 30,
2016
2017
F-18
F-19
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following is a preliminary estimate of the assets acquired and the liabilities assumed by us in the
The condensed consolidated statements of operations include $94.0 million of revenue and $8.7 million of
acquisition, reconciled to total estimated purchase consideration (in thousands):
pre-tax income from AS&E# for the period from September 10, 2016 to June 30, 2017.
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues—current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenues—long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79,195
24,607
27,495
7,450
5,337
74,800
201
(5,044)
(4,723)
(11,281)
(13,784)
(7,279)
(3,225)
(9,580)
(14,004)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,165
115,838
Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$266,003
The goodwill is largely attributable to expected synergies between us and AS&E# and the assembled
workforce of AS&E#.
Intangible assets are recorded at estimated fair value, as determined by management based on available
information, which includes a valuation prepared by an independent third party. The fair value attributed to the
intangible assets acquired was based on estimates, assumptions and other information compiled by management,
including independent valuations that utilized established valuation techniques. The value attributed to goodwill
and intangible assets is not 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
Lives
Gross
Carrying
Value
Amortizable assets:
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships/backlog . . . . . . . . . . . . . . . . . . . . . . . . . .
10 years
7 years
Total amortizable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-amortizable assets:
Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
In-process research and development (‘‘IPR&D’’)
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,750
27,550
59,300
12,300
3,200
$74,800
The following unaudited pro forma results of operations are prepared for comparative purposes only and do
not necessarily reflect the results that would have occurred had the acquisition occurred at the beginning of the
earliest period presented or the results which may occur in the future. The following unaudited pro forma results of
operations assume the AS&E# acquisition had occurred on July 1, 2015 (in thousands):
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . .
$1,080,859
86,921
$
$928,679
2,223
$
$978,706
5,856
$
2015
2016
2017
Significant pro forma adjustments incorporated into the unaudited pro forma results above include the
recognition of additional amortization expense related to acquired intangible assets and additional interest expense
related to debt incurred to finance the acquisition. In addition, significant non-recurring adjustments include the
elimination and shift to the comparable periods in the prior year of non-recurring acquisition-related expenses and
employee termination costs related to the integration of AS&E# into the operations of our Security division. Total
eliminations for these items during fiscal year ending 2016 and 2017, were $28.6 million and $13.9 million,
respectively, and these have been added to the comparable periods in the prior year.
3.
INVENTORIES
Inventory consisted of the following (in thousands):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$133,540
47,460
92,288
$129,645
65,454
53,411
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$273,288
$248,510
June 30,
2016
2017
F-18
F-19
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
Intangible assets subject to amortization consisted of the following (in thousands):
June 30, 2016
June 30, 2017
Estimated
Useful
Lives
June 30,
2016
2017
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings, civil works and improvements . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment and tooling . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software implementation in process . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A $ 14,498
170,232
9,015
154,309
3,314
17,902
17,769
—
4,978
5-40 years
1-13 years
3-10 years
3-13 years
3-5 years
3-10 years
N/A
N/A
$ 14,212
157,123
9,025
166,991
3,371
17,991
17,303
2,590
1,049
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . .
392,017
(208,903)
389,655
(248,116)
Property and equipment, net . . . . . . . . . . . . . . . . . . . .
$ 183,114
$ 141,539
During fiscal 2015, 2016 and 2017, depreciation expense was approximately $55.4 million, $52.2 million and
$56.0 million, respectvely.
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal 2016 and 2017 are as follows (in thousands):
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Consolidated
Balance as of June 30, 2015 . . . . . . . . . . . . . . . . . . .
Goodwill acquired or adjusted during the period . . . .
. . . . . . . . . .
Foreign currency translation adjustment
Balance as of June 30, 2016 . . . . . . . . . . . . . . . . . . .
Goodwill acquired or adjusted during the period . . . .
Goodwill reduced as part of a divestiture . . . . . . . . .
. . . . . . . . . .
Foreign currency translation adjustment
Security
Division
$ 29,730
3,187
5
$ 32,922
122,022
—
139
$43,182
—
(608)
$42,574
—
(2,200)
(245)
Balance as of June 30, 2017 . . . . . . . . . . . . . . . . . . .
$155,083
$40,129
$25,255
23,980
(1,912)
$47,323
—
—
(406)
$46,917
$ 98,167
27,167
(2,515)
$122,819
122,022
(2,200)
(512)
$242,129
Weighted
Average Carrying Accumulated Intangibles Carrying Accumulated Intangibles
Gross
Gross
Lives
Value
Amortization
Net
Value
Amortization
Net
Amortizable assets:
Software development costs . . . .
Patents . . . . . . . . . . . . . . . . . . . 20 years
Developed technology . . . . . . . . 10 years
7 years
Customer relationships/backlog . .
9 years $22,091
8,111
12,901
14,223
$ 4,120
1,760
3,969
4,862
$17,971 $ 26,753
8,386
37,446
38,289
6,351
8,932
9,361
$ 6,291
1,676
5,530
7,667
$ 20,462
6,710
31,916
30,622
Total amortizable assets . . . .
Non-amortizable assets:
Trademarks . . . . . . . . . . . . . . . .
IPR&D . . . . . . . . . . . . . . . . . .
57,326
14,711
42,615
110,874
21,164
89,710
13,668
—
—
—
13,668
—
25,540
3,200
—
—
25,540
3,200
Total intangible assets . . . . .
$70,994
$14,711
$56,283 $139,614
$21,164
$118,450
Amortization expense for fiscal 2015, 2016 and 2017 was $3.6 million, $5.7 million and $12.3 million,
respectively. Future acquisitions could cause these amounts to increase. At June 30, 2017, estimated future
amortization expense was as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter, including assets that have not yet begun to be amortized . .
$14,523
14,362
13,635
10,392
8,524
28,274
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$89,710
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. During fiscal 2015, 2016 and 2017, we capitalized software development costs in the
amount of $3.0 million, $2.7 million and $2.3 million, respectively.
6.
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
Impairment
During fiscal 2017, we determined that certain idle assets related to our turnkey screening program in Mexico
were permanently impaired. These costs included costs related to civil works for five sites that were relocated
during the fourth quarter of fiscal 2017, whereby these civil works were determined to have no value; and civil
F-20
F-21
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
Intangible assets subject to amortization consisted of the following (in thousands):
June 30, 2016
June 30, 2017
Estimated
Useful
Lives
June 30,
2016
2017
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings, civil works and improvements . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment and tooling . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software implementation in process . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A $ 14,498
170,232
9,015
154,309
3,314
17,902
17,769
—
4,978
5-40 years
1-13 years
3-10 years
3-13 years
3-5 years
3-10 years
N/A
N/A
$ 14,212
157,123
9,025
166,991
3,371
17,991
17,303
2,590
1,049
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . .
392,017
(208,903)
389,655
(248,116)
Property and equipment, net . . . . . . . . . . . . . . . . . . . .
$ 183,114
$ 141,539
During fiscal 2015, 2016 and 2017, depreciation expense was approximately $55.4 million, $52.2 million and
$56.0 million, respectvely.
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for fiscal 2016 and 2017 are as follows (in thousands):
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Consolidated
Balance as of June 30, 2015 . . . . . . . . . . . . . . . . . . .
Goodwill acquired or adjusted during the period . . . .
. . . . . . . . . .
Foreign currency translation adjustment
Balance as of June 30, 2016 . . . . . . . . . . . . . . . . . . .
Goodwill acquired or adjusted during the period . . . .
Goodwill reduced as part of a divestiture . . . . . . . . .
. . . . . . . . . .
Foreign currency translation adjustment
Security
Division
$ 29,730
3,187
5
$ 32,922
122,022
—
139
$43,182
—
(608)
$42,574
—
(2,200)
(245)
Balance as of June 30, 2017 . . . . . . . . . . . . . . . . . . .
$155,083
$40,129
$25,255
23,980
(1,912)
$47,323
—
—
(406)
$46,917
$ 98,167
27,167
(2,515)
$122,819
122,022
(2,200)
(512)
$242,129
Weighted
Average Carrying Accumulated Intangibles Carrying Accumulated Intangibles
Gross
Gross
Lives
Value
Amortization
Net
Value
Amortization
Net
Amortizable assets:
Software development costs . . . .
Patents . . . . . . . . . . . . . . . . . . . 20 years
Developed technology . . . . . . . . 10 years
7 years
Customer relationships/backlog . .
9 years $22,091
8,111
12,901
14,223
$ 4,120
1,760
3,969
4,862
$17,971 $ 26,753
8,386
37,446
38,289
6,351
8,932
9,361
$ 6,291
1,676
5,530
7,667
$ 20,462
6,710
31,916
30,622
Total amortizable assets . . . .
Non-amortizable assets:
Trademarks . . . . . . . . . . . . . . . .
IPR&D . . . . . . . . . . . . . . . . . .
57,326
14,711
42,615
110,874
21,164
89,710
13,668
—
—
—
13,668
—
25,540
3,200
—
—
25,540
3,200
Total intangible assets . . . . .
$70,994
$14,711
$56,283 $139,614
$21,164
$118,450
Amortization expense for fiscal 2015, 2016 and 2017 was $3.6 million, $5.7 million and $12.3 million,
respectively. Future acquisitions could cause these amounts to increase. At June 30, 2017, estimated future
amortization expense was as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter, including assets that have not yet begun to be amortized . .
$14,523
14,362
13,635
10,392
8,524
28,274
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$89,710
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. During fiscal 2015, 2016 and 2017, we capitalized software development costs in the
amount of $3.0 million, $2.7 million and $2.3 million, respectively.
6.
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
Impairment
During fiscal 2017, we determined that certain idle assets related to our turnkey screening program in Mexico
were permanently impaired. These costs included costs related to civil works for five sites that were relocated
during the fourth quarter of fiscal 2017, whereby these civil works were determined to have no value; and civil
F-20
F-21
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
works and equipment for other sites that were partially completed prior to the customer informing us that these sites
would not be needed. The carrying value of these assets when they were impaired was $17.5 million. Also, during
the year, two product lines in our Security division were abandoned, one of which was determined to be redundant
with a similar product acquired as part of our acquisition of AS&E#. As a result, $9.4 million of assets, including
inventory and the intangible assets and fixed assets related to these products lines, were determined to be
permanently impaired.
During fiscal 2016, $9.7 million of impairment charges were incurred as we determined that certain assets
would not be used and are permanently impaired, and that it was more likely than not that a minority interest
investment will not be recovered.
Restructuring and Other Charges
We endeavor to align our global capacity and infrastructure with demand by our customers as well as fully
integrate acquisitions, thereby improving operational efficiency. The significant initiatives undertaken by us are
further discussed below and a summary of all such activity is included in the succeeding tables.
Acquisition and integration of AS&E#.
In conjunction with the acquisition of AS&E#, beginning in fiscal
2016 we incurred financing costs and professional fees to complete the acquisition and employee separation costs
and other costs related to the integration of AS&E# into our Security division. Such costs totaled approximately
$14.7 million through June 30, 2017, including $8.0 million for the elimination of 58 employee positions. During
the year ended June 30, 2017, we incurred $12.4 million of costs for these activities. The integration of AS&E#,
which included the merger of manufacturing facilities, employee terminations and streamlining of processes, was
substantially completed during fiscal 2017.
Facility consolidation / employee termination. During fiscal 2017, our Healthcare division consolidated
one of our research and development and manufacturing facilities. As of result of this initiative, total costs incurred
were $2.0 million to terminate 99 positions and complete other consolidation activities.
The following table summarizes restructuring and other charges for the periods set forth below (in thousands):
2015
Optoelectronics
and
Security Healthcare Manufacturing
Division
Division
Division
Employee termination costs . . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . . .
Charges related to contract settlement . . . . . . . . . .
Legal settlement and related cost . . . . . . . . . . . . .
$1,331
—
3,772
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . . .
$5,103
$1,242
136
—
—
$1,378
$ 277
2,388
—
—
$2,665
Corporate
Total
$—
—
—
704
$704
$2,850
2,524
3,772
704
$9,850
2016
Optoelectronics
and
Security Healthcare Manufacturing
Division
Division
Division
Acquisition-related costs . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . .
Legal settlement and related costs . . . . . . . . . . .
Other charges . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
1,358
206
1,091
572
2,601
487
—
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . .
$3,227
$3,088
$ 220
588
—
1,843
118
$2,769
Corporate
Total
$3,256
—
—
—
—
$ 3,476
4,547
693
2,934
690
$3,256
$12,340
Acquisition-related costs . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . .
Other charges (reversals) . . . . . . . . . . . . . . . . .
2017
Optoelectronics
and
Healthcare Manufacturing
Division
$ —
1,760
1,095
374
Division
Corporate
Total
$ —
631
444
(70)
$4,877
—
—
500
$ 5,687
10,647
2,506
811
Security
Division
$
810
8,256
967
7
Total expensed . . . . . . . . . . . . . . . . . . . . . .
$10,040
$3,229
$1,005
$5,377
$19,651
The changes in the accrual for restructuring and other charges for the year ended June 30, 2017 were as follows
(in thousands):
Acquisition-
related
Costs
Employee
Termination
Costs
Facility
Closure/
Consolidation
Cost
Other
Costs
Total
Balance as of June 30, 2016 . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . .
