What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-27 compared with 2022-10-28 · 79 added, 46 removed, 165 unchanged (43% of the section changed)

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together with our wholly-owned subsidiaries.

This management’s discussion and analysis of financial condition as of September 30, 2022 and results of operations for the three months ended September 30, 2022 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 filed with the SEC.

This management’s discussion and analysis of financial condition as of December 31, 2022 and results of operations for the three and six months ended December 31, 2022 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 filed with the SEC.

Forward-Looking Statements

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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 54% of our total consolidated revenues for the three months ended September 30, 2021 and 2022.

Revenues from our Security division accounted for 53% and 55% of our total consolidated revenues for the six months ended December 31, 2021 and 2022, respectively.

Healthcare Division .

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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 18% and 16% of our total consolidated revenues for the three months ended September 30, 2021 and 2022, respectively.

Revenues from our Healthcare division accounted for 19% and 16% of our total consolidated revenues for the six months ended December 31, 2021 and 2022, respectively.

Optoelectronics and Manufacturing Division .

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We provide our optoelectronic devices and electronics manufacturing services to OEM customers and to our own Security and Healthcare divisions.

Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 28% and 30% of our total consolidated revenues for the three months ended September 30, 2021 and 2022, respectively.

Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 28% and 29% of our total consolidated revenues for the six months ended December 31, 2021 and 2022, respectively.

Trends and Uncertainties

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There is substantial uncertainty regarding the duration, scope, and ultimate impact of the COVID-19 pandemic.

During the early stages of the pandemic and continuing to a lesser extent throughout the duration of the pandemic, our Healthcare division experienced increased demand for certain products as a result of COVID-19.

During the early stages of the pandemic, our Healthcare division experienced increased demand for certain products as a result of COVID-19.

In our Security division, throughout the pandemic, receipt of certain orders has been delayed, most notably with respect to our aviation and cargo products, and our revenues have been adversely impacted as a result of the pandemic.

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Healthcare Considerations.

As described above, our Healthcare division experienced some increased demand for its patient monitoring products as a result of the COVID-19 pandemic during the earlier stages of the pandemic that has continued to a lesser extent throughout the duration of the pandemic.

As described above, our Healthcare division experienced some increased demand for its patient monitoring products as a result of the COVID-19 pandemic during the earlier stages of the pandemic.

Increased healthcare capital purchases made in prior periods may result in fewer capital purchases in subsequent periods.

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Currency Exchange Rates.

On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 1.8% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to the strengthening of the U.S.

On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 1.7% for the six months ended December 31, 2022 compared to the six months ended December 31, 2021, primarily due to the strengthening of the U.S.

dollar against other foreign currencies in 2022.

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dollar against foreign currencies would positively impact our sales for the remainder of the year.

Results of Operations for the Three Months Ended September 30, 2021 (Q1 Fiscal 2022) Compared to the Three Months Ended September 30 , 2022 (Q1 Fiscal 2023) (amounts in millions)

Results of Operations for the Three Months Ended December 31, 2021 (Q2 Fiscal 2022) Compared to the Three Months Ended December 31 , 2022 (Q2 Fiscal 2023) (amounts in millions)

The table below and the discussion that follows are based upon the way in which we analyze our business.

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Total net revenues

Revenues for the Security division during the three months ended September 30, 2022 decreased year-over-year due to a reduction in product and service revenues of approximately $2.7 million and $1.8 million, respectively.

Approximately $3 million of this decrease is due to the negative year-over-year impact of foreign currency exchange rates on sales.

Revenues for the Healthcare division during the three months ended September 30, 2022 decreased year-over-year due to a reduction in patient monitoring sales of $6.9 million and a decrease in cardiology sales of $1.1 million, offset by an increase in service revenues of $1.0 million.

Revenues for the Optoelectronics and Manufacturing division during the three months ended September 30, 2022 increased year-over year as a result of an increase in revenue in our optoelectronics business of approximately $4.1 million, offset by a reduction in revenue of approximately $3.8 million in our contract manufacturing business.

