What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-01-26 compared with 2023-10-27 · 86 added, 44 removed, 148 unchanged (47% of the section changed)

2 unchanged sentences

together with our wholly-owned subsidiaries.

This management’s discussion and analysis of financial condition as of September 30, 2023 and results of operations for the three months ended September 30, 2023 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, 2023 filed with the SEC.

This management’s discussion and analysis of financial condition as of December 31, 2023 and results of operations for the three and six months ended December 31, 2023 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, 2023 filed with the SEC.

Forward-Looking Statements

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for weapons, explosives, drugs, radioactive and nuclear materials and other contraband.

Revenues from our Security division accounted for 54% and 59% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.

Revenues from our Security division accounted for 55% and 64% of our total consolidated revenues for the six months ended December 31, 2022 and 2023, respectively.

Optoelectronics and Manufacturing Division .

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We also 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 30% and 28% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.

Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 29% and 24% of our total consolidated revenues for the six months ended December 31, 2022 and 2023, 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 16% and 13% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.

Revenues from our Healthcare division accounted for 16% and 12% of our total consolidated revenues for the six months ended December 31, 2022 and 2023, respectively.

Trends and Uncertainties

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The House and Senate continue the legislative process on the FY 2024 budget.

The President signed a continuing resolution to fund the U.S government at FY 2023 levels through the earlier of November 17, 2023 or until FY 2024 appropriations bills are enacted.

The President signed a continuing resolution to fund the U.S government at FY 2023 levels through the earlier of March 8, 2024 or until FY 2024 appropriations bills are enacted.

During periods covered by continuing resolutions, we may experience delays in new awards of our products and services, and those delays may adversely affect our results of operations.

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Currency Exchange Rates.

On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 1.9% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the strengthening of the U.S.

On a year-over-year basis, currency exchange rates positively impacted reported sales by approximately 2.6% for the six months ended December 31, 2023 compared to the six months ended December 31, 2022, primarily due to the weakening of the U.S.

dollar against other foreign currencies in 2023.

Any further strengthening of the U.S.

dollar against foreign currencies would adversely impact our sales for the remainder of the year, and any weakening of the U.S.

Any strengthening of the U.S.

dollar against foreign currencies would adversely impact our sales for the remainder of the year, and any further weakening of the U.S.

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

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During fiscal year 2023, our Security division was awarded two significant international contracts valued in aggregate greater than $700 million with expected revenues to be recognized over multiple years.

Results of Operations for the Three Months Ended September 30, 2022 (Q1 Fiscal 2023) Compared to the Three Months Ended September 30, 2023 (Q1 Fiscal 2024) (amounts in millions)

Results of Operations for the Three Months Ended December 31, 2022 (Q2 Fiscal 2023) Compared to the Three Months Ended December 31, 2023 (Q2 Fiscal 2024) (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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Revenues for the Security division during Q2 fiscal 2024 increased year-over-year due to increases in product and service revenues of approximately $79.8 million and $2.7 million, respectively.

The increase in product revenue was primarily driven by delivery of systems for our new contracts in Mexico.

The increase in product revenue was primarily driven by growth in cargo and vehicle inspection systems sales.

The increase in service revenue was due primarily to the increase in the installed base of products.

Revenues for the Optoelectronics and Manufacturing division during Q1 fiscal 2024 decreased year-over year as a result of a decrease in revenue in our optoelectronics business of approximately $4.5 million, offset by an increase in revenue of approximately $1.8 million in our contract manufacturing business.

Revenues for the Healthcare division during Q1 fiscal 2024 decreased year-over-year due to a reduction in patient monitoring sales of $6.2 million offset by an increase in cardiology sales of $0.6 million.

Revenues for the Optoelectronics and Manufacturing division during Q2 fiscal 2024 decreased year-over year as a result of a decrease in revenue in our optoelectronics business and contract manufacturing business of approximately $2.6 million and $0.7 million, respectively.

Revenues for the Healthcare division during Q2 fiscal 2024 decreased year-over-year due primarily to a reduction in patient monitoring sales of $4.8 million, partially offset by an increase in service revenue of $1.5 million, cardiology sales of $1.1 million, and supplies and accessories revenue of $0.5 million.