Payments and other adjustments . . . . . . . . . . . .
$ —
5,687
(5,687)
$
413
10,647
(10,885)
$
126
2,506
(2,341)
$ — $
811
(811)
539
19,651
(19,724)
Balance as of June 30, 2017 . . . . . . . . . . . . . .
$ —
$
175
$
291
$ — $
466
F-22
F-23
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
works and equipment for other sites that were partially completed prior to the customer informing us that these sites
would not be needed. The carrying value of these assets when they were impaired was $17.5 million. Also, during
the year, two product lines in our Security division were abandoned, one of which was determined to be redundant
with a similar product acquired as part of our acquisition of AS&E#. As a result, $9.4 million of assets, including
inventory and the intangible assets and fixed assets related to these products lines, were determined to be
permanently impaired.
During fiscal 2016, $9.7 million of impairment charges were incurred as we determined that certain assets
would not be used and are permanently impaired, and that it was more likely than not that a minority interest
investment will not be recovered.
Restructuring and Other Charges
We endeavor to align our global capacity and infrastructure with demand by our customers as well as fully
integrate acquisitions, thereby improving operational efficiency. The significant initiatives undertaken by us are
further discussed below and a summary of all such activity is included in the succeeding tables.
Acquisition and integration of AS&E#.
In conjunction with the acquisition of AS&E#, beginning in fiscal
2016 we incurred financing costs and professional fees to complete the acquisition and employee separation costs
and other costs related to the integration of AS&E# into our Security division. Such costs totaled approximately
$14.7 million through June 30, 2017, including $8.0 million for the elimination of 58 employee positions. During
the year ended June 30, 2017, we incurred $12.4 million of costs for these activities. The integration of AS&E#,
which included the merger of manufacturing facilities, employee terminations and streamlining of processes, was
substantially completed during fiscal 2017.
Facility consolidation / employee termination. During fiscal 2017, our Healthcare division consolidated
one of our research and development and manufacturing facilities. As of result of this initiative, total costs incurred
were $2.0 million to terminate 99 positions and complete other consolidation activities.
The following table summarizes restructuring and other charges for the periods set forth below (in thousands):
2015
Optoelectronics
and
2016
Optoelectronics
and
Security Healthcare Manufacturing
Division
Division
Division
Acquisition-related costs . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . .
Legal settlement and related costs . . . . . . . . . . .
Other charges . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
1,358
206
1,091
572
2,601
487
—
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . .
$3,227
$3,088
$ 220
588
—
1,843
118
$2,769
Corporate
Total
$3,256
—
—
—
—
$ 3,476
4,547
693
2,934
690
$3,256
$12,340
Acquisition-related costs . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . .
Other charges (reversals) . . . . . . . . . . . . . . . . .
2017
Optoelectronics
and
Healthcare Manufacturing
Division
$ —
1,760
1,095
374
Division
Corporate
Total
$ —
631
444
(70)
$4,877
—
—
500
$ 5,687
10,647
2,506
811
Security
Division
$
810
8,256
967
7
Total expensed . . . . . . . . . . . . . . . . . . . . . .
$10,040
$3,229
$1,005
$5,377
$19,651
The changes in the accrual for restructuring and other charges for the year ended June 30, 2017 were as follows
(in thousands):
Acquisition-
related
Costs
Employee
Termination
Costs
Facility
Closure/
Consolidation
Cost
Other
Costs
Total
Balance as of June 30, 2016 . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . .
Payments and other adjustments . . . . . . . . . . . .
$ —
5,687
(5,687)
$
413
10,647
(10,885)
$
126
2,506
(2,341)
$ — $
811
(811)
539
19,651
(19,724)
Balance as of June 30, 2017 . . . . . . . . . . . . . .
$ —
$
175
$
291
$ — $
466
Security Healthcare Manufacturing
Division
Division
Division
Employee termination costs . . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . . .
Charges related to contract settlement . . . . . . . . . .
Legal settlement and related cost . . . . . . . . . . . . .
$1,331
—
3,772
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . . .
$5,103
$1,242
136
—
—
$1,378
$ 277
2,388
—
—
$2,665
Corporate
Total
$—
—
—
704
$704
$2,850
2,524
3,772
704
$9,850
F-22
F-23
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following table summarizes the impairment, restructuring and other charges for fiscal 2015, 2016 and
2017 (in thousands):
2015
2016
2017
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of minority interest investment . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 6,821
2,853
—
$27,047
—
Total impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility closure / consolidations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to government contract issues . . . . . . . . . . . . . . . . . . . . . . .
Legal settlements and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
2,524
2,850
3,772
704
—
—
9,674
—
693
4,547
496
2,934
3,476
194
27,047
489
2,506
10,647
—
—
5,687
322
Total impairment, restructuring and other charges . . . . . . . . . . . . . . . . .
$9,850
$22,014
$46,698
7. LINE-OF-CREDIT BORROWINGS AND DEBT
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 1.5% as of June 30, 2017, 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 June 30, 2017,
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 and certain subsidiaries’ assets. The agreement contains various representations
and warranties, affirmative, negative and financial covenants and conditions of default customary for financing
agreements of this type. As of June 30, 2017, there was $103.0 million of borrowings outstanding under the
revolving credit facility and $18.3 million outstanding under the letters-of-credit sub-facility. Available borrowing
under the credit facility as of June 30, 2017 was $403.7 million. Under the terms of the revolving credit facility,
loans 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 as part of the overall treasury function. Therefore, borrowings under the credit facility are
classified in current liabilities. As of June 30, 2017, 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 1.25% convertible senior notes due 2022 (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, commencing on September 1, 2017. 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 OSI Systems, Inc. and our subsidiaries, as well as any of the existing and future indebtedness that may
be guaranteed by our subsidiaries to the extent of such guarantee, including the guarantees of certain of our
subsidiaries under our existing revolving credit facility. The proceeds from the issuance of the Notes, after
deducting offering expenses and underwriting discounts, were used to repurchase $35 million of our Common
Stock from purchasers of the Notes in this offering in privately negotiated transactions concurrently with this
offering. The remaining net proceeds from the issuance of the Notes of $245 million were used to repay a portion of
the amount outstanding under our revolving credit facility.
The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and,
thereafter, 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, 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 30 consecutive trading day period. 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 year ended June 30,
2017 was $4.1 million, which consists of $1.2 million of contractual interest expense, $2.5 million of amortization
of the debt discount and $0.4 million of amortization of debt issuance costs. As of June 30, 2017, the unamortized
debt discount was $42.6 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 $6.1 million as of June 30, 2017 is
amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes.
Based upon a June 30, 2017 stock price of $75.15 per share, the ‘‘if-converted’’ value of the Notes did not exceed
the principal amount.
F-24
F-25
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following table summarizes the impairment, restructuring and other charges for fiscal 2015, 2016 and
2017 (in thousands):
2015
2016
2017
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of minority interest investment . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 6,821
2,853
—
$27,047
—
Total impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility closure / consolidations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges related to government contract issues . . . . . . . . . . . . . . . . . . . . . . .
Legal settlements and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
2,524
2,850
3,772
704
—
—
9,674
—
693
4,547
496
2,934
3,476
194
27,047
489
2,506
10,647
—
—
5,687
322
Total impairment, restructuring and other charges . . . . . . . . . . . . . . . . .
$9,850
$22,014
$46,698
7. LINE-OF-CREDIT BORROWINGS AND DEBT
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 1.5% as of June 30, 2017, 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 June 30, 2017,
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 and certain subsidiaries’ assets. The agreement contains various representations
and warranties, affirmative, negative and financial covenants and conditions of default customary for financing
agreements of this type. As of June 30, 2017, there was $103.0 million of borrowings outstanding under the
revolving credit facility and $18.3 million outstanding under the letters-of-credit sub-facility. Available borrowing
under the credit facility as of June 30, 2017 was $403.7 million. Under the terms of the revolving credit facility,
loans 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 as part of the overall treasury function. Therefore, borrowings under the credit facility are
classified in current liabilities. As of June 30, 2017, 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 1.25% convertible senior notes due 2022 (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, commencing on September 1, 2017. 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 OSI Systems, Inc. and our subsidiaries, as well as any of the existing and future indebtedness that may
be guaranteed by our subsidiaries to the extent of such guarantee, including the guarantees of certain of our
subsidiaries under our existing revolving credit facility. The proceeds from the issuance of the Notes, after
deducting offering expenses and underwriting discounts, were used to repurchase $35 million of our Common
Stock from purchasers of the Notes in this offering in privately negotiated transactions concurrently with this
offering. The remaining net proceeds from the issuance of the Notes of $245 million were used to repay a portion of
the amount outstanding under our revolving credit facility.
The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and,
thereafter, 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, 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 30 consecutive trading day period. 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 year ended June 30,
2017 was $4.1 million, which consists of $1.2 million of contractual interest expense, $2.5 million of amortization
of the debt discount and $0.4 million of amortization of debt issuance costs. As of June 30, 2017, the unamortized
debt discount was $42.6 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 $6.1 million as of June 30, 2017 is
amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes.
Based upon a June 30, 2017 stock price of $75.15 per share, the ‘‘if-converted’’ value of the Notes did not exceed
the principal amount.
F-24
F-25
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
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 June 30, 2017, $46.3 million was outstanding under
these letter-of-credit facilities. As of June 30, 2017, the total amount available under these credit facilities was
$26.5 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 at June 30 (in thousands):
1.25% convertible notes due 2022:
Principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $287,500
(42,602)
(6,073)
—
—
2016
2017
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term debt
Less current portion of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
—
6,847
1,966
238,825
3,700
1,621
8,813
(2,759)
244,146
(2,396)
We recorded stock-based-compensation expense in the consolidated statement of operations as follows (in
thousands):
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,037
21,249
215
—
$ 1,199
19,307
253
—
$ 1,443
21,354
433
2,902
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Related income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,501
(8,552)
20,759
(7,762)
26,132
(9,815)
Stock based compensation expense, net
. . . . . . . . . . . . . . . . . . . . . . .
$13,949
$12,997
$16,317
2015
2016
2017
As of June 30, 2017, total unrecognized compensation cost related to share-based compensation grants were
estimated at $0.6 million for stock options and $14.4 million for restricted stock and RSUs under the OSI Plans. We
expect to recognize these costs over a weighted-average period of 1.5 years with respect to the stock options and
2.0 years for grants of restricted stock and RSUs.
Employee Stock Purchase Plan—We have an employee stock purchase plan under which eligible employees
may purchase a limited number of shares of Common Stock at a discount of up to 15% of the market value of such
stock at pre-determined, plan-defined dates. During the three years ended June 30, 2015, 2016 and 2017, employees
purchased 65,706, 60,375 and 71,314 shares, respectively. As of June 30, 2017, there were 821,805 shares of our
Common Stock available for issuance under the plan.
Long-term portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,054
$241,750
OSI Plans
Fiscal year principal payments of long-term debt as of June 30, 2017 are as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,396
2,074
765
82
4
238,825
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,146
8. STOCK-BASED COMPENSATION
As of June 30, 2017, we maintained two share-based employee compensation plans: the 2012 Incentive Award
Plan (‘‘2012 Plan’’) and the Amended and Restated 2006 Equity Participation Plan (‘‘2006 Plan’’). Upon
stockholder approval of the 2012 Plan, we ceased to make grants under the 2006 Plan. In addition, pursuant to the
acquisition of 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’’.
In September 2012, our Board of Directors approved the 2012 Plan, and in December 2012, our stockholders
adopted the 2012 Plan. The 2012 Plan serves as the successor to the 2006 Plan. No new awards will be issued under
the 2006 Plan as of the date of stockholder approval of the 2012 Plan. Outstanding awards under the 2006 Plan
continue to be subject to the terms and conditions of the 2006 Plan.
Under the 2012 Plan, we are authorized to grant awards in the form of incentive options, nonqualified options,
restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses, amongst other
forms of equity, to qualified employees, directors and consultants.
Under the OSI Plans, the exercise price of nonqualified options and incentive stock options may not be less
than the fair market value of our Common Stock on the date of grant. The exercise price of nonqualified options and
incentive stock options granted to individuals who own more than 10% of our voting stock may not be less than
110% of the fair market value of our Common Stock on the date of grant. Stock options granted under the OSI
Plans typically vest over three years based on continued service. Restricted stock and RSUs typically vest over three
to four years based on continued service. Certain restricted stock awards granted to senior management vest based
on the achievement of pre-established performance criteria.
Stock Option Fair Value Estimation Assumptions. We estimate the fair value of our stock options at the date
of grant using the Black-Scholes option-pricing valuation model. Our valuation model is affected by our stock price
as well as weighted average assumptions for a number of subjective variables described below.