Revenues for the Security division during the three months ended December 31, 2022 increased year-over-year due to increases in product and service revenues of approximately $13.8 million and $7.7 million, respectively.

The increase in both product and service revenue was primarily driven by increased sales of cargo and vehicle inspection systems which was partially offset by a decrease in aviation related revenues.

Revenues for the Healthcare division during the three months ended December 31, 2022 decreased year-over-year due to a reduction in patient monitoring sales of $7.3 million due in part to elevated demand related to COVID in the prior year period, a decrease in cardiology sales of $1.4 million and a decrease in service revenue of $0.2 million.

Revenues for the Optoelectronics and Manufacturing division during the three months ended December 31, 2022 increased year-over year as a result of an increase in revenue in our optoelectronics business and contract manufacturing business of approximately $2.5 million and $3.8 million, respectively.

Gross profit is impacted by sales volume, productivity, and changes in overall manufacturing-related costs, such as raw materials and component costs, warranty expense, provision for inventory, freight, and logistics.

Our cost of goods sold increased year-over-year primarily as a result of the mix of revenues and higher raw material and freight costs.

Gross profit as a percentage of net revenues during the quarter ended September 30, 2022 decreased on a year-over-year basis due to (i) a reduction in the Security division gross margins due to a less favorable sales mix and increased component, freight and travel costs, (ii) a reduction in sales in the Healthcare division, which carries the highest gross margin of our three divisions, and (iii) an increase in sales in the Optoelectronics and Manufacturing division, which carries the lowest gross margin of our three divisions.

Our cost of goods sold increased year-over-year primarily as a result of the increase in revenues and higher raw material costs.

Gross profit as a percentage of net revenues during the quarter ended December 31, 2022 decreased on a year-over-year basis due to (i) a reduction in the Security division gross margins due to a decrease in margin from product sales driven by a less favorable product mix and increased component costs, (ii) a reduction in sales in the Healthcare division, which carries the highest gross margin of our three divisions, and (iii) an increase in sales in the Optoelectronics and Manufacturing division, which carries the lowest gross margin of our three divisions.

Operating Expenses

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Our significant selling, general and administrative (SG&A) expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, and depreciation and amortization expense.

SG&A expense for the three months ended September 30, 2022 was $3.9 million lower than such expenses in the same prior-year period primarily due to reduced professional service fees, less commissions on lower sales, and favorable foreign exchange rates.

SG&A expense for the three months ended December 31, 2022 was $0.9 million lower than such expenses in the same prior-year period primarily due to reduced compensation costs offset primarily by a provision for bad debts compared to a bad debt recovery in the second quarter of fiscal 2022.

Research and development .

Research and development (R&D) expenses include research related to new product development and product enhancements.

R&D expense during the three months ended September 30, 2022 remained comparable to the same prior-year period with investments to support new product development initiatives primarily in our Security and Healthcare divisions.

R&D expense during the three months ended December 31, 2022 was approximately $0.5 million lower than such expenses in the same prior-year period primarily due to a decrease in outside services incurred by our Security and Healthcare divisions partially offset by increases in compensation and professional fees.

Impairment, restructuring and other charges.

Impairment, restructuring and other charges generally consist of charges relating to reductions in our workforce, facilities consolidation, impairment of assets, costs related to acquisition activity, legal charges and other non-recurring charges.

During the three months ended September 30, 2022, impairment, restructuring and other charges primarily consisted of $0.9 million for legal charges and $0.3 million in charges for employee terminations.

During the three months ended September 30, 2021, impairment, restructuring and other charges consisted of $2.2 million for legal charges net of insurance recoveries and $0.3 million in charges for employee terminations from operational efficiency activities.

During the three months ended December 31, 2022, impairment, restructuring and other charges primarily consisted of $1.9 million for legal charges and $0.2 million in charges for employee terminations.