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 increase in net revenues described above which was driven by our Security division.

Gross profit as a percentage of net revenues during the quarter ended September 30, 2023 increased on a year-over-year basis due to an increase in the Security division gross margins due to a more favorable sales mix partially offset by a reduction in the sales in the Healthcare division, which carries the highest gross margin of our three divisions.

Gross profit as a percentage of net revenues during the quarter ended December 31, 2023 increased on a year-over-year basis due to an increase in the Security division gross margins due to a more favorable sales mix and economies of scale associated with the increase in net revenues, partially offset by a reduction in the sales in the Healthcare division, which carries the highest gross margin of our three divisions.

Operating Expenses

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Research and development

Impairment, restructuring and other charges, net

Restructuring and other charges, net

Total 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, foreign currency translation, changes in fair value of contingent earnout liabilities and depreciation and amortization expense.

SG&A expense for Q1 fiscal 2024 was $6.4 million higher than in the same prior-year period primarily due to a benefit recognized in the prior year attributable to favorable foreign exchange rates and lower recovery of losses on accounts receivable in Q1 fiscal 2024 compared to the same prior-year period.

SG&A expense for Q2 fiscal 2024 increased on a year-over-year basis primarily due to increases in employee compensation, professional services and provision for losses on accounts receivable partially offset by favorable foreign currency exchange rates in Q2 fiscal 2024 compared to the same prior-year period.

Research and development.

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

R&D expense during Q1 fiscal 2024 was $1.4 million higher than the same prior-year period with investments to support new product development initiatives primarily in our Security and Healthcare divisions.

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, and other non-recurring charges.

During Q1 fiscal 2024, impairment, restructuring and other charges consisted of $0.2 million for acquisition activity and $0.3 million in charges for employee terminations, legal charges and other costs.

During Q1 fiscal 2023, impairment, restructuring and other charges consisted of $0.9 million for legal charges and $0.3 million in charges for employee terminations from operational efficiency activities.

R&D expense during Q2 fiscal 2024 was $1.8 million higher than the same prior-year period with investments to support new product development initiatives primarily in our Security and Healthcare divisions driven primarily by compensation costs.

Restructuring and other charges.

Restructuring and other charges generally consist of charges relating to reductions in our workforce, facilities consolidation, costs related to acquisition activity, and other non-recurring charges.

During Q2 fiscal 2024, restructuring and other charges consisted of $0.2 million in acquisition related costs, $0.3 million in legal charges, $0.3 million for facility closure costs for operational efficiency activities, and $0.2 million for employee terminations.

During Q2 fiscal 2023, restructuring and other charges primarily consisted of $1.9 million for legal charges and $0.2 million in charges for employee terminations.

Interest and Other Expense, Net

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For Q2 fiscal 2024, interest and other expense, net was $6.5 million as compared to $5.2 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 Q1 fiscal 2024 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 ended September 30, 2022 and were retired on September 1, 2022 using borrowings from our credit facility.

Interest expense for Q1 fiscal 2024 and 2023 included a benefit of $0.9 million and an expense of $0.1 million, respectively, from the interest rate swap.

This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during Q2 fiscal 2024 in comparison with the same period in the prior year.

Interest expense for Q2 fiscal 2024 and 2023 included a benefit of $0.9 million and $0.2 million, respectively, from the interest rate swap.

Income taxes .

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The effective tax rates for Q2 fiscal 2024 and 2023 were 20.2% and 19.5%, respectively.

During the Q1 fiscal 2024 and 2023, we recognized a net discrete tax benefit of $0.4 million and $0.1 million, respectively, related to equity-based compensation under ASU 2016-09.

During Q2 fiscal 2024, we recognized a net discrete tax benefit of $0.2 million related to equity-based compensation under ASU 2016-09 and a benefit of $2.3 million from changes in prior year estimates.

During Q2 fiscal 2023, 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.

Results of Operations for the Six Months Ended December 31, 2022 (YTD Q2 Fiscal 2023) Compared to the Six Months Ended December 31, 2023 (YTD Q2 Fiscal 2024) (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 YTD Q2 fiscal 2024 increased year-over-year due to an increase in product and service revenues of approximately $92.1 million and $10.1 million, respectively.

The increase in product revenue was primarily driven by growth in cargo and vehicle inspection systems sales.

The increase in service revenue was due primarily to the increase in the installed base of products.

Revenues for the Optoelectronics and Manufacturing division during YTD Q2 fiscal 2024 decreased year-over year as a result of a decrease in revenue in our optoelectronics business of approximately $7.0 million, partially offset by an increase in revenue of approximately $1.1 million in our contract manufacturing business.

Revenues for the Healthcare division during YTD Q2 fiscal 2024 decreased year-over-year due to a reduction in patient monitoring sales of $11.9 million, partially offset by an increase in service revenue of $2.6 million.

cardiology sales of $1.5 million and supplies and accessories revenue of $0.3 million.

Our cost of goods sold increased year-over-year primarily as a result of the increase in net revenues described above which was driven by our Security division.

Gross profit as a percentage of net revenues YTD Q2 fiscal 2024 increased on a year-over-year basis due to an increase in the Security division gross margins due to a more favorable sales mix and economies of scale associated with the increase in net revenues, partially offset by a reduction in the sales in the Healthcare division, which carries the highest gross margin of our three divisions.

Operating Expenses

Selling, general and administrative

Research and development

Restructuring and other charges, net

Total operating expenses

Selling, general and administrative .

SG&A expense YTD fiscal 2024 was $24.0 million higher than in the same prior-year period, primarily due to increases employee compensation, professional services, provision for losses on accounts receivable, changes in fair value of certain contingent earnout liabilities, and unfavorable impact of foreign currency exchange rates in YTD fiscal 2024 compared to the same prior-year period.

Research and development.

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

R&D expense YTD Q2 fiscal 2024 was $3.3 million higher than the same prior-year period driven primarily by compensation costs related to investments to support new product development initiatives mainly in our Security and Healthcare divisions.

Restructuring and other charges.

Restructuring and other charges generally consist of charges relating to reductions in our workforce, facilities consolidation, costs related to acquisition activity, and other non-recurring charges.

For YTD Q2 fiscal 2024, restructuring and other charges consisted of $0.4 million in acquisition related costs, $0.4 million in legal charges, $0.3 million for facility closure costs for operational efficiency activities, and $0.3 million for employee terminations.

For YTD Q2 fiscal 2023, restructuring and other charges primarily consisted of $2.9 million for legal charges and $0.5 million in charges for employee terminations.

Interest and Other Expense, Net

Interest and other expense, net

Interest and other expense, net .

For YTD Q2 fiscal 2024, interest and other expense, net was $12.3 million as compared to $8.6 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 YTD Q2 fiscal 2024 in comparison with the same period in the prior year.

The 1.25% convertible notes were retired on September 1, 2022 using borrowings from our credit facility.

Interest expense for YTD Q2 fiscal 2024 and 2023 included a benefit of $1.8 million and nil, respectively, from the interest rate swap.

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 YTD Q2 fiscal 2024 and 2023, we recognized a provision for income taxes of $13.2 million and $7.6 million, respectively.

The effective tax rates for YTD Q2 fiscal 2024 and 2023 were 21.0% and 21.6%, respectively.

For YTD Q2 fiscal 2024, we recognized a discrete tax benefit of $0.6 million related to equity-based compensation under ASU 2016-09 and a benefit of $2.3 million from changes in prior year estimates.

For YTD Q2 fiscal 2023, we recognized a discrete tax benefit of $0.5 million related to equity-based compensation under ASU 2016-09 and a benefit of $0.4 million from changes in prior year tax estimates.

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 $82.6 million at September 30, 2023, an increase of $5.8 million, or 7.6%, from $76.8 million at June 30, 2023.

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 beyond that.

Cash and cash equivalents totaled $127.3 million at December 31, 2023, an increase of $50.5 million, or 65.8%, from $76.8 million at June 30, 2023.

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 thereafter for the foreseeable future.

In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S.

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 term loan.

The term loan was available to us to draw through December 2026.

As of September 30, 2023, there was $235.0 million outstanding under our revolving credit facility, $37.7 million of outstanding letters of credit, and $141.3 million outstanding under the term loan.

Cash Provided by Operating Activities.

Our senior secured credit facility comprises a term loan and a $600 million revolving credit facility which includes a $300 million sub-facility for letters of credit.

As of December 31, 2023, there was $316.0 million outstanding under our revolving credit facility, $54.0 million of outstanding letters of credit and $139.4 million outstanding under the term loan.

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 Q1 fiscal 2024, we generated cash from operations of $17.1 million which was consistent with the prior period.

The increase in net income in Q1 fiscal 2024 compared to the same period last year was offset by changes in net working capital.

For YTD Q2 fiscal 2024, cash used in operations was $6.4 million compared to cash provided by operations of $8.2 million in the prior period.

The net change in cash flows from operating activities was due primarily to a net increase in inventories associated with our recent international contracts in the Security division, partially offset by other changes in net working capital and the increase in net income in YTD Q2 fiscal 2024 compared with the same period last year.

Cash Used in Investing Activities .

Net cash used in investing activities was $9.6 million for Q1 fiscal 2024 as compared to $9.1 million in the same prior-year period.

Cash used to acquire businesses was nil during the three-month period ended September 30, 2023 compared to $1.9 in the prior year.

Capital expenditures in the three-month period ended September 30, 2023 were $5.2 million compared to $3.3 million in the same prior-year period.

Expenditures for intangible and other assets in the three-month period ended September 30, 2023 were $4.2 million compared to $3.9 million in the same prior-year period.

Cash Used in Financing Activities .

Net cash used in financing activities was $1.9 million during Q1 fiscal 2024, compared to $13.9 million during the same prior-year period.

The decrease in cash used in financing activities was due to (1) no repurchases of common stock during Q1 fiscal 2024 compared to $17.3 million in the same prior-year period and (2) higher net borrowings in Q1 fiscal 2024 compared to the same prior-year period, which were partially offset by higher taxes paid related to settlement of equity awards of $22.2 million during Q1 fiscal 2024 compared to $11.1 million in the same prior-year period.

Net cash used in investing activities was $21.8 million for YTD Q2 fiscal 2024 as compared to $18.9 million in the same prior-year period.

Cash used to acquire businesses was $9.0 million for YTD Q2 fiscal 2024 compared to $3.5 million in the prior year.

Capital expenditures for YTD Q2 fiscal 2024 were $8.7 million compared to $7.0 million in the same prior-year period.

Expenditures for intangible and other assets for YTD Q2 fiscal 2024 were $8.4 million compared to $8.0 million in the same prior-year period.

Cash Provided by (Used in) Financing Activities .

Net cash provided by financing activities was $77.1 million for YTD Q2 fiscal 2024, compared to net cash used in financing activities of $3.7 million during the same prior-year period.

The net change from the prior-year period was primarily due to (1) higher net borrowings for YTD Q2 fiscal 2024 to fund purchases of inventory as discussed above and (2) no repurchases of common stock during YTD Q2 fiscal 2024 compared to $21.8 million in the same prior-year period, which were partially offset by higher taxes paid related to settlement of equity awards of $23.0 million during YTD Q2 fiscal 2024 compared to $11.6 million in the same prior-year period.

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

Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $82.6 million at September 30, 2023.

Our cash and cash equivalents totaled $127.3 million at December 31, 2023.

Of this amount, approximately 92% 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, Qatar, Singapore, India, Malaysia and Canada, and to a lesser extent in Indonesia, Australia, Germany, Mexico and Egypt among other countries.

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

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

We did not repurchase any shares of Common Stock during the first quarter of fiscal year 2024.

We did not repurchase any shares of Common Stock during the first and second quarters of fiscal year 2024.

Contractual Obligations

During the first quarter of fiscal year 2024, 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, 2023.

During the six months ended December 31, 2023, 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, 2023.

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

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Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption.

There were no new pronouncements adopted in the first quarter of fiscal year 2024.

There were no new pronouncements adopted during the second quarter of fiscal year 2024.

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