F-26
F-27
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
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 June 30, 2017, $46.3 million was outstanding under
these letter-of-credit facilities. As of June 30, 2017, the total amount available under these credit facilities was
$26.5 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 at June 30 (in thousands):
1.25% convertible notes due 2022:
Principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $287,500
(42,602)
(6,073)
—
—
2016
2017
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term debt
Less current portion of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
—
6,847
1,966
238,825
3,700
1,621
8,813
(2,759)
244,146
(2,396)
We recorded stock-based-compensation expense in the consolidated statement of operations as follows (in
thousands):
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,037
21,249
215
—
$ 1,199
19,307
253
—
$ 1,443
21,354
433
2,902
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Related income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,501
(8,552)
20,759
(7,762)
26,132
(9,815)
Stock based compensation expense, net
. . . . . . . . . . . . . . . . . . . . . . .
$13,949
$12,997
$16,317
2015
2016
2017
As of June 30, 2017, total unrecognized compensation cost related to share-based compensation grants were
estimated at $0.6 million for stock options and $14.4 million for restricted stock and RSUs under the OSI Plans. We
expect to recognize these costs over a weighted-average period of 1.5 years with respect to the stock options and
2.0 years for grants of restricted stock and RSUs.
Employee Stock Purchase Plan—We have an employee stock purchase plan under which eligible employees
may purchase a limited number of shares of Common Stock at a discount of up to 15% of the market value of such
stock at pre-determined, plan-defined dates. During the three years ended June 30, 2015, 2016 and 2017, employees
purchased 65,706, 60,375 and 71,314 shares, respectively. As of June 30, 2017, there were 821,805 shares of our
Common Stock available for issuance under the plan.
Long-term portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,054
$241,750
OSI Plans
Fiscal year principal payments of long-term debt as of June 30, 2017 are as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,396
2,074
765
82
4
238,825
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,146
8. STOCK-BASED COMPENSATION
As of June 30, 2017, we maintained two share-based employee compensation plans: the 2012 Incentive Award
Plan (‘‘2012 Plan’’) and the Amended and Restated 2006 Equity Participation Plan (‘‘2006 Plan’’). Upon
stockholder approval of the 2012 Plan, we ceased to make grants under the 2006 Plan. In addition, pursuant to the
acquisition of 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’’.
In September 2012, our Board of Directors approved the 2012 Plan, and in December 2012, our stockholders
adopted the 2012 Plan. The 2012 Plan serves as the successor to the 2006 Plan. No new awards will be issued under
the 2006 Plan as of the date of stockholder approval of the 2012 Plan. Outstanding awards under the 2006 Plan
continue to be subject to the terms and conditions of the 2006 Plan.
Under the 2012 Plan, we are authorized to grant awards in the form of incentive options, nonqualified options,
restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses, amongst other
forms of equity, to qualified employees, directors and consultants.
Under the OSI Plans, the exercise price of nonqualified options and incentive stock options may not be less
than the fair market value of our Common Stock on the date of grant. The exercise price of nonqualified options and
incentive stock options granted to individuals who own more than 10% of our voting stock may not be less than
110% of the fair market value of our Common Stock on the date of grant. Stock options granted under the OSI
Plans typically vest over three years based on continued service. Restricted stock and RSUs typically vest over three
to four years based on continued service. Certain restricted stock awards granted to senior management vest based
on the achievement of pre-established performance criteria.
Stock Option Fair Value Estimation Assumptions. We estimate the fair value of our stock options at the date
of grant using the Black-Scholes option-pricing valuation model. Our valuation model is affected by our stock price
as well as weighted average assumptions for a number of subjective variables described below.
F-26
F-27
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Expected Dividend. Expected dividend is based on historical patterns and our anticipated dividend payments
The following summarizes stock option activity for fiscal years 2015, 2016 and 2017:
over the expected holding period.
Risk-Free Interest Rate. The risk-free interest rate for stock options is based on U.S. Treasuries for a maturity
matching the expected holding period.
Expected Volatility. Expected volatility is based on our historical share price volatility matching the expected
holding period. No single method of estimating volatility is proper under all circumstances and to the extent that a
company can derive implied volatility based on the trading of its financial instruments on a public market, it may be
appropriate to use both implied and historical volatility in its assumptions. We have certain financial instruments
that are publicly traded from which we can derive the implied volatility. Therefore, we use implied and historical
volatility for valuing our stock options. We believe that implied and historical volatility is a better indicator of
expected volatility because it is generally reflective of both historical volatility and expectations of how future
volatility will differ from historical volatility.
Expected Holding Period. We use historical stock option exercise data to estimate the expected holding
period.
Outstanding at June 30, 2014 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Outstanding at June 30, 2015 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Outstanding at June 30, 2016 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Number of
Options
1,022,991
45,104
(38,907)
(16,538)
1,012,650
35,162
(107,059)
(6,641)
934,112
19,176
(168,564)
(4,053)
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining Contractual
Term
Aggregate
Intrinsic Value
(in thousands)
26.60
68.05
41.20
62.20
27.30
73.42
28.05
66.56
28.67
73.42
26.68
68.28
Changes in assumptions can materially impact the estimated fair value of stock options. The weighted average
Outstanding at June 30, 2017 . . . . . . . . . . . . .
780,671
$30.00
assumptions used in the valuation model are presented in the table below.
Exercisable at June 30, 2017 . . . . . . . . . . . . . .
730,426
$27.08
3.3 years
2.9 years
$35,252
$35,109
2015
2016
2017
Expected dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected holding period (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
1.5% 1.4% 1.7%
31.0% 31.0% 33.0%
4.5
4.5
4.5
The per-share weighted-average grant-date fair value of stock options granted under the OSI Plans was $19.26,
$20.66 and $22.19 for fiscal 2015, 2016 and 2017, respectively. The total intrinsic value of options exercised during
fiscal 2017 was $8,165,000.
F-28
F-29
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Expected Dividend. Expected dividend is based on historical patterns and our anticipated dividend payments
The following summarizes stock option activity for fiscal years 2015, 2016 and 2017:
over the expected holding period.
Risk-Free Interest Rate. The risk-free interest rate for stock options is based on U.S. Treasuries for a maturity
matching the expected holding period.
Expected Volatility. Expected volatility is based on our historical share price volatility matching the expected
holding period. No single method of estimating volatility is proper under all circumstances and to the extent that a
company can derive implied volatility based on the trading of its financial instruments on a public market, it may be
appropriate to use both implied and historical volatility in its assumptions. We have certain financial instruments
that are publicly traded from which we can derive the implied volatility. Therefore, we use implied and historical
volatility for valuing our stock options. We believe that implied and historical volatility is a better indicator of
expected volatility because it is generally reflective of both historical volatility and expectations of how future
volatility will differ from historical volatility.
Expected Holding Period. We use historical stock option exercise data to estimate the expected holding
period.
Outstanding at June 30, 2014 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Outstanding at June 30, 2015 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Outstanding at June 30, 2016 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited . . . . . . . . . . . . . . . .
Number of
Options
1,022,991
45,104
(38,907)
(16,538)
1,012,650
35,162
(107,059)
(6,641)
934,112
19,176
(168,564)
(4,053)
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining Contractual
Term
Aggregate
Intrinsic Value
(in thousands)
26.60
68.05
41.20
62.20
27.30
73.42
28.05
66.56
28.67
73.42
26.68
68.28
Changes in assumptions can materially impact the estimated fair value of stock options. The weighted average
Outstanding at June 30, 2017 . . . . . . . . . . . . .
780,671
$30.00
assumptions used in the valuation model are presented in the table below.
Exercisable at June 30, 2017 . . . . . . . . . . . . . .
730,426
$27.08
3.3 years
2.9 years
$35,252
$35,109
2015
2016
2017
Expected dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected holding period (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
1.5% 1.4% 1.7%
31.0% 31.0% 33.0%
4.5
4.5
4.5
The per-share weighted-average grant-date fair value of stock options granted under the OSI Plans was $19.26,
$20.66 and $22.19 for fiscal 2015, 2016 and 2017, respectively. The total intrinsic value of options exercised during
fiscal 2017 was $8,165,000.
F-28
F-29
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Restricted Stock Awards and Restricted Stock Units—A summary of restricted stock award and RSU activity
9.
INCOME TAXES
for the periods indicated was as follows:
Nonvested at June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net replacement RSUs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Fair Value
$54.78
64.68
42.75
55.62
$63.75
72.90
65.36
67.70
$67.94
64.55
67.87
67.76
68.34
Shares
661,400
281,163
(262,221)
(20,436)
659,906
337,628
(417,896)
(49,140)
530,498
379,888
(299,277)
20,953
(20,375)
Nonvested at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
611,687
$65.85
(1) Pursuant to the acquisition of AS&E#, we assumed unvested RSUs originally granted by AS&E# and
converted them into RSUs for our Common Stock.
The per-share weighted average grant-date fair value of restricted stock and RSUs granted under the OSI Plans
was $64.68, $72.90 and $64.55 for fiscal 2015, 2016 and 2017, respectively. The total fair value of shares vested
during fiscal 2015, 2016 and 2017 was $11.2 million, $27.3 million and $23.2 million, respectively.
As of June 30, 2017, there were approximately 1.3 million shares available for grant under the 2012 Plan.
Under the terms of the 2012 Plan, RSUs and restricted stock granted from the pool of shares available for grant
reduce the pool by 1.87 shares for each award granted. RSUs and restricted stock forfeited and returned to the pool
of shares available for grant increase the pool by 1.87 shares for each award forfeited.
We granted 151,469, 139,300 and 156,836 performance-based awards during fiscal 2015, 2016 and 2017,
respectively. These performance-based restricted stock and RSU awards are contingent on the achievement of
certain performance metrics. The payout can range from zero to 250% of the original number of shares or units
awarded.
The following is a geographical breakdown of income before the provision for income taxes (in thousands):
Pre-tax income (loss):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (16,428) $(34,732) $(39,686)
65,437
70,227
105,281
Total pre-tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 88,853
$ 35,495
$ 25,751
2015
2016
2017
Our provision (benefit) for income taxes consists of the following (in thousands):
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,502
1,276
25,880
$
(488) $
108
22,942
788
493
27,616
Total current provision . . . . . . . . . . . . . . . . . . . . . . . .
29,658
22,562
28,897
2015
2016
2017
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,910) $(11,865) $(16,314)
(484)
(7,424)
473
(1,832)
(1,180)
3,134
Total deferred benefit
. . . . . . . . . . . . . . . . . . . . . . . .
(5,956)
(13,224)
(24,222)
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,702
$ 9,338
$ 4,675
As of June 30, 2016 and 2017, our liability for uncertain tax positions was $4.9 million and $6.0 million,
respectively. The $6.0 million represents the amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate.
We recognize potential interest and penalties related to income tax matters in income tax expense. As of
June 30, 2017, we had accrued $0.8 million for interest and penalties. Our uncertain tax positions are related to tax
years that remain subject to examination by the relevant tax authorities. These include fiscal years after 2012 for
federal purposes, fiscal years after 2011 for state purposes and fiscal years after 2006 for various foreign
jurisdictions. Facts and circumstances could arise that could cause us to reduce the liability for unrecognized tax
benefits, including, but not limited to, settlement of income tax positions or expiration of statutes of limitation.
Since the ultimate resolution of uncertain tax positions depends on many factors and assumptions, we are not able
to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such
changes.
F-30
F-31
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Restricted Stock Awards and Restricted Stock Units—A summary of restricted stock award and RSU activity
9.
INCOME TAXES
for the periods indicated was as follows:
Nonvested at June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net replacement RSUs (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Fair Value
$54.78
64.68
42.75
55.62
$63.75
72.90
65.36
67.70
$67.94
64.55
67.87
67.76
68.34
Shares
661,400
281,163
(262,221)
(20,436)
659,906
337,628
(417,896)
(49,140)
530,498
379,888
(299,277)
20,953
(20,375)
Nonvested at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
611,687
$65.85
(1) Pursuant to the acquisition of AS&E#, we assumed unvested RSUs originally granted by AS&E# and
converted them into RSUs for our Common Stock.
The per-share weighted average grant-date fair value of restricted stock and RSUs granted under the OSI Plans
was $64.68, $72.90 and $64.55 for fiscal 2015, 2016 and 2017, respectively. The total fair value of shares vested
during fiscal 2015, 2016 and 2017 was $11.2 million, $27.3 million and $23.2 million, respectively.
As of June 30, 2017, there were approximately 1.3 million shares available for grant under the 2012 Plan.
Under the terms of the 2012 Plan, RSUs and restricted stock granted from the pool of shares available for grant
reduce the pool by 1.87 shares for each award granted. RSUs and restricted stock forfeited and returned to the pool
of shares available for grant increase the pool by 1.87 shares for each award forfeited.
We granted 151,469, 139,300 and 156,836 performance-based awards during fiscal 2015, 2016 and 2017,
respectively. These performance-based restricted stock and RSU awards are contingent on the achievement of
certain performance metrics. The payout can range from zero to 250% of the original number of shares or units
awarded.
The following is a geographical breakdown of income before the provision for income taxes (in thousands):
Pre-tax income (loss):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (16,428) $(34,732) $(39,686)
65,437
70,227
105,281
Total pre-tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 88,853
$ 35,495
$ 25,751
2015
2016
2017
Our provision (benefit) for income taxes consists of the following (in thousands):
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,502
1,276
25,880
$
(488) $
108
22,942
788
493
27,616
Total current provision . . . . . . . . . . . . . . . . . . . . . . . .