During the three months ended December 31, 2021, impairment, restructuring and other charges primarily consisted of $0.5 million for legal charges and $0.3 million in charges for employee terminations.

Interest and other expense, net .

For the three months ended September 30, 2022, interest and other expense, net was $3.4 million as compared to $2.0 million in the same prior-year period.

This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during the three months ended September 30, 2022 in comparison with the levels of borrowing during the same period in the prior year.

The 1.25% convertible notes were outstanding for the first two months of the quarter and were retired on September 1, 2022 using borrowings from our credit facility.

For the three months ended December 31, 2022, interest and other expense, net was $5.2 million as compared to $2.2 million in the same prior-year period.

This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during the three months ended December 31, 2022 in comparison with the levels of borrowing during the same period in the prior year.

The 1.25% convertible notes that were previously outstanding during the three month period ended December 31, 2021 were retired in September 2022 using borrowings from our credit facility which carries a higher interest rate.

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, (v) tax holidays granted to certain of our international subsidiaries and (vi) discrete tax items.

For each of the three months ended September 30, 2021 and 2022, we recognized a provision for income taxes of $3.6 million.

The effective tax rates for the three months ended September 30, 2021 and 2022 were 15.9% and 24.4%, respectively.

During the three months ended September 30, 2021 and 2022, we recognized a net discrete tax benefit of $2.1 million and $0.1 million, respectively, related to equity-based compensation under ASU 2016-09.

For the three months ended December 31, 2022, we recognized a provision for income taxes of $4.0 million compared to $7.1 million for the comparable prior-year period.

The effective tax rates for the three months ended December 31, 2021 and 2022 were 26.3% and 19.5%, respectively.

During the three months ended December 31, 2022, we recognized a net discrete tax benefit of $0.4 million related to equity-based compensation under ASU 2016-09 and a benefit of $0.4 million from changes in prior year estimates.

During the three-month periods ended December 31, 2021, we recognized a net discrete tax provision of $0.3 million for changes in prior year tax estimates and equity-based compensation under ASU 2016-09.

Results of Operations for the Six Months Ended December 31, 2021 (YTD Q2 Fiscal 2022) Compared to the Six Months Ended December 31, 2022 (YTD Q2 Fiscal 2023) (amounts in millions)

The table below and the discussion that follows are based upon the way in which we analyze our business.

See Note 12 to the condensed consolidated financial statements for additional information about our business segments.

Optoelectronics and Manufacturing

Total net revenues

Revenues for the Security division during the six months ended December 31, 2022 increased year-over-year due to an increase in product and service revenues of approximately $11.1 million and $5.9 million, respectively.

The increase in both product and service revenue was primarily driven by increased sales of cargo and vehicle inspection systems which was partially offset by a decrease in aviation related revenues.

Revenues for the Healthcare division during the six months ended December 31, 2022 decreased year-over-year due to a reduction in patient monitoring sales of $14.1 million due in part to elevated demand related to COVID in the prior year period, and a decrease in cardiology sales of $2.5 million, offset by an increase in service revenues of $0.8 million.

Revenues for the Optoelectronics and Manufacturing division during the six months ended December 31, 2022 increased year-over year as a result of an increase in revenue in our optoelectronics business of approximately $6.6 million.

Our cost of goods sold increased year-over-year primarily as a result of the increase in revenues and higher raw material costs.

Gross profit as a percentage of net revenues during the six months ended December 31, 2022 decreased on a year-over-year basis due to (i) a reduction in the Security division gross margins due to a decrease in margin from product sales driven by a less favorable product mix and increased component costs, (ii) a reduction in sales in the Healthcare division, which carries the highest gross margin of our three divisions, and (iii) an increase in sales in the Optoelectronics and Manufacturing division, which carries the lowest gross margin of our three divisions .

Operating Expenses

Selling, general and administrative

Research and development

Impairment, restructuring and other charges, net

Total operating expenses

Selling, general and administrative .