29,658
22,562
28,897
2015
2016
2017
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (7,910) $(11,865) $(16,314)
(484)
(7,424)
473
(1,832)
(1,180)
3,134
Total deferred benefit
. . . . . . . . . . . . . . . . . . . . . . . .
(5,956)
(13,224)
(24,222)
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,702
$ 9,338
$ 4,675
As of June 30, 2016 and 2017, our liability for uncertain tax positions was $4.9 million and $6.0 million,
respectively. The $6.0 million represents the amount of unrecognized tax benefits that, if recognized, would affect
the effective tax rate.
We recognize potential interest and penalties related to income tax matters in income tax expense. As of
June 30, 2017, we had accrued $0.8 million for interest and penalties. Our uncertain tax positions are related to tax
years that remain subject to examination by the relevant tax authorities. These include fiscal years after 2012 for
federal purposes, fiscal years after 2011 for state purposes and fiscal years after 2006 for various foreign
jurisdictions. Facts and circumstances could arise that could cause us to reduce the liability for unrecognized tax
benefits, including, but not limited to, settlement of income tax positions or expiration of statutes of limitation.
Since the ultimate resolution of uncertain tax positions depends on many factors and assumptions, we are not able
to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such
changes.
F-30
F-31
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
A summary of activity of unrecognized tax benefits for fiscal 2015, 2016 and 2017 is as follows (in
Deferred income tax assets (liabilities) consisted of the following (in thousands):
thousands).
Balance as July 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions for the current year
. . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax position from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions for the current year
. . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax position from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,049
350
533
(2,178)
$ 9,754
594
1,445
(598)
Balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,195
We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries as it is our
intention to utilize those earnings in the foreign operations for an indefinite period of time. At June 30, 2017,
undistributed earnings of the foreign subsidiaries amounted to approximately $628 million. The amount of
unrecognized deferred tax liability related to these temporary differences is estimated to be approximately
$220 million. The amount of tax payable could be significantly impacted by the source location and amount of the
distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to
use foreign tax credits.
June 30,
2016
2017
Deferred income tax assets:
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock & deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,003
17,468
14,284
3,757
10,700
4,637
5,912
20,699
3,641
$ 19,005
34,318
4,028
5,839
15,933
7,348
11,511
24,211
3,001
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,101
(14,458)
125,194
(19,997)
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . .
82,643
105,197
Deferred income tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41,415)
(1,629)
(21,408)
—
(3,813)
(63)
(21,228)
(655)
(48,966)
(17,019)
(2,983)
(130)
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . .
(68,328)
(90,981)
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,315
$ 14,216
The components of the net deferred income tax asset are classified in the consolidated balance sheets as
follows (in thousands):
Long term deferred income tax asset, included in other assets . . . . . . . . . . . .
Long term deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,475
(29,160)
34,897
(20,681)
Net deferred income tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,315
$14,216
2016
2017
F-32
F-33
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
A summary of activity of unrecognized tax benefits for fiscal 2015, 2016 and 2017 is as follows (in
Deferred income tax assets (liabilities) consisted of the following (in thousands):
thousands).
Balance as July 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions for the current year
. . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax position from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions for the current year
. . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax position from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,049
350
533
(2,178)
$ 9,754
594
1,445
(598)
Balance at June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,195
We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries as it is our
intention to utilize those earnings in the foreign operations for an indefinite period of time. At June 30, 2017,
undistributed earnings of the foreign subsidiaries amounted to approximately $628 million. The amount of
unrecognized deferred tax liability related to these temporary differences is estimated to be approximately
$220 million. The amount of tax payable could be significantly impacted by the source location and amount of the
distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to
use foreign tax credits.
June 30,
2016
2017
Deferred income tax assets:
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock & deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,003
17,468
14,284
3,757
10,700
4,637
5,912
20,699
3,641
$ 19,005
34,318
4,028
5,839
15,933
7,348
11,511
24,211
3,001
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,101
(14,458)
125,194
(19,997)
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . .
82,643
105,197
Deferred income tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41,415)
(1,629)
(21,408)
—
(3,813)
(63)
(21,228)
(655)
(48,966)
(17,019)
(2,983)
(130)
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . .
(68,328)
(90,981)
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,315
$ 14,216
The components of the net deferred income tax asset are classified in the consolidated balance sheets as
follows (in thousands):
Long term deferred income tax asset, included in other assets . . . . . . . . . . . .
Long term deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,475
(29,160)
34,897
(20,681)
Net deferred income tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,315
$14,216
2016
2017
F-32
F-33
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The components of current taxes receivable and payable and prepaid taxes are classified in the consolidated
The consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to
balance sheets as follows (in thousands):
the following:
Current taxes receivable and prepaid taxes, included in prepaid
expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . .
Current taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,495
(8,032)
$12,100
(6,454)
Net tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,463
5,646
2016
2017
As of June 30, 2017, we had federal, state, and foreign net operating loss carryforwards of approximately
$81.4 million, $61.4 million and $21.5 million, respectively. As of June 30, 2017, we had federal and state research
and development tax credit carryforwards of approximately $10.6 million and $5.4 million, respectively. As of
June 30, 2017, we had foreign tax credit carryforwards of $7.8 million. Our credit carryforwards will begin to
expire in the tax year ending June 30, 2019.
We have established valuation allowances that relate to the net operating loss of certain subsidiaries and R&D
credits. During the year ended June 30, 2017, we recorded a net aggregated increase of $5.5 million to these
valuation allowances. We review the adequacy of individual valuation allowances and release such allowances when
it is determined that it is more likely than not that the related benefits will be realized.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplifies the accounting for income taxes, among other changes, related to stock-based compensation. We
adopted this ASU effective April 1, 2017. We recognized all excess tax benefits and tax deficiencies as income tax
expense or benefit in the current year. An income tax benefit of approximately $2.4 million was recognized in fiscal
2017 as a result of the adoption of ASU 2016-09. In addition, we recognized $3.8 million of deferred tax assets and,
accordingly, increased retained earnings by this same amount.
June 30,
2015
2016
2017
35.0% 35.0% 35.0%
(2.1) —
(0.9)
(9.4)
(1.8)
(8.9)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Provision for income taxes at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . .
UK Patent Box benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income subject to tax at other than federal statutory rate . . . . . . . . . . . . . . . .
Stock compensations excess tax benefit
(1.1)
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4
Tax on foreign currency gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
State tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax on foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-taxable gain from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Non-taxable earnings from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico imputed income or expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.3)
(0.7)
(1.1)
(0.6)
4.9
0.5
5.8
(5.0)
0.9
2.3
2.3
(0.3)
4.5
0.9
(7.9)
(0.4)
(1.1)
—
(2.5)
(20.0)
(9.5)
10.4
(1.4)
1.8
9.1
1.5
(1.5)
0.4
1.5
(3.6)
(1.8)
(2.0)
0.7
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.7% 26.3% 18.1%
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate
in an international environment with significant operations in various locations outside the U.S. Accordingly, the
consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable
rates.
10. COMMITMENTS AND CONTINGENCIES
The following is a summary of commitments as of June 30, 2017 (in thousands):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related obligations . . . . . . . . . . . . . . .
Defined benefit plan obligation . . . . . . . . . . . . . . .
Payments Due by Period
Total
$347,146
30,209
42,895
95,705
10,462
Less than
1 year
$105,396
8,759
42,847
84,303
145
1-3 years
3-5 years
$ 2,839
11,679
33
9,152
1,805
$
86
7,762
—
2,250
2,340
After
5 years
$238,825
2,009
15
—
6,172
Total contractual obligations . . . . . . . . . . . . . . . . .
$526,417
$241,450
$25,508
$12,438
$247,021
Other Commercial Commitments—letters of credit
.
$ 64,342
$ 46,602
$10,209
$
161
$
7,370
F-34
F-35
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The components of current taxes receivable and payable and prepaid taxes are classified in the consolidated
The consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to
balance sheets as follows (in thousands):
the following:
Current taxes receivable and prepaid taxes, included in prepaid
expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . .
Current taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,495
(8,032)
$12,100
(6,454)
Net tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,463
5,646
2016
2017
As of June 30, 2017, we had federal, state, and foreign net operating loss carryforwards of approximately
$81.4 million, $61.4 million and $21.5 million, respectively. As of June 30, 2017, we had federal and state research
and development tax credit carryforwards of approximately $10.6 million and $5.4 million, respectively. As of
June 30, 2017, we had foreign tax credit carryforwards of $7.8 million. Our credit carryforwards will begin to
expire in the tax year ending June 30, 2019.
We have established valuation allowances that relate to the net operating loss of certain subsidiaries and R&D
credits. During the year ended June 30, 2017, we recorded a net aggregated increase of $5.5 million to these
valuation allowances. We review the adequacy of individual valuation allowances and release such allowances when
it is determined that it is more likely than not that the related benefits will be realized.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplifies the accounting for income taxes, among other changes, related to stock-based compensation. We
adopted this ASU effective April 1, 2017. We recognized all excess tax benefits and tax deficiencies as income tax
expense or benefit in the current year. An income tax benefit of approximately $2.4 million was recognized in fiscal
2017 as a result of the adoption of ASU 2016-09. In addition, we recognized $3.8 million of deferred tax assets and,
accordingly, increased retained earnings by this same amount.
June 30,
2015
2016
2017
35.0% 35.0% 35.0%
(2.1) —
(0.9)
(9.4)
(1.8)
(8.9)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Provision for income taxes at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . .
UK Patent Box benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income subject to tax at other than federal statutory rate . . . . . . . . . . . . . . . .
Stock compensations excess tax benefit
(1.1)
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4
Tax on foreign currency gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
State tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax on foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-taxable gain from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
Non-taxable earnings from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico imputed income or expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.3)
(0.7)
(1.1)
(0.6)
4.9
0.5
5.8
(5.0)
0.9
2.3
2.3
(0.3)
4.5
0.9
(7.9)
(0.4)
(1.1)
—
(2.5)
(20.0)
(9.5)
10.4
(1.4)
1.8
9.1
1.5
(1.5)
0.4
1.5
(3.6)
(1.8)
(2.0)
0.7
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.7% 26.3% 18.1%
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate
in an international environment with significant operations in various locations outside the U.S. Accordingly, the
consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable
rates.
10. COMMITMENTS AND CONTINGENCIES
The following is a summary of commitments as of June 30, 2017 (in thousands):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related obligations . . . . . . . . . . . . . . .
Defined benefit plan obligation . . . . . . . . . . . . . . .
Payments Due by Period
Total
$347,146
30,209
42,895
95,705
10,462
Less than
1 year
$105,396
8,759
42,847
84,303
145
1-3 years
3-5 years
$ 2,839
11,679
33
9,152
1,805
$
86
7,762
—
2,250
2,340
After
5 years
$238,825
2,009
15
—
6,172
Total contractual obligations . . . . . . . . . . . . . . . . .
$526,417
$241,450
$25,508
$12,438
$247,021
Other Commercial Commitments—letters of credit
.
$ 64,342
$ 46,602
$10,209
$
161
$
7,370
F-34
F-35
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Operating Leases—We lease facilities and certain equipment under various operating lease agreements.
Certain leases provide for periodic rent increases and may contain escalation clauses and renewal options. Rent
expense totaled $10.0 million, $9.0 million and $10.2 million for fiscal years 2015, 2016 and 2017, respectively.
Contingent Acquisition Obligations—Under the terms and conditions of the purchase agreements associated
with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain
sales or profitability milestones by the acquired operations. The maximum amount of such future payments under
arrangements with contingent consideration caps is $18.2 million as of June 30, 2017. In addition, one of the
purchase agreements we entered into requires royalty payments through 2022 based on the license of, or sales of
products containing, the technology of CXR Limited, a company acquired in 2004.
For acquisitions that occurred through the end of fiscal year 2009, we account for such contingent payments as
an addition to the purchase price of the acquired business. For acquisitions after fiscal 2009, pursuant to the
adoption Financial Accounting Standard 141R, which was codified into ASC 805, the estimated fair value of these
obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling,
general and administrative expense in the consolidated financial statements. The estimated fair value measurements
of contingent earn-out obligations are primarily based on unobservable inputs, which may include projected
revenues, gross margins, operating income, estimated probability of achieving and the estimated probability of
earn-out payments being made. These projections and probabilities are used to estimate future contingent earnout
payments, which are discounted back to present value to compute the contingent earnout liability. The following
table reconciles the contingent earnout liabilities, which are included in Other accrued expenses and current
liabilities, and Other long-term liabilities in the accompanying consolidated balance sheets, from June 30, 2016 to
June 30, 2017:
Beginning fair value, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of fair value for contingent earn-out obligations . . . . . . . . . . .
Payments on contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . .
$17,117
(3,877)
(1,400)
Ending fair value, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,840
Advances from Customers—We receive advances from customers associated with certain projects. In fiscal
2012, we entered into an agreement with the Mexican government to provide a turnkey security screening solution
at various locations throughout the country. Associated with the agreement, we were provided an advance totaling
$100 million. We were obligated to provide a guarantee until the advance had been amortized. As of June 30, 2017,
this advance has been fully amortized.
Environmental Contingencies—We are subject to various environmental laws. Our practice is to conduct
appropriate environmental investigations at our manufacturing facilities in North America, Asia-Pacific, and
Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation,
potential areas of environmental concern related to past and present activities or from nearby operations. In certain
cases, we have conducted further environmental assessments consisting of soil and groundwater testing and other
investigations deemed appropriate by independent environmental consultants.
We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California
facility that resulted from unspecified on- and off-site releases occurring prior to our occupancy. We believe the
releases are of a historical nature and not uncommon to the region in general. We continue to take voluntary actions,
in cooperation with the local governing agency, to fully investigate the site in order to develop appropriate remedial
actions.
We have not accrued for loss contingencies relating to the Hawthorne facility or any other environmental
matters because we believe that, although unfavorable outcomes may be possible, they are not considered by our
management to be probable and reasonably estimable. If one or more of these environmental matters are resolved in
a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be
material.
Indemnifications—In the normal course of business, we have agreed to indemnify certain parties with respect
to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of
representations, warranties or covenants, or intellectual property infringement or other claims made by third parties.
These agreements may limit the time within which an indemnification claim can be made and the amount of the
claim. In addition, we have entered into indemnification agreements with our directors and certain of our officers. It
is not possible to determine the maximum potential amount under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. We have not recorded any liability for costs related to contingent indemnification obligations as of
June 30, 2017.
Legal Proceedings—Our recently acquired subsidiary, AS&E#, has been the subject of an investigation by the
Office of the Inspector General of the U.S. General Services Administration (‘‘GSA’’). The investigation relates to
AS&E#’s discount practices and compliance with the pricing provisions of AS&E#’s GSA Schedule contract. The
investigation could lead to claims or findings of violations of the False Claims Act in connection with AS&E#’s
GSA contracting activity. Violations of the False Claims Act could result in the imposition of damages (up to treble
damages) plus civil penalties in some cases, and we expect to incur legal costs in connection with the investigation.
We and AS&E# continue to cooperate with the GSA investigation and management believes that an appropriate
accrual for this uncertainty has been provided in the accompanying condensed consolidated financial statements.
We are involved in various other claims and legal proceedings arising in the ordinary course of business. In our
opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a
material adverse effect on our business, financial condition, results of operations or cash flows. We have not
accrued for loss contingencies relating to such matters because we believe 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 our company, the impact on our business,
financial condition, results of operations and cash flow could be material.
11. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
Our Board of Directors has an authorized Common Stock repurchase program. During fiscal 2015, 2016 and
2017, we repurchased 454,635 shares, 1,201,402 shares and 642,277shares, respectively, under this program. As of
June 30, 2017, 872,481 shares were available for additional repurchase under the program. Upon repurchase, the
shares were restored to the status of authorized but unissued shares in the accompanying consolidated financial
statements.
F-36
F-37
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
Operating Leases—We lease facilities and certain equipment under various operating lease agreements.
Certain leases provide for periodic rent increases and may contain escalation clauses and renewal options. Rent
expense totaled $10.0 million, $9.0 million and $10.2 million for fiscal years 2015, 2016 and 2017, respectively.
Contingent Acquisition Obligations—Under the terms and conditions of the purchase agreements associated
with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain
sales or profitability milestones by the acquired operations. The maximum amount of such future payments under
arrangements with contingent consideration caps is $18.2 million as of June 30, 2017. In addition, one of the
purchase agreements we entered into requires royalty payments through 2022 based on the license of, or sales of
products containing, the technology of CXR Limited, a company acquired in 2004.
For acquisitions that occurred through the end of fiscal year 2009, we account for such contingent payments as
an addition to the purchase price of the acquired business. For acquisitions after fiscal 2009, pursuant to the
adoption Financial Accounting Standard 141R, which was codified into ASC 805, the estimated fair value of these
obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling,
general and administrative expense in the consolidated financial statements. The estimated fair value measurements
of contingent earn-out obligations are primarily based on unobservable inputs, which may include projected
revenues, gross margins, operating income, estimated probability of achieving and the estimated probability of
earn-out payments being made. These projections and probabilities are used to estimate future contingent earnout
payments, which are discounted back to present value to compute the contingent earnout liability. The following
table reconciles the contingent earnout liabilities, which are included in Other accrued expenses and current
liabilities, and Other long-term liabilities in the accompanying consolidated balance sheets, from June 30, 2016 to
June 30, 2017:
Beginning fair value, June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of fair value for contingent earn-out obligations . . . . . . . . . . .
Payments on contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . .
$17,117
(3,877)
(1,400)
Ending fair value, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,840
Advances from Customers—We receive advances from customers associated with certain projects. In fiscal
2012, we entered into an agreement with the Mexican government to provide a turnkey security screening solution
at various locations throughout the country. Associated with the agreement, we were provided an advance totaling
$100 million. We were obligated to provide a guarantee until the advance had been amortized. As of June 30, 2017,
this advance has been fully amortized.
Environmental Contingencies—We are subject to various environmental laws. Our practice is to conduct
appropriate environmental investigations at our manufacturing facilities in North America, Asia-Pacific, and
Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation,
potential areas of environmental concern related to past and present activities or from nearby operations. In certain
cases, we have conducted further environmental assessments consisting of soil and groundwater testing and other
investigations deemed appropriate by independent environmental consultants.
We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California
facility that resulted from unspecified on- and off-site releases occurring prior to our occupancy. We believe the
releases are of a historical nature and not uncommon to the region in general. We continue to take voluntary actions,
in cooperation with the local governing agency, to fully investigate the site in order to develop appropriate remedial
actions.
We have not accrued for loss contingencies relating to the Hawthorne facility or any other environmental
matters because we believe that, although unfavorable outcomes may be possible, they are not considered by our
management to be probable and reasonably estimable. If one or more of these environmental matters are resolved in
a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be
material.
Indemnifications—In the normal course of business, we have agreed to indemnify certain parties with respect
to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of
representations, warranties or covenants, or intellectual property infringement or other claims made by third parties.
These agreements may limit the time within which an indemnification claim can be made and the amount of the
claim. In addition, we have entered into indemnification agreements with our directors and certain of our officers. It
is not possible to determine the maximum potential amount under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. We have not recorded any liability for costs related to contingent indemnification obligations as of
June 30, 2017.
Legal Proceedings—Our recently acquired subsidiary, AS&E#, has been the subject of an investigation by the
Office of the Inspector General of the U.S. General Services Administration (‘‘GSA’’). The investigation relates to
AS&E#’s discount practices and compliance with the pricing provisions of AS&E#’s GSA Schedule contract. The
investigation could lead to claims or findings of violations of the False Claims Act in connection with AS&E#’s
GSA contracting activity. Violations of the False Claims Act could result in the imposition of damages (up to treble
damages) plus civil penalties in some cases, and we expect to incur legal costs in connection with the investigation.
We and AS&E# continue to cooperate with the GSA investigation and management believes that an appropriate
accrual for this uncertainty has been provided in the accompanying condensed consolidated financial statements.
We are involved in various other claims and legal proceedings arising in the ordinary course of business. In our
opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a
material adverse effect on our business, financial condition, results of operations or cash flows. We have not
accrued for loss contingencies relating to such matters because we believe 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 our company, the impact on our business,
financial condition, results of operations and cash flow could be material.
11. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
Our Board of Directors has an authorized Common Stock repurchase program. During fiscal 2015, 2016 and
2017, we repurchased 454,635 shares, 1,201,402 shares and 642,277shares, respectively, under this program. As of
June 30, 2017, 872,481 shares were available for additional repurchase under the program. Upon repurchase, the
shares were restored to the status of authorized but unissued shares in the accompanying consolidated financial
statements.
F-36
F-37
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
12. RELATED-PARTY TRANSACTIONS
Employee Pension Plans
In 1994, we, together with an unrelated company, formed ECIL- Rapiscan Security Products Limited, a joint
venture organized under the laws of India. We own a 36% interest in the joint venture, our Chairman and Chief
Executive Officer owns a 10.5% interest, and our Executive Vice President and President of OSI Solutions Business
and Director owns a 4.5% ownership interest. Our initial investment was approximately $0.1 million. For each of
the years ended June 30, 2015, 2016 and 2017, our equity earnings in the joint venture were less than $0.1 million.
We, our Chairman and Chief Executive Officer and our Executive Vice President and President of OSI Solutions
Business and Director collectively control less than 50% of the board of directors voting power in the joint venture.
As a result, we account for the investment under the equity method of accounting. The joint venture was formed for
the purpose of the manufacture, assembly, service and testing of security and inspection systems and other
products. Some of our subsidiaries are suppliers to the joint venture partner, which in turn manufactures and sells
the resulting products. Sales to the joint venture partner for fiscal 2015, 2016 and 2017 were approximately
$7.3 million, $9.1 million and $10.2 million, respectively. Receivables from the joint venture were $3.6 million and
$4.0 million as of June 30, 2016 and 2017, respectively.
We have contracted with entities owned by our Chief Executive Officer and/or his family members to provide
warehousing and consulting services. Such expenses for 2016 and 2017 were approximately $34,000 and $18,000,
respectively; there were no expenses during 2015.
13. EMPLOYEE BENEFIT PLANS
Employee Retirement Savings Plans
We have various qualified employee retirement savings plans. Participants can contribute certain amounts to
the plans and we match a certain portion of employee contributions. We contributed approximately $4.5 million,
$4.6 million and $5.0 million to the plans for the fiscal years ended June 30, 2015, 2016 and 2017, respectively.
Deferred Compensation Plan
We have a deferred compensation plan, which meets the requirements for deferred compensation under
Section 409A of the Internal Revenue Code. The plan provides that selected employees are eligible to defer up to
80% of their salaries and up to 100% of their bonuses. We may also make employer contributions to participant
accounts in certain circumstances. The benefits under this plan are unsecured. Participants are generally eligible to
receive payment of their vested benefit at the end of their elected deferral period or after termination of their
employment for any reason or at a later date to comply with the restrictions of Section 409A. Discretionary
company contributions and the related earnings are subject to a vesting schedule dependent upon years of service to
us and, also, vest completely upon the participant’s disability or death while employed by us or immediately prior to
a change of control. We made contributions of $0.7 million, $0.6 million and $0.6 million during fiscal year 2015,
2016 and 2017, respectively. As of June 30, 2017, we held assets of $19.3 million and liabilities of $19.6 million
related to this plan. Assets related to this plan are included in other assets and liabilities related to this plan are
included in other long-term liabilities in the consolidated balance sheets. The plan liabilities include accrued
employer contributions not yet funded to the plan.
We sponsor a number of qualified and nonqualified pension plans for our employees at certain locations. In
accordance with accounting standards for employee pension and postretirement benefits, we fully recognize the
overfunded or underfunded status of each of our defined benefit plans as an asset or liability in the consolidated
balance sheets. The asset or liability equals the difference between the fair value of the plans’ assets and their
benefit obligations. The liabilities associated with underfunded plans are classified as noncurrent, except to the
extent the fair value of the plans’ assets is less than the plans’ estimated benefit payments over the next 12 months.
We measure our pension and postretirement benefit plans’ assets and benefit obligations as of June 30.
The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets
for fiscal years 2016 and 2017, and a statement of the funded status as of June 30, 2016 and 2017 (in thousands):
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2017
$13,896
(933)
582
(1,187)
1,226
(279)
$13,305
(88)
453
—
435
(379)
Benefit obligation at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,305
13,726
Change in Plan Assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,090
(923)
488
55
(1,500)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,210
5,210
(122)
745
65
(343)
5,555
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,095)
—
(8,171)
—
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (8,095) $ (8,171)
Amount recognized in consolidated balance sheets consists of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
648
(8,581)
2,792
$
759
(8,051)
2,016
F-38
F-39
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
12. RELATED-PARTY TRANSACTIONS
Employee Pension Plans
In 1994, we, together with an unrelated company, formed ECIL- Rapiscan Security Products Limited, a joint
venture organized under the laws of India. We own a 36% interest in the joint venture, our Chairman and Chief
Executive Officer owns a 10.5% interest, and our Executive Vice President and President of OSI Solutions Business
and Director owns a 4.5% ownership interest. Our initial investment was approximately $0.1 million. For each of
the years ended June 30, 2015, 2016 and 2017, our equity earnings in the joint venture were less than $0.1 million.
We, our Chairman and Chief Executive Officer and our Executive Vice President and President of OSI Solutions
Business and Director collectively control less than 50% of the board of directors voting power in the joint venture.
As a result, we account for the investment under the equity method of accounting. The joint venture was formed for
the purpose of the manufacture, assembly, service and testing of security and inspection systems and other
products. Some of our subsidiaries are suppliers to the joint venture partner, which in turn manufactures and sells
the resulting products. Sales to the joint venture partner for fiscal 2015, 2016 and 2017 were approximately
$7.3 million, $9.1 million and $10.2 million, respectively. Receivables from the joint venture were $3.6 million and
$4.0 million as of June 30, 2016 and 2017, respectively.
We have contracted with entities owned by our Chief Executive Officer and/or his family members to provide
warehousing and consulting services. Such expenses for 2016 and 2017 were approximately $34,000 and $18,000,
respectively; there were no expenses during 2015.
13. EMPLOYEE BENEFIT PLANS
Employee Retirement Savings Plans
We have various qualified employee retirement savings plans. Participants can contribute certain amounts to
the plans and we match a certain portion of employee contributions. We contributed approximately $4.5 million,
$4.6 million and $5.0 million to the plans for the fiscal years ended June 30, 2015, 2016 and 2017, respectively.
Deferred Compensation Plan
We have a deferred compensation plan, which meets the requirements for deferred compensation under
Section 409A of the Internal Revenue Code. The plan provides that selected employees are eligible to defer up to
80% of their salaries and up to 100% of their bonuses. We may also make employer contributions to participant
accounts in certain circumstances. The benefits under this plan are unsecured. Participants are generally eligible to
receive payment of their vested benefit at the end of their elected deferral period or after termination of their
employment for any reason or at a later date to comply with the restrictions of Section 409A. Discretionary
company contributions and the related earnings are subject to a vesting schedule dependent upon years of service to
us and, also, vest completely upon the participant’s disability or death while employed by us or immediately prior to
a change of control. We made contributions of $0.7 million, $0.6 million and $0.6 million during fiscal year 2015,
2016 and 2017, respectively. As of June 30, 2017, we held assets of $19.3 million and liabilities of $19.6 million
related to this plan. Assets related to this plan are included in other assets and liabilities related to this plan are
included in other long-term liabilities in the consolidated balance sheets. The plan liabilities include accrued
employer contributions not yet funded to the plan.
We sponsor a number of qualified and nonqualified pension plans for our employees at certain locations. In
accordance with accounting standards for employee pension and postretirement benefits, we fully recognize the
overfunded or underfunded status of each of our defined benefit plans as an asset or liability in the consolidated
balance sheets. The asset or liability equals the difference between the fair value of the plans’ assets and their
benefit obligations. The liabilities associated with underfunded plans are classified as noncurrent, except to the
extent the fair value of the plans’ assets is less than the plans’ estimated benefit payments over the next 12 months.
We measure our pension and postretirement benefit plans’ assets and benefit obligations as of June 30.
The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets
for fiscal years 2016 and 2017, and a statement of the funded status as of June 30, 2016 and 2017 (in thousands):
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2017
$13,896
(933)
582
(1,187)
1,226
(279)
$13,305
(88)
453
—
435
(379)
Benefit obligation at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,305
13,726
Change in Plan Assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,090
(923)
488
55
(1,500)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,210
5,210
(122)
745
65
(343)
5,555
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,095)
—
(8,171)
—
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (8,095) $ (8,171)
Amount recognized in consolidated balance sheets consists of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
648
(8,581)
2,792
$
759
(8,051)
2,016
F-38
F-39
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following table provides the net periodic benefit costs for each of the fiscal years ended June 30, (in
thousands):
Net Periodic Benefit Costs
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2016
2017
$
34
671
(418)
615
204
$ — $ —
453
(200)
279
317
582
(303)
420
43
Net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,106
$ 742
$ 849
Plan Assumptions
Weighted average assumptions at year-end:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5% 3.4%
4.8% 3.8%
2.9% 3.0%
2016
2017
The long term return on assets has been derived from the weighted average of assumed returns on each of the
major asset categories. The weighted average is based on the actual proportion of each major asset class held, rather
than a benchmark portfolio of assets. The expected returns for each major asset class have been derived from a
combination of both historical market returns and current market data as well as the views of a range of investment
managers.
Plan Assets and Investment Policy
Fiscal year ended
June 30, 2016
Fiscal year ended
June 30, 2017
Proportion of
Fair Value
Expected Rate
of Return
Proportion of
Fair Value
Expected Rate
of Return
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58%
32%
10%
Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
7%
2%
2%
4.8%
51%
41%
8%
100%
6%
2%
1%
3.8%
The defined benefit plans’ assets are invested in a range of pooled investment funds that provide access to a
diverse range of asset classes. The investment objective is to maximize the investment return over the long term
without exposing the fund to an unnecessary level of risk. Within this objective, it is recognized that benefits will be
secured by the purchase of annuities at the time of employee retirement.
The benchmark is to hold assets in both equity and debt securities. The proportion in each investment class is
not mandated and is allowed to fluctuate with market movements. The equity holdings are maintained in balanced
funds under the control of investment managers.
Day-to-day equities selection decisions are delegated to investment managers, although these are monitored
against performance and risk targets. Due to the nature of the pooled funds, there are no significant holdings in any
single company (greater than 5% of the total assets). The investment strategy is reviewed on a regular basis, based
on the results of third-party liability studies.
Projected Benefit Payments
The following table reflects estimated benefits payments, based upon the same assumptions used to measure
the benefit obligation and net pension cost, as of June 30, 2017 (in thousands):
July 1, 2017 to June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2018 to June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2019 to June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2020 to June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2021 to June 30, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2022 to June 30, 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 145
649
1156
1,173
1,167
6,172
Pension Benefits
Company Contribution
As of June 30, 2017, our weighted average contribution rate is under 1% of pensionable salaries. If our
contributions continue at the current rate, the estimated total company contributions for fiscal 2018 will be
approximately $0.1 million.
14. SEGMENT INFORMATION
We have determined that we operate 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). We also have a
corporate segment (Corporate) that includes executive compensation and certain other general and administrative
expenses; expenses related to stock issuances and legal, 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 supply components and subsystems to
OEM customers, 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.
F-40
F-41
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following table provides the net periodic benefit costs for each of the fiscal years ended June 30, (in
thousands):
Net Periodic Benefit Costs
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2016
2017
$
34
671
(418)
615
204
$ — $ —
453
(200)
279
317
582
(303)
420
43
Net periodic benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,106
$ 742
$ 849
Plan Assumptions
Weighted average assumptions at year-end:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5% 3.4%
4.8% 3.8%
2.9% 3.0%
2016
2017
The long term return on assets has been derived from the weighted average of assumed returns on each of the
major asset categories. The weighted average is based on the actual proportion of each major asset class held, rather
than a benchmark portfolio of assets. The expected returns for each major asset class have been derived from a
combination of both historical market returns and current market data as well as the views of a range of investment
managers.
Plan Assets and Investment Policy
Fiscal year ended
June 30, 2016
Fiscal year ended
June 30, 2017
Proportion of
Fair Value
Expected Rate
of Return
Proportion of
Fair Value
Expected Rate
of Return
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58%
32%
10%
Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
7%
2%
2%
4.8%
51%
41%
8%
100%
6%
2%
1%
3.8%
The defined benefit plans’ assets are invested in a range of pooled investment funds that provide access to a
diverse range of asset classes. The investment objective is to maximize the investment return over the long term
without exposing the fund to an unnecessary level of risk. Within this objective, it is recognized that benefits will be
secured by the purchase of annuities at the time of employee retirement.
The benchmark is to hold assets in both equity and debt securities. The proportion in each investment class is
not mandated and is allowed to fluctuate with market movements. The equity holdings are maintained in balanced
funds under the control of investment managers.
Day-to-day equities selection decisions are delegated to investment managers, although these are monitored
against performance and risk targets. Due to the nature of the pooled funds, there are no significant holdings in any
single company (greater than 5% of the total assets). The investment strategy is reviewed on a regular basis, based
on the results of third-party liability studies.
Projected Benefit Payments
The following table reflects estimated benefits payments, based upon the same assumptions used to measure
the benefit obligation and net pension cost, as of June 30, 2017 (in thousands):
July 1, 2017 to June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2018 to June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2019 to June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2020 to June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2021 to June 30, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2022 to June 30, 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 145
649
1156
1,173
1,167
6,172
Pension Benefits
Company Contribution
As of June 30, 2017, our weighted average contribution rate is under 1% of pensionable salaries. If our
contributions continue at the current rate, the estimated total company contributions for fiscal 2018 will be
approximately $0.1 million.
14. SEGMENT INFORMATION
We have determined that we operate 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). We also have a
corporate segment (Corporate) that includes executive compensation and certain other general and administrative
expenses; expenses related to stock issuances and legal, 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 supply components and subsystems to
OEM customers, 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.
F-40
F-41
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following tables present the operations and identifiable assets by industry segment (in thousands):
2015
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
Total revenues . . . . .
$481,087
$255,691
$221,424
$ —
$ —
$958,202
—
$481,087
—
$255,691
46,448
$267,872
—
$ —
(46,448)
(46,448)
—
$958,202
Income (loss) from operations .
$ 67,804
$ 24,666
$ 17,533
$(17,455)
$
(440)
$ 92,108
Segments assets . . . . . . . . . . .
$470,808
$223,412
$164,922
$ 82,789
$ (4,642)
$937,289
Capital expenditures . . . . . . . .
$
7,601
Depreciation and amortization .
$ 45,231
$
$
2,628
7,223
$
$
3,411
5,028
$ 1,646
$ —
$ 1,494
$ —
$ 15,286
$ 58,976
2016
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
$411,212
$211,458
$206,990
$ —
$ —
$829,660
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
—
—
40,512
—
(40,512)
—
Total revenues . . . . .
$411,212
$211,458
$247,502
$ —
(40,512)
$829,660
Income (loss) from operations .
$ 37,845
$
8,351
$ 19,654
$(27,199)
$
(277)
$ 38,374
Segments assets . . . . . . . . . . .
$519,068
$200,067
$211,337
$ 64,970
$ (3,719)
$991,723
Capital expenditures . . . . . . . .
$
8,910
Depreciation and amortization .
$ 43,257
$
$
2,395
7,401
$
$
4,539
5,842
$ 1,844
$ —
$ 17,688
$ 1,422
$ —
$ 57,922
2017
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
$555,197
$200,034
$205,720
$ —
$ —
$ 960,951
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
—
—
30,380
—
(30,380)
—
Total revenues . . . . .
$555,197
$200,034
$236,100
$ —
(30,380)
$ 960,951
Income (loss) from operations .
$ 35,256
$
2,624
$ 23,792
$(29,359)
$
979
$
33,292
Segments assets . . . . . . . . . . .
$785,230
$186,021
$196,567
$ 64,959
$ (2,690)
$1,230,087
Capital expenditures . . . . . . . .
$ 10,436
Depreciation and amortization .
$ 53,924
$
$
1,797
6,495
$
$
2,856
6,561
$ 2,007
$ —
$ 1,255
$ —
$
$
17,096
68,235
The following tables present the revenues and identifiable assets by geographical area (in thousands):
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2015
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$472,990
120,582
21,035
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
614,607
159,127
31,238
190,365
153,230
—
$ 6,583
—
—
6,583
333
—
333
39,532
(46,448)
$479,573
120,582
21,035
621,190
159,460
31,238
190,698
192,762
(46,448)
$ 48,203
154,939
6,158
209,300
31,467
1,472
32,939
14,320
N/A
$154,338
154,939
6,158
315,435
58,594
14,323
72,917
16,787
N/A
Total . . . . . . . . . . . . . . . . . . . .
$958,202
$ —
$958,202
$256,559
$405,139
F-42
F-43
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
The following tables present the operations and identifiable assets by industry segment (in thousands):
2015
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
Total revenues . . . . .
$481,087
$255,691
$221,424
$ —
$ —
$958,202
—
$481,087
—
$255,691
46,448
$267,872
—
$ —
(46,448)
(46,448)
—
$958,202
Income (loss) from operations .
$ 67,804
$ 24,666
$ 17,533
$(17,455)
$
(440)
$ 92,108
Segments assets . . . . . . . . . . .
$470,808
$223,412
$164,922
$ 82,789
$ (4,642)
$937,289
Capital expenditures . . . . . . . .
$
7,601
Depreciation and amortization .
$ 45,231
$
$
2,628
7,223
$
$
3,411
5,028
$ 1,646
$ —
$ 1,494
$ —
$ 15,286
$ 58,976
2016
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
$411,212
$211,458
$206,990
$ —
$ —
$829,660
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
—
—
40,512
—
(40,512)
—
Total revenues . . . . .
$411,212
$211,458
$247,502
$ —
(40,512)
$829,660
Income (loss) from operations .
$ 37,845
$
8,351
$ 19,654
$(27,199)
$
(277)
$ 38,374
Segments assets . . . . . . . . . . .
$519,068
$200,067
$211,337
$ 64,970
$ (3,719)
$991,723
Capital expenditures . . . . . . . .
$
8,910
Depreciation and amortization .
$ 43,257
$
$
2,395
7,401
$
$
4,539
5,842
$ 1,844
$ —
$ 17,688
$ 1,422
$ —
$ 57,922
2017
Optoelectronics
and
Healthcare Manufacturing
Division
Division
Corporate
Eliminations
Consolidated
Security
Division
$555,197
$200,034
$205,720
$ —
$ —
$ 960,951
Revenues:
External customer revenue
Revenue between product
segments . . . . . . . . . .
—
—
30,380
—
(30,380)
—
Total revenues . . . . .
$555,197
$200,034
$236,100
$ —
(30,380)
$ 960,951
Income (loss) from operations .
$ 35,256
$
2,624
$ 23,792
$(29,359)
$
979
$
33,292
Segments assets . . . . . . . . . . .
$785,230
$186,021
$196,567
$ 64,959
$ (2,690)
$1,230,087
Capital expenditures . . . . . . . .
$ 10,436
Depreciation and amortization .
$ 53,924
$
$
1,797
6,495
$
$
2,856
6,561
$ 2,007
$ —
$ 1,255
$ —
$
$
17,096
68,235
The following tables present the revenues and identifiable assets by geographical area (in thousands):
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2015
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$472,990
120,582
21,035
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
614,607
159,127
31,238
190,365
153,230
—
$ 6,583
—
—
6,583
333
—
333
39,532
(46,448)
$479,573
120,582
21,035
621,190
159,460
31,238
190,698
192,762
(46,448)
$ 48,203
154,939
6,158
209,300
31,467
1,472
32,939
14,320
N/A
$154,338
154,939
6,158
315,435
58,594
14,323
72,917
16,787
N/A
Total . . . . . . . . . . . . . . . . . . . .
$958,202
$ —
$958,202
$256,559
$405,139
F-42
F-43
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Additions
Balance at
beginning
of period
Charged
to costs
and expenses
Charged
Deductions-
in other
accounts Write-offs
Balance at
end of
period
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2016
Description
Balance for doubtful accounts:
Year ended June 30, 2015 . . . . . . . . . . . . .
$5,691
Year ended June 30, 2016 . . . . . . . . . . . . .
$5,900
Year ended June 30, 2017 . . . . . . . . . . . . .
$7,051
$ 340
$2,095
$2,872
$—
$—
$—
$131
$944
$360
$5,900
$7,051
$9,563
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$404,929
119,039
15,525
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
539,493
130,812
38,233
169,045
121,122
—
$ 5,803
—
—
5,803
1,128
—
1,128
33,581
(40,512)
$410,732
119,039
15,525
545,296
131,940
38,233
170,173
154,703
(40,512)
$ 40,855
115,954
5,193
162,002
25,505
11,556
37,061
14,765
N/A
$167,860
115,954
7,055
290,869
61,037
23,898
84,935
17,126
N/A
Total . . . . . . . . . . . . . . . . . . . .
$829,660
$ —
$829,660
$213,828
$392,930
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2017
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$478,791
119,910
14,886
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
613,587
185,803
33,202
219,005
128,359
—
$ 5,339
—
—
5,339
542
—
542
24,499
(30,380)
$484,130
119,910
14,886
618,926
186,345
33,202
219,547
152,858
(30,380)
$ 65,046
63,914
4,294
133,254
23,396
10,451
33,847
14,509
N/A
$380,200
63,914
6,127
450,241
61,319
13,868
75,187
16,762
N/A
Total . . . . . . . . . . . . . . . . . . . .
$960,951
$ —
960,951
$181,610
$542,190
Pursuant to Accounting Standards Codification 280 ‘‘Segment Reporting,’’ external revenues are attributed to
individual countries based upon the location of our selling entity.
*
*
*
*
*
*
F-44
F-45
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2017
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Additions
Balance at
beginning
of period
Charged
to costs
and expenses
Charged
Deductions-
in other
accounts Write-offs
Balance at
end of
period
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2016
Description
Balance for doubtful accounts:
Year ended June 30, 2015 . . . . . . . . . . . . .
$5,691
Year ended June 30, 2016 . . . . . . . . . . . . .
$5,900
Year ended June 30, 2017 . . . . . . . . . . . . .
$7,051
$ 340
$2,095
$2,872
$—
$—
$—
$131
$944
$360
$5,900
$7,051
$9,563
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$404,929
119,039
15,525
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
539,493
130,812
38,233
169,045
121,122
—
$ 5,803
—
—
5,803
1,128
—
1,128
33,581
(40,512)
$410,732
119,039
15,525
545,296
131,940
38,233
170,173
154,703
(40,512)
$ 40,855
115,954
5,193
162,002
25,505
11,556
37,061
14,765
N/A
$167,860
115,954
7,055
290,869
61,037
23,898
84,935
17,126
N/A
Total . . . . . . . . . . . . . . . . . . . .
$829,660
$ —
$829,660
$213,828
$392,930
External
revenues
Intersegment
revenues
Total
Consolidated
Long lived
tangible assets
Long lived
assets
2017
Geographic region:
United States . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
Other Americas . . . . . . . . . . . . . . . .
$478,791
119,910
14,886
Total Americas . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . .
Other Europe, Middle East and Africa
Total EMEA . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . .
613,587
185,803
33,202
219,005
128,359
—
$ 5,339
—
—
5,339
542
—
542
24,499
(30,380)
$484,130
119,910
14,886
618,926
186,345
33,202
219,547
152,858
(30,380)
$ 65,046
63,914
4,294
133,254
23,396
10,451
33,847
14,509
N/A
$380,200
63,914
6,127
450,241
61,319
13,868
75,187
16,762
N/A
Total . . . . . . . . . . . . . . . . . . . .
$960,951
$ —
960,951
$181,610
$542,190
Pursuant to Accounting Standards Codification 280 ‘‘Segment Reporting,’’ external revenues are attributed to
individual countries based upon the location of our selling entity.
*
*
*
*
*
*
F-44
F-45
SUPPLEMENTARY DATA
UNAUDITED QUARTERLY RESULTS
No.
EXHIBIT DESCRIPTION
INDEX TO EXHIBITS
The following tables present unaudited quarterly financial information for the four quarters ended June 30,
2016 and 2017 (in thousands, except per share data):
Quarter Ended
September 30,
2015
December 31, March 31,
2015
2016
June 30,
2016
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,050
132,079
$197,339
129,275
$210,804
140,745
$221,467
150,702
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . .
67,971
68,064
70,059
70,765
Operating expenses:
Selling, general and administrative . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Interest and other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
40,393
11,881
—
52,274
15,697
(794)
14,903
4,098
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,805
Basic earnings per common share . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . .
$
$
0.55
0.53
43,141
13,045
11,097
67,283
781
(623)
158
50
108
0.01
0.01
$
$
$
39,233
12,945
4,537
56,715
13,344
(666)
12,678
3,335
9,343
0.48
0.47
$
$
$
43,888
11,945
6,380
62,213
8,552
(796)
7,756
1,855
5,901
0.31
0.30
$
$
$
Quarter Ended
September 30,
2016
December 31, March 31,
2016
2017
June 30,
2017
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .
$220,855
152,768
$242,548
159,953
$245,146
159,118
$252,402
165,611
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . .
68,087
82,595
86,028
86,791
Operating expenses:
Selling, general and administrative . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Interest and other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . .
43,553
12,478
9,957
65,988
2,099
(1,158)
941
264
677
0.04
0.03
$
$
$
51,544
12,938
9,420
73,902
8,693
(1,981)
6,712
1,879
4,833
0.25
0.25
$
$
$
49,431
14,395
2,508
66,334
19,694
(489)
19,205
5,186
$ 14,019
$
$
0.83
0.80
$
$
$
48,032
11,140
24,813
83,985
2,806
(3,913)
(1,107)
(2,654)
1,547
0.08
0.08
F-46
2.1
2.2
3.1
3.2
4.1
4.2
4.3
10.1†
10.2†
10.3†
10.4†
10.5†
10.6
10.7
10.8
10.9
10.10
10.11
10.12†
10.13†
10.14†
10.15†
10.16†
Agreement and Plan of Merger, dated as of June 20, 2016, by and among OSI Systems, Inc.,
Apple Merger Sub, Inc. and American Science and Engineering, Inc. (19)
Equity Purchase Agreement, dated as of May 31, 2017, by and among OSI Systems, Inc., OSI
(Holdings) Company Limited, Smiths Detection, LLC, Smiths Detection United Kingdom
Limited, Smiths Detection (Australia) Pty Ltd, and Smiths Detection Group Limited (23)
Certificate of Incorporation of OSI Systems, Inc. (1)
Bylaws of OSI Systems, Inc. (1)
Form of Common Stock Certificate (1)
Indenture (including the form of Note) related to the 1.25% Convertible Senior Notes due 2022,
dated as of February 22, 2017, between OSI Systems, Inc. and Branch Banking and Trust
Company, as trustee (20)
Form of 1.25% Convertible Senior Note due 2022 (included in Exhibit 4.2) (20)
Amended and Restated OSI Systems, Inc. Deferred Compensation Plan (2)
OSI Systems, Inc. Nonqualified Defined Benefit Plan (3)
Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase Plan (4)
First Amendment to Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase
Plan (24)
Form of Indemnification Agreement for Directors and Executive Officers of OSI
Systems, Inc. (5)
Credit Agreement dated October 15, 2010, between Wells Fargo Bank, N.A. and OSI
Systems, Inc. (6)
First Amendment to Credit Agreement dated November 10, 2011, between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (7)
Second Amendment to Credit Agreement dated December 15, 2011, between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (8)
Third Amendment to Credit Agreement dated April 10, 2012, between Wells Fargo Bank, N.A.
and OSI Systems, Inc. (9)
Fourth Amendment to Credit Agreement dated May 28, 2014 between Wells Fargo Bank, N.A.
and OSI Systems, Inc. (10)
Fifth Amendment to Credit Agreement dated December 20, 2016 between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (21)
Amended and Restated 2006 Equity Participation Plan of OSI Systems, Inc. (11)
Employment Agreement effective as of January 1, 2012 between Deepak Chopra and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Deepak Chopra and
OSI Systems, Inc. (17)
Employment Agreement effective as of January 1, 2012 between Alan Edrick and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Alan Edrick and
OSI Systems, Inc. (17)
SUPPLEMENTARY DATA
UNAUDITED QUARTERLY RESULTS
No.
EXHIBIT DESCRIPTION
INDEX TO EXHIBITS
The following tables present unaudited quarterly financial information for the four quarters ended June 30,
2016 and 2017 (in thousands, except per share data):
Quarter Ended
September 30,
2015
December 31, March 31,
2015
2016
June 30,
2016
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,050
132,079
$197,339
129,275
$210,804
140,745
$221,467
150,702
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . .
67,971
68,064
70,059
70,765
Operating expenses:
Selling, general and administrative . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Interest and other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
40,393
11,881
—
52,274
15,697
(794)
14,903
4,098
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,805
Basic earnings per common share . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . .
$
$
0.55
0.53
43,141
13,045
11,097
67,283
781
(623)
158
50
108
0.01
0.01
$
$
$
39,233
12,945
4,537
56,715
13,344
(666)
12,678
3,335
9,343
0.48
0.47
$
$
$
43,888
11,945
6,380
62,213
8,552
(796)
7,756
1,855
5,901
0.31
0.30
$
$
$
Quarter Ended
September 30,
2016
December 31, March 31,
2016
2017
June 30,
2017
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .
$220,855
152,768
$242,548
159,953
$245,146
159,118
$252,402
165,611
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . .
68,087
82,595
86,028
86,791
Operating expenses:
Selling, general and administrative . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Interest and other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . .
43,553
12,478
9,957
65,988
2,099
(1,158)
941
264
677
0.04
0.03
$
$
$
51,544
12,938
9,420
73,902
8,693
(1,981)
6,712
1,879
4,833
0.25
0.25
$
$
$
49,431
14,395
2,508
66,334
19,694
(489)
19,205
5,186
$ 14,019
$
$
0.83
0.80
$
$
$
48,032
11,140
24,813
83,985
2,806
(3,913)
(1,107)
(2,654)
1,547
0.08
0.08
F-46
2.1
2.2
3.1
3.2
4.1
4.2
4.3
10.1†
10.2†
10.3†
10.4†
10.5†
10.6
10.7
10.8
10.9
10.10
10.11
10.12†
10.13†
10.14†
10.15†
10.16†
Agreement and Plan of Merger, dated as of June 20, 2016, by and among OSI Systems, Inc.,
Apple Merger Sub, Inc. and American Science and Engineering, Inc. (19)
Equity Purchase Agreement, dated as of May 31, 2017, by and among OSI Systems, Inc., OSI
(Holdings) Company Limited, Smiths Detection, LLC, Smiths Detection United Kingdom
Limited, Smiths Detection (Australia) Pty Ltd, and Smiths Detection Group Limited (23)
Certificate of Incorporation of OSI Systems, Inc. (1)
Bylaws of OSI Systems, Inc. (1)
Form of Common Stock Certificate (1)
Indenture (including the form of Note) related to the 1.25% Convertible Senior Notes due 2022,
dated as of February 22, 2017, between OSI Systems, Inc. and Branch Banking and Trust
Company, as trustee (20)
Form of 1.25% Convertible Senior Note due 2022 (included in Exhibit 4.2) (20)
Amended and Restated OSI Systems, Inc. Deferred Compensation Plan (2)
OSI Systems, Inc. Nonqualified Defined Benefit Plan (3)
Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase Plan (4)
First Amendment to Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase
Plan (24)
Form of Indemnification Agreement for Directors and Executive Officers of OSI
Systems, Inc. (5)
Credit Agreement dated October 15, 2010, between Wells Fargo Bank, N.A. and OSI
Systems, Inc. (6)
First Amendment to Credit Agreement dated November 10, 2011, between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (7)
Second Amendment to Credit Agreement dated December 15, 2011, between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (8)
Third Amendment to Credit Agreement dated April 10, 2012, between Wells Fargo Bank, N.A.
and OSI Systems, Inc. (9)
Fourth Amendment to Credit Agreement dated May 28, 2014 between Wells Fargo Bank, N.A.
and OSI Systems, Inc. (10)
Fifth Amendment to Credit Agreement dated December 20, 2016 between Wells Fargo Bank,
N.A. and OSI Systems, Inc. (21)
Amended and Restated 2006 Equity Participation Plan of OSI Systems, Inc. (11)
Employment Agreement effective as of January 1, 2012 between Deepak Chopra and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Deepak Chopra and
OSI Systems, Inc. (17)
Employment Agreement effective as of January 1, 2012 between Alan Edrick and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Alan Edrick and
OSI Systems, Inc. (17)
(6) Previously filed with our Current Report on Form 8-K filed on October 19, 2010.
(7) Previously filed with our Current Report on Form 8-K filed on November 10, 2011.
(8) Previously filed with our Quarterly Report on Form 10-Q filed on January 25, 2012.
(9) Previously filed with our Current Report on Form 8-K filed on April 11, 2012.
(10) Previously filed with our Current Report on Form 8-K filed on May 29, 2014.
(11) Previously filed with our Current Report on Form 8-K filed on December 1, 2010.
(12) Previously filed with our Current Report on Form 8-K filed on April 6, 2012.
(13) Previously filed with our Current Report on Form 8-K filed on May 1, 2012.
(14) Previously filed with our Proxy Statement on Schedule 14A filed on October 23, 2012.
(15) Previously filed with our Registration Statement on Form S-8 filed on August 16, 2013.
(16) Previously filed with our Current Report on Form 8-K filed on May 23, 2016.
(17) Previously filed with our Quarterly Report on Form 10-Q filed on January 28, 2016.
(18) Previously filed with our Quarterly Report on Form 10-Q filed on October 30, 2015.
(19) Previously filed with our Current Report on Form 8-K filed on June 21, 2016.
(20) Previously filed with our Current Report on Form 8-K filed on February 22, 2017.
(21) Previously filed with our Current Report on Form 8-K filed on December 21, 2016.
(22) Previously filed with our Quarterly Report on Form 10-Q filed on October 31, 2016.
(23) Previously filed with our Current Report on Form 8-K filed on June 1, 2017.
(24) Previously filed with our Proxy Statement on Schedule 14A filed on October 21, 2016.
No.
EXHIBIT DESCRIPTION
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†
10.25†
10.26†
14.1
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*
32.2*
101.1
Employment Agreement effective as of January 1, 2012 between Ajay Mehra and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of May 1, 2015 between Ajay Mehra and
OSI Systems, Inc. (18)
Employment Agreement effective as of January 1, 2012 between Victor Sze and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Victor Sze and OSI
Systems, Inc. (17)
Offer Letter dated April 1, 2015 between Pak Chin and OSI Systems, Inc. (22)
Retirement Benefit Award Agreement effective as of January 1, 2012 between Deepak Chopra
and OSI Systems, Inc. (13)
OSI Systems, Inc. 2012 Incentive Award Plan (14)
Form of Restricted Stock Award Agreement (15)
Form of Restricted Stock Unit Award Agreement (15)
Form of Stock Option Agreement (15)
OSI Systems, Inc. Code of Ethics and Conduct effective May 23, 2016 (16)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on the signature page of this Form 10-K)
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906
The following financial information from the Registrant’s Annual Report on Form 10-K for the
year ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language), as
follows:
(i)
the consolidated balance sheets
(ii)
the consolidated statements of operations
(iii) the consolidated statements of comprehensive income
(iv)
the consolidated statements of stockholders’ equity
(v)
the consolidated statements of cash flows
(vi) the notes to the consolidated financial statements, tagged in summary and detail
Filed herewith
Denotes a management contract or compensatory plan or arrangement.
*
†
(1) Previously filed with our Current Report on Form 8-K filed on March 8, 2010.
(2) Previously filed with our Quarterly Report on Form 10-Q filed on May 2, 2014.
(3) Previously filed with our Current Report on Form 8-K filed on October 10, 2008.
(4) Previously filed with our Quarterly Report on Form 10-Q filed on October 24, 2014.
(5) Previously filed with our Annual Report on Form 10-K filed on August 27, 2010.
(6) Previously filed with our Current Report on Form 8-K filed on October 19, 2010.
(7) Previously filed with our Current Report on Form 8-K filed on November 10, 2011.
(8) Previously filed with our Quarterly Report on Form 10-Q filed on January 25, 2012.
(9) Previously filed with our Current Report on Form 8-K filed on April 11, 2012.
(10) Previously filed with our Current Report on Form 8-K filed on May 29, 2014.
(11) Previously filed with our Current Report on Form 8-K filed on December 1, 2010.
(12) Previously filed with our Current Report on Form 8-K filed on April 6, 2012.
(13) Previously filed with our Current Report on Form 8-K filed on May 1, 2012.
(14) Previously filed with our Proxy Statement on Schedule 14A filed on October 23, 2012.
(15) Previously filed with our Registration Statement on Form S-8 filed on August 16, 2013.
(16) Previously filed with our Current Report on Form 8-K filed on May 23, 2016.
(17) Previously filed with our Quarterly Report on Form 10-Q filed on January 28, 2016.
(18) Previously filed with our Quarterly Report on Form 10-Q filed on October 30, 2015.
(19) Previously filed with our Current Report on Form 8-K filed on June 21, 2016.
(20) Previously filed with our Current Report on Form 8-K filed on February 22, 2017.
(21) Previously filed with our Current Report on Form 8-K filed on December 21, 2016.
(22) Previously filed with our Quarterly Report on Form 10-Q filed on October 31, 2016.
(23) Previously filed with our Current Report on Form 8-K filed on June 1, 2017.
(24) Previously filed with our Proxy Statement on Schedule 14A filed on October 21, 2016.
No.
EXHIBIT DESCRIPTION
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†
10.25†
10.26†
14.1
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*
32.2*
101.1
Employment Agreement effective as of January 1, 2012 between Ajay Mehra and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of May 1, 2015 between Ajay Mehra and
OSI Systems, Inc. (18)
Employment Agreement effective as of January 1, 2012 between Victor Sze and OSI
Systems, Inc. (12)
Amendment to Employment Agreement effective as of July 1, 2015 between Victor Sze and OSI
Systems, Inc. (17)
Offer Letter dated April 1, 2015 between Pak Chin and OSI Systems, Inc. (22)
Retirement Benefit Award Agreement effective as of January 1, 2012 between Deepak Chopra
and OSI Systems, Inc. (13)
OSI Systems, Inc. 2012 Incentive Award Plan (14)
Form of Restricted Stock Award Agreement (15)
Form of Restricted Stock Unit Award Agreement (15)
Form of Stock Option Agreement (15)
OSI Systems, Inc. Code of Ethics and Conduct effective May 23, 2016 (16)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on the signature page of this Form 10-K)
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906
The following financial information from the Registrant’s Annual Report on Form 10-K for the
year ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language), as
follows:
(i)
the consolidated balance sheets
(ii)
the consolidated statements of operations
(iii) the consolidated statements of comprehensive income
(iv)
the consolidated statements of stockholders’ equity
(v)
the consolidated statements of cash flows
(vi) the notes to the consolidated financial statements, tagged in summary and detail
Filed herewith
Denotes a management contract or compensatory plan or arrangement.
*
†
(1) Previously filed with our Current Report on Form 8-K filed on March 8, 2010.
(2) Previously filed with our Quarterly Report on Form 10-Q filed on May 2, 2014.
(3) Previously filed with our Current Report on Form 8-K filed on October 10, 2008.
(4) Previously filed with our Quarterly Report on Form 10-Q filed on October 24, 2014.
(5) Previously filed with our Annual Report on Form 10-K filed on August 27, 2010.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
OSI SYSTEMS, INC.
(Registrant)
Date: September 6, 2017
By:
/s/ ALAN EDRICK
Alan Edrick,
Executive Vice President & Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does
hereby constitute and appoint Deepak Chopra, Alan Edrick and Victor Sze, and each of them singly, our true and
lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities
indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do
all such things in our names and in our capacities as officers and directors to enable OSI Systems, Inc. to comply
with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission in connection therewith, hereby ratifying and confirming our signatures as they may be
signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons, on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ DEEPAK CHOPRA
Deepak Chopra
/s/ ALAN EDRICK
Alan Edrick
/s/ AJAY MEHRA
Ajay Mehra
/s/ WILLIAM F. BALLHAUS, JR.
William F. Ballhaus, Jr.
/s/ GERALD CHIZEVER
Gerald Chizever
/s/ STEVEN C. GOOD
Steven C. Good
/s/ JAMES B. HAWKINS
James B. Hawkins
/s/ MEYER LUSKIN
Meyer Luskin
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
September 6, 2017
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
September 6, 2017
Executive Vice President and Director
September 6, 2017
Director
Director
Director
Director
Director
II-1
September 6, 2017
September 6, 2017
September 6, 2017
September 6, 2017
September 6, 2017
(This page has been left blank intentionally.)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
OSI SYSTEMS, INC.
(Registrant)
Date: September 6, 2017
By:
/s/ ALAN EDRICK
Alan Edrick,
Executive Vice President & Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does
hereby constitute and appoint Deepak Chopra, Alan Edrick and Victor Sze, and each of them singly, our true and
lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities
indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do
all such things in our names and in our capacities as officers and directors to enable OSI Systems, Inc. to comply
with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission in connection therewith, hereby ratifying and confirming our signatures as they may be
signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons, on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ DEEPAK CHOPRA
Deepak Chopra
/s/ ALAN EDRICK
Alan Edrick
/s/ AJAY MEHRA
Ajay Mehra
/s/ WILLIAM F. BALLHAUS, JR.
William F. Ballhaus, Jr.
/s/ GERALD CHIZEVER
Gerald Chizever
/s/ STEVEN C. GOOD
Steven C. Good
/s/ JAMES B. HAWKINS
James B. Hawkins
/s/ MEYER LUSKIN
Meyer Luskin
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
September 6, 2017
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
September 6, 2017
Executive Vice President and Director
September 6, 2017
Director
Director
Director
Director
Director
II-1
September 6, 2017
September 6, 2017
September 6, 2017
September 6, 2017
September 6, 2017
(This page has been left blank intentionally.)
C O R P O R A T E I N F O R M A T I O N
BOARD OF DIRECTORS
Deepak Chopra
President, Chief Executive Officer and Chairman of the Board
INDEPENDENT AUDITORS
Moss Adams LLP
Los Angeles, California
Ajay Mehra
Executive Vice President and President of OSI Solutions Business
TRANSFER AGENT
Steven C. Good
Director
Meyer Luskin
Director
William F. Ballhaus, Jr.
Director
James B. Hawkins
Director
Gerald Chizever
Director
EXECUTIVE OFFICERS
Deepak Chopra
President, Chief Executive Officer and Chairman of the Board
Alan Edrick
Executive Vice President and Chief Financial Officer
Ajay Mehra
Executive Vice President and President of OSI Solutions Business
Victor Sze
Executive Vice President and General Counsel
Mal Maginnis
President, Rapiscan Systems
Manoocher Mansouri
President, OSI Optoelectronics and Manufacturing Division
Sujit Kumar
President, Healthcare Division
Shawn Thompson
President, OSI Electronics
Rick Merritt
Senior Vice President and Chief Human Resources Officer
Broadridge Corporate Issuer Solutions, Inc.
Philadelphia, PA
ANNUAL MEETING
The Annual Meeting of Stockholders will be held
at 10:00 a.m. Monday, December 11, 2017 at
12525 Chadron Avenue
Hawthorne, CA 90250
SAFE HARBOR STATEMENT
This Annual Report 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 state-
ments relate to the Company’s current expectations, beliefs, projec-
tions and similar expressions concerning matters that are not historical
facts and are not guarantees of future performance. Forward-looking
statements involve uncertainties, risks, assumptions and contingen-
cies, many of which are outside the Company’s control, that may cause
actual results to differ materially from those described in or implied
by any forward-looking statement. All forward-looking statements are
based on currently available information and speak only as of the date
on which they are made. The Company assumes no obligation to up-
date any forward-looking statement made in this Annual Report that
becomes untrue because of subsequent events, new information or
otherwise, except to the extent it is required to do so in connection
with its ongoing requirements under Federal securities laws. For a
further discussion of these and other factors that could cause the
Company’s future results to differ materially from any forward-looking
statements, see the section entitled “Risk Factors” in the Company’s
Form 10-K for the year ended June 30, 2017 and other risks described
therein and in documents subsequently filed by the Company from
time to time with the Securities and Exchange Commission.
t
e
n
.
t
o
v
i
p
g
b
w
w
w
/
i
.
i
s
r
e
n
t
r
a
P
t
o
v
i
P
g
B
y
b
n
g
s
e
D
t
r
o
p
e
R
i
l
a
u
n
n
A
12525 Chadron Ave nue
Hawth orne, Cali fornia 90250
w w w.o si-syst ems .com