SG&A expense for the six months ended December 31, 2022 was $4.8 million lower than such expenses in the same prior-year period primarily due to a reduction in compensation, professional fees and favorable foreign exchange rates partially offset by a provision for bad debts compared to a bad debt recovery in the prior period.

Research and development .

R&D expense during the six months ended December 31, 2022 decreased as compared to the same prior-year period primarily due to a decrease in outside services partially offset by increases in compensation and travel in our Security and Healthcare divisions.

Impairment, restructuring and other charges.

During the six months ended December 31, 2022, impairment, restructuring and other charges primarily consisted of $2.9 million in legal charges primarily relating to government investigations and $0.5 million for employee terminations.

During the six months ended December 31, 2021, impairment, restructuring and other charges consisted of $2.7 million for legal charges and $0.7 million in charges for employee terminations.

Interest and other expense, net .

For the six months ended December 31, 2022, interest and other expense, net was $8.6 million as compared to $4.2 million in the same prior-year period.

This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during the six months ended December 31, 2022 in comparison with the levels of borrowing during the same period in the prior year.

The 1.25% convertible notes that were previously outstanding during the six-month period ended December 31, 2021 were retired in September 2022 using borrowings from our credit facility which carries a higher interest rate.

Income taxes .

For the six months ended December 31, 2022, we recognized a provision for income taxes of $7.6 million compared to $10.7 million for the comparable prior-year period.

The effective tax rates for the six months ended December 31, 2021 and 2022 were 21.6% for both periods.

During the six months ended December 31, 2022, we recognized discrete tax benefit of $0.5 million related to equity-based compensation under ASU 2016-09 and $0.4 million from changes in prior year estimates.

During the six months ended December 31, 2021, we recognized a net discrete tax benefit of $1.8 million, which was comprised of $2.0 million related to equity-based compensation under ASU 2016-09 partially offset by a discrete tax expense for prior year tax estimates of $0.2 million.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit facilities.

Cash and cash equivalents totaled $54.0 million at September 30, 2022, a decrease of $10.2 million, or 15.9%, from $64.2 million at June 30, 2022.

Cash and cash equivalents totaled $45.6 million at December 31, 2022, a decrease of $18.6 million, or 29.0%, from $64.2 million at June 30, 2022.

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 the foreseeable future.

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subsidiaries, and our credit facilities will be sufficient to satisfy our obligations in the U.S.

We have a $750 million credit facility that is comprised of a $600 million revolving credit facility, which includes a $300 million sub-facility for letters of credit, and a $150 million delayed draw term loan.

The term loan was available to us to draw through September 1, 2022.

As of September 30, 2022, there was $215.0 million outstanding under our revolving credit facility, $150 million outstanding under the term loan and $67.2 million of outstanding letters of credit.

We have a $750 million credit facility that is comprised of a $600 million revolving credit facility, which includes a $300 million sub-facility for letters of credit, and a $150 million term loan.

As of December 31, 2022, there was $235.0 million outstanding under our revolving credit facility, $146.9 million outstanding under the term loan and $66.8 million of outstanding letters of credit.

As of December 31, 2022, the total amount available under these credit facilities was $298.2 million.

Cash Provided by (Used in) 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 the three months ended September 30, 2022, we generated cash from operations of $17.2 million compared to $11.0 million of cash used in the same prior-year period.

The increase was driven by increases from changes in accounts payable, advances from customers, deferred revenue and other changes in net working capital.

During the six months ended December 31, 2022, we generated cash from operations of $8.2 million compared to $3.4 million of cash generated in the same prior-year period.

The increase was driven primarily by the positive impact in working capital changes.

Cash Used in Investing Activities .

Net cash used in investing activities was $9.1 million for the three months ended September 30, 2022 as compared to $7.8 million in the same prior-year period.

Cash used to acquire businesses was $1.9 million during the three-month period ended September 30, 2022 compared to nil in the prior year.

Capital expenditures in the three-month period ended September 30, 2022 were $3.3 million compared to $3.5 million in the same prior-year period.

Expenditures for intangible and other assets in the three-month period ended September 30, 2022 were $3.9 million compared to $4.3 million in the same prior-year period.

Cash Used in Financing Activities .

Net cash used in financing activities was $13.9 million during the three months ended September 30, 2022, compared to $7.2 million during the same prior-year period.

The increase in cash used in financing activities was due to the increase in net payments on long-term debt by $142 million that was partially offset by the increase in net borrowings on bank lines of credit by $129 million.

Cash used to repurchase common stock and taxes paid related to the net share settlement of equity awards was $28.4 million in the three-month period ended September 30, 2022 compared to $34.8 million in the same prior-year period.

Net cash used in investing activities was $18.9 million for the six months ended December 31, 2022 as compared to $15.4 million in the same prior-year period.

Cash used to acquire businesses was $3.5 million during the six-month period ended December 31, 2022 compared to nil in the prior year.

Capital expenditures in the six-month period ended December 31, 2022 were $7.0 million compared to $7.4 million in the same prior-year period.

Expenditures for intangible and other assets in the six-month period ended December 31, 2022 were $8.0 million compared to $8.1 million in the same prior-year period.

Cash Provided by (Used in) Financing Activities .

Net cash used in financing activities was $3.7 million during the six months ended December 31, 2022 compared to net cash provided by financing activities of $17.6 million during the same prior-year period.

The increase in cash used in financing activities was due to the increase in net payments on long-term debt by $145 million, of which $242.3 million pertains to the repurchase and cancellation of the 1.25% Convertible Senior Notes utilizing proceeds of the senior secured credit facility, that was partially offset by the increase in net borrowings on bank lines of credit by $93 million.

Cash used to repurchase of common stock and taxes paid related to the net settlement of equity awards was $33.4 million in the six-months ended December 31, 2022 compared to $64.4 in the same prior-year period.

See Note 8 to the condensed consolidated financial statements for a detailed discussion regarding our credit facility and our Notes.

Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $54.0 million at September 30, 2022.

Our cash and cash equivalents totaled $45.6 million at December 31, 2022.

Of this amount, approximately 98% was held by our foreign subsidiaries and subject to repatriation tax considerations.

These foreign funds were held primarily by our subsidiaries in the United Kingdom, Singapore, Malaysia, Canada and India and, to a lesser extent, in Australia, Albania, Indonesia and Mexico among others.

These foreign funds were held primarily by our subsidiaries in the United Kingdom, Singapore, Malaysia, Mexico, Canada and India and, to a lesser extent, in Indonesia, Albania and Australia.

We intend to permanently reinvest certain earnings from foreign operations, and we currently do not anticipate that we will need this cash in foreign countries to fund our U.S.

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Issuer Purchases of Equity Securities

The following table contains information about the shares of common stock we purchased during the quarter ended September 30, 2022:

The following table contains information about the shares of common stock we purchased during the quarter ended December 31, 2022:

Maximum number (or

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under the plans or

July 1 to July 31, 2022

August 1 to August 31, 2022

September 1 to September 30, 2022

October 1 to October 31, 2022

November 1 to November 30, 2022

December 1 to December 31, 2022

(1) In April 2020, the Board of Directors authorized a share repurchase program of up to 1,000,000 shares of common stock.

In August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares authorized under the stock repurchase program.

In August 2020, the Board of Directors increased to 3,000,000 shares the maximum number of shares authorized under the stock repurchase program.

In September 2022, when there were 1,131,301 shares remaining authorized and yet to be repurchased under the plan, the Board of Directors renewed the authorization and revised the maximum number of shares to 2,000,000 shares authorized under the stock repurchase program.

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Contractual Obligations

During the three months ended September 30, 2022, there were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

During the six months ended December 31, 2022, there were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis