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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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

Graphic

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

33-0238801

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

OSIS

The Nasdaq Global Select Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

   

Accelerated filer 

Non-accelerated filer 

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 

As of October 27, 2020, there were 17,920,788 shares of the registrant’s common stock outstanding.

Table of Contents

OSI SYSTEMS, INC.

INDEX

PAGE

PART I — FINANCIAL INFORMATION

3

Item 1 —

Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets at June 30, 2020 and September 30, 2020

3

Condensed Consolidated Statements of Operations for the three months ended September 30, 2019 and 2020

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2019 and 2020

5

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2019 and 2020

6

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2020

7

Notes to Condensed Consolidated Financial Statements

8

Item 2 —

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3 —

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4 —

Controls and Procedures

28

PART II — OTHER INFORMATION

29

Item 1 —

Legal Proceedings

29

Item 1A —

Risk Factors

29

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3 —

Defaults Upon Senior Securities

29

Item 4 —

Mine Safety Disclosures

29

Item 5 —

Other Information

29

Item 6 —

Exhibits

30

Signatures

31

2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share amounts and par value)

June 30, 

September 30, 

    

2020

    

2020

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

76,102

$

76,925

Accounts receivable, net

 

269,840

 

253,149

Inventories

 

241,226

 

255,434

Prepaid expenses and other current assets

 

30,541

 

29,285

Total current assets

 

617,709

 

614,793

Property and equipment, net

 

127,936

 

127,705

Goodwill

 

310,627

 

315,511

Intangible assets, net

 

128,279

 

134,781

Other assets

 

83,990

 

78,158

Total assets

$

1,268,541

$

1,270,948

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Bank lines of credit

$

59,000

$

51,000

Current portion of long-term debt

 

926

 

898

Accounts payable

 

84,940

 

92,605

Accrued payroll and related expenses

 

46,127

 

31,816

Advances from customers

 

28,155

 

41,117

Other accrued expenses and current liabilities

 

110,953

 

116,501

Total current liabilities

 

330,101

 

333,937

Long-term debt

 

267,072

 

269,356

Deferred income taxes

 

5,846

 

3,153

Other long-term liabilities

 

93,370

 

106,962

Total liabilities

 

696,389

 

713,408

Commitments and contingencies (Note 10)

STOCKHOLDERS' EQUITY:

Preferred stock, $0.001 par value— 10,000,000 shares authorized; no shares issued or outstanding

 

 

Common stock, $0.001 par value—100,000,000 shares authorized; issued and outstanding, 18,011,982 shares at June 30, 2020 and 17,912,541 shares at September 30, 2020

 

122,553

 

95,084

Retained earnings

 

474,793

 

484,137

Accumulated other comprehensive loss

 

(25,194)

 

(21,681)

Total stockholders’ equity

 

572,152

 

557,540

Total liabilities and stockholders’ equity

$

1,268,541

$

1,270,948

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended September 30, 

    

2019

    

2020

Net revenues:

    

    

Products

$

209,761

$

182,747

Services

 

81,091

 

72,161

Total net revenues

 

290,852

 

254,908

Cost of goods sold:

Products

 

146,342

 

124,841

Services

 

45,299

 

34,316

Total cost of goods sold

 

191,641

 

159,157

Gross profit

 

99,211

 

95,751

Operating expenses:

Selling, general and administrative

 

62,177

 

58,617

Research and development

 

14,246

 

12,082

Impairment, restructuring and other charges (benefit), net

 

(2,099)

 

8,359

Total operating expenses

 

74,324

 

79,058

Income from operations

 

24,887

 

16,693

Interest and other expense, net

 

(4,736)

 

(4,189)

Income before income taxes

 

20,151

 

12,504

(Provision) benefit for income taxes

 

592

 

(3,160)

Net income

$

20,743

$

9,344

Earnings per share:

Basic

$

1.14

$

0.52

Diluted

$

1.10

$

0.51

Shares used in per share calculation:

Basic

 

18,259

 

18,051

Diluted

 

18,903

 

18,335

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)

    

Three Months Ended September 30, 

2019

    

2020

Net income

$

20,743

$

9,344

Other comprehensive income (loss):

Foreign currency translation adjustment

 

(3,052)

 

3,454

Other

10

59

Other comprehensive income (loss)

(3,042)

3,513

Comprehensive income

$

17,701

$

12,857

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)

Three Months Ended September 30, 2019

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—June 30, 2019

 

18,167,020

$

168,913

$

399,541

$

(16,727)

$

551,727

Exercise of stock options

 

167,306

 

2,832

 

 

 

2,832

Vesting of RSUs

 

360,866

 

 

 

 

Shares issued under employee stock purchase program

 

34,837

 

2,065

 

 

 

2,065

Stock-based compensation expense

 

 

6,416

 

 

 

6,416

Repurchase of common stock

(126,051)

(13,262)

(13,262)

Taxes paid related to net share settlement of equity awards

 

(246,514)

 

(25,915)

 

 

 

(25,915)

Net income

 

 

 

20,743

 

 

20,743

Other comprehensive loss

 

 

 

 

(3,042)

 

(3,042)

Balance—September 30, 2019

18,357,464

$

141,049

$

420,284

$

(19,769)

$

541,564

Three Months Ended September 30, 2020

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—June 30, 2020

 

18,011,982

$

122,553

$

474,793

$

(25,194)

$

572,152

Exercise of stock options

 

69,195

80

80

Vesting of RSUs

 

286,701

Shares issued under employee stock purchase program

 

32,641

2,022

2,022

Stock-based compensation expense

 

6,109

6,109

Repurchase of common stock

(320,136)

(24,816)

(24,816)

Taxes paid related to net share settlement of equity awards

 

(167,842)

(10,864)

(10,864)

Net income

 

9,344

9,344

Other comprehensive income

 

3,513

3,513

Balance—September 30, 2020

17,912,541

$

95,084

$

484,137

$

(21,681)

$

557,540

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

Three Months Ended September 30, 

2019

2020

CASH FLOWS FROM OPERATING ACTIVITIES

    

    

    

Net income

$

20,743

$

9,344

Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions:

Depreciation and amortization

 

13,539

 

10,002

Stock-based compensation expense

 

6,416

 

6,109

Deferred income taxes

(3)

96

Amortization of debt discount and issuance costs

 

2,308

 

2,400

Impairment charges

552

Provision (benefit) for loss on accounts receivable

(221)

2,916

Other

 

160

 

16

Changes in operating assets and liabilities—net of business acquisitions:

Accounts receivable

 

(6,940)

 

14,356

Inventories

 

4,167

 

(14,278)

Prepaid expenses and other assets

 

(13,272)

 

3,377

Accounts payable

 

7,594

 

7,358

Accrued payroll and related expenses

(11,675)

(9,469)

Advances from customers

 

6,673

 

12,773

Deferred revenue

(4,459)

5,355

Other

 

(192)

 

2,925

Net cash provided by operating activities

 

24,838

 

53,832

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

 

(6,026)

 

(3,780)

Purchases of certificates of deposit

(1,815)

Proceeds from maturities of certificates of deposit

700

Acquisition of business, net of cash acquired

 

 

(3,000)

Payments for intangible and other assets

 

(2,088)

 

(4,446)

Net cash used in investing activities

 

(8,114)

 

(12,341)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (repayments) on bank lines of credit

 

7,000

 

(8,000)

Proceeds from long-term debt

 

198

 

156

Payments on long-term debt

 

(253)

 

(303)

Proceeds from exercise of stock options and employee stock purchase plan

 

4,897

 

2,102

Payments of contingent consideration

(144)

(121)

Repurchases of common stock

 

(13,262)

 

(24,816)

Taxes paid related to net share settlement of equity awards

 

(25,915)

 

(10,864)

Net cash used in financing activities

 

(27,479)

 

(41,846)

Effect of exchange rate changes on cash

 

(419)

 

1,178

Net change in cash and cash equivalents

 

(11,174)

 

823

Cash and cash equivalents—beginning of period

 

96,316

 

76,102

Cash and cash equivalents—end of period

$

85,142

$

76,925

Supplemental disclosure of cash flow information:

Cash paid, net during the period for:

Interest

$

2,986

$

3,015

Income taxes

$

4,098

$

1,735

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 filed with the SEC. The results of operations for the three months ended September 30, 2020 are not necessarily indicative of the operating results to be expected for the full 2021 fiscal year or any future periods.

Use of Estimates

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

Earnings Per Share Computations

We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income available to common stockholders by the sum of the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method. The underlying equity component of the 1.25% convertible senior notes due 2022 (the “Notes”) discussed in Note 8 to the condensed consolidated financial statements will have a net impact on diluted earnings per share when the average price of our common stock exceeds the conversion price because the principal amount of the Notes is intended to be settled in cash upon conversion. The dilutive effect of the Notes is included in the calculation below for the three months ended September 30, 2019. There was no dilutive effect of the Notes for the three months ended September 30, 2020.

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

Three Months Ended September 30, 

    

2019

    

2020

Net income available to common stockholders

$

20,743

$

9,344

Weighted average shares outstanding—basic

 

18,259

 

18,051

Dilutive effect of equity awards

 

628

 

284

Dilutive effect of the Notes

16

Weighted average shares outstanding—diluted

 

18,903

 

18,335

Basic earnings per share

$

1.14

$

0.52

Diluted earnings per share

$

1.10

$

0.51

Shares excluded from diluted earnings per share due to their anti-dilutive effect

84

87

Cash and Cash Equivalents

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

Our cash and cash equivalents totaled $76.9 million at September 30, 2020. Of this amount, approximately 76% 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, Malaysia, Canada, Singapore, India and Australia and to a lesser extent in Mexico, Germany and Albania among other countries. We have cash holdings in financial institutions that exceed insured limits for such institutions; however, we mitigate this risk by utilizing international financial institutions of high credit quality.

Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable, debt instruments and foreign currency forward contracts. 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, as the interest rates of these instruments are variable or comparable to current rates for financing available to us. The fair values of our foreign currency forward contracts were not significant as of September 30, 2020.

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. The Level 1 category includes assets and liabilities measured at quoted prices in active markets for identical assets and liabilities. The Level 2 category includes assets and liabilities measured from observable inputs other than quoted market prices. The Level 3 category includes assets and liabilities for which valuation inputs are unobservable and significant to the fair value measurement. Our contingent payment obligations related to acquisitions, which are further discussed in Note 10 to the condensed consolidated financial statements, are in the Level 3 category for valuation purposes.

The fair values of our financial assets and liabilities are categorized as follows (in thousands):

    

June 30, 2020

    

September 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets :

Insurance company contracts

$

$

37,155

$

$

37,155

$

$

39,724

$

$

39,724

Liabilities:

Contingent consideration

$

$

$

13,867

$

13,867

$

$

$

21,015

$

21,015

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Derivative Instruments and Hedging Activity

Our use of derivatives consists of foreign currency forward contracts. These forward contracts are utilized to partially mitigate certain balance sheet exposures and used as a net investment hedge for a foreign subsidiary to protect against potential changes resulting from short-term foreign currency fluctuations. These contracts have original maturities of up to three months.  We do not use hedging instruments for speculative purposes.

The net investment hedge has been designated as a hedge instrument and accounted for under ASC 815 “Derivatives and Hedging” (ASC 815).  Hedge effectiveness is assessed using the spot method, consistent with guidance in ASC 815 whereby the change in fair value of the forward contract is recorded in the same manner as the related currency translation adjustments, within other comprehensive income, as the hedging instrument is expected to be fully effective unless the amount hedged exceeds the net investment in the foreign operation, or the foreign operation is liquidated.  We initiated the net investment hedge during the three months ended September 30, 2020 and the amount recorded in other comprehensive income was not significant for such period.

The net gains or losses from the foreign currency forward contracts for balance sheet exposures, which are not designated as hedge instruments, are reported in the consolidated income statement immediately.  We initiated these forward contracts during the three months ended September 30, 2020 and the amounts reported in the consolidated income statement were not significant for such period.  The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term.  Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.  As of September 30, 2020 we held foreign currency forward contracts with notional amounts totalling $37.5 million. Unrealized gains and losses from the forward currency forward contracts as of September 30, 2020 were not significant. There were no derivative instruments as of June 30, 2020.

Recently Adopted Accounting Pronouncements

Retirement Benefit Plans

In August 2018, the FASB issued authoritative guidance under Accounting Standards Update (“ASU”) 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. We adopted this new guidance in the first quarter of fiscal 2021, and it did not have a significant impact on our disclosures in the consolidated financial statements.

Intangibles

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. We adopted this new guidance in the first quarter of fiscal 2021, and it did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"). Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate. ASU 2020-06 also provides for certain disclosures with regard to convertible instruments and associated fair values. We are required to adopt this new guidance in the first quarter of fiscal 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. Modifications to debt agreements for a change in the reference interest rate will be accounted for by prospectively adjusting the effective interest rate.  The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates, however the adoption of this new guidance for modifications to contracts, if any, is not expected to have a significant impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles of ASC 740, and is intended to improve consistency and simplify GAAP by clarifying and amending existing guidance for income taxes and related topics. We are required to adopt this new guidance in the first quarter of fiscal 2022. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

2. Business Combinations

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

Fiscal Year 2021 Business Acquisition

In July 2020 we (through our Healthcare division) acquired a privately-held software development company for $3.0 million, plus up to $12.0 million in potential contingent consideration. The goodwill recognized for this business is deductible for income tax purposes.  This acquisition was financed with available cash on hand.  This business acquisition was not material to our consolidated financial statements. Accordingly, pro-forma historical results of operations and certain other disclosures related to this business have not been presented.

3. Balance Sheet Details

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

June 30, 

September 30, 

Accounts receivable, net

    

2020

    

2020

Accounts receivable

$

287,488

    

$

273,515

Less allowance for doubtful accounts

 

(17,648)

 

(20,366)

Total

$

269,840

$

253,149

June 30, 

September 30, 

Inventories

    

2020

    

2020

Raw materials

$

132,797

    

$

142,404

Work-in-process

 

50,023

 

58,363

Finished goods

 

58,406

 

54,667

Total

$

241,226

$

255,434

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June 30, 

September 30, 

Property and equipment, net

2020

2020

Land

    

$

16,516

    

$

16,523

Buildings, civil works and improvements

 

57,709

 

57,796

Leasehold improvements

 

9,052

 

9,158

Equipment, furniture and fixtures

 

149,310

 

151,568

Computer software

 

18,217

 

21,932

Computer software implementation in process

11,817

10,131

Construction in process

 

3,598

 

3,909

Total

 

266,219

 

271,017

Less accumulated depreciation and amortization

 

(138,283)

 

(143,312)

Property and equipment, net

$

127,936

$

127,705

Depreciation and amortization expense for property and equipment was $5.1 million and $5.2 million for the three months ended September 30, 2019 and 2020, respectively.

4. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the three-month period ended September 30, 2020 were as follows (in thousands):

Optoelectronics

and

Security

Healthcare

Manufacturing

    

Division

    

Division

    

Division

    

Consolidated

Balance as of June 30, 2020

$

203,627

$

39,983

$

67,017

$

310,627

Goodwill acquired or adjusted during the period

 

498

 

3,244

 

 

3,742

Foreign currency translation adjustment

 

149

 

113

 

880

 

1,142

Balance as of September 30, 2020

$

204,274

$

43,340

$

67,897

$

315,511

Intangible assets consisted of the following (in thousands):

June 30, 2020

September 30, 2020

Weighted

Gross

Gross

Average

Carrying

Accumulated

Intangibles

Carrying

Accumulated

Intangibles

  

Lives

  

Value

  

Amortization

  

Net

  

Value

  

Amortization

  

Net

Amortizable assets:

Software development costs

 

8 years

$

41,332

$

(16,295)

$

25,037

$

44,436

$

(16,344)

$

28,092

Patents

 

19 years

 

9,962

 

(2,584)

 

7,378

 

10,214

 

(2,845)

 

7,369

Developed technology

 

10 years

 

55,719

 

(19,556)

 

36,163

 

60,945

 

(21,167)

 

39,778

Customer relationships/backlog

 

7 years

 

64,128

 

(32,110)

 

32,018

 

63,550

 

(33,172)

 

30,378

Total amortizable assets

 

171,141

 

(70,545)

 

100,596

 

179,145

 

(73,528)

 

105,617

Non-amortizable assets:

IPR&D

533

533

533

533

Trademarks

 

27,150

 

 

27,150

 

28,631

 

 

28,631

Total intangible assets

$

198,824

$

(70,545)

$

128,279

$

208,309

$

(73,528)

$

134,781

Amortization expense related to intangible assets was $4.9 million and $4.8 million for the three-month periods ended September 30, 2019 and 2020, respectively.

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At September 30, 2020, the estimated future amortization expense for intangible assets was as follows (in thousands):

2021 (remaining 9 months)

$

13,977

2022

 

17,804

2023

 

17,457

2024

 

16,774

2025

 

12,691

Thereafter

 

26,914

Total

$

105,617

Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product by product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight-line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended September 30, 2019 and 2020, we capitalized software development costs in the amounts of $1.3 million and $4.1 million, respectively.

5. Contract Assets and Liabilities

We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606. When we recognize revenue in advance of the point in time at which contracts give us the right to invoice a customer, we record this as unbilled revenue, which is included in accounts receivable, net, on the consolidated balance sheet. We may also receive consideration, per the terms of a contract, from customers prior to transferring goods to the customer. We record customer deposits as contract liabilities. Additionally, we may receive payments, most typically under service and warranty contracts, at the onset of the contract and before services have been performed. In such instances, we record a deferred revenue liability.  We recognize these contract liabilities as sales after all revenue recognition criteria are met.

Contract assets and liabilities were as follows (in thousands):

    

June 30, 

    

September 30, 

    

    

 

Contract Assets:

2020

2020

Change

% Change

 

Unbilled revenue

$

43,011

$

53,463

$

10,452

 

24

%

Contract Liabilities:

    

    

    

    

 

Advances from customers

$

28,155

$

41,117

$

12,962

46

%

Deferred revenue—current

 

32,863

 

37,508

 

4,645

14

%

Deferred revenue—long-term

 

13,214

 

14,029

 

815

6

%

Contract assets increased during the three months ended September 30, 2020 primarily due to satisfaction of performance obligations for cargo and vehicle inspection systems in our Security division which have not yet been billed to customers. The increase in contract liabilities was primarily due to receipt of contract deposits and additional performance obligations in our Security division.

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $297.6 million. We expect to recognize revenue on approximately 51% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the three months ended September 30, 2020, we recognized revenue of $19.1 million from contract liabilities existing at the beginning of the period.

Practical Expedients. In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat the shipping activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only give consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year.

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6. Leases

The components of operating lease expense were as follows (in thousands):

    

Three Months Ended September 30, 

2019

    

2020

Operating lease cost

$

2,649

$

2,533

Variable lease cost

 

138

 

258

Short-term lease cost

 

209

 

212

$

2,996

$

3,003

Supplemental disclosures related to operating leases were as follows (in thousands):

    

Balance Sheet Category

    

June 30, 2020

    

September 30, 2020

Operating lease ROU assets, net

 

Other assets

$

27,936

$

25,417

Operating lease liabilities, current portion

 

Other accrued expenses and current liabilities

$

8,537

$

8,006

Operating lease liabilities, long-term

 

Other long-term liabilities

 

19,713

 

18,235

Total operating lease liabilities

$

28,250

$

26,241

Weighted average remaining lease term

 

 

4.5 years

Weighted average discount rate

 

 

4.3 %

Supplemental cash flow information related to operating leases was as follows (in thousands):

    

Three Months Ended September 30, 

2019

    

2020

Cash paid for operating lease liabilities

$

2,572

$

2,580

ROU assets obtained in exchange for new lease obligations

 

1,313

 

122

Maturities of operating lease liabilities at September 30, 2020 were as follows (in thousands):

    

September 30, 2020

Less than one year

$

8,919

1 – 2 years

 

6,220

2 – 3 years

 

4,377

3 – 4 years

 

3,764

4 – 5 years

 

2,399

Thereafter

 

3,407

 

29,086

Less: imputed interest

 

(2,845)

Total lease liabilities

$

26,241

7. Impairment, Restructuring and Other Charges

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

During the quarter ended September 30, 2019, we recognized a net benefit of $2.1 million primarily related to reimbursements from our insurance carriers for covered legal charges, partially offset by additional legal fees related to class action litigation and government investigations.

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During the three months ended September 30, 2020, we commenced exit activities associated with an expired turnkey contract in Mexico whereby we incurred non-recurring charges totaling $6.9 million comprised of exit costs of $2.5 million for employee terminations, facility closure and other exit costs of $1.1 million, direct transaction costs of $2.7 million and impairment of a right-of-use asset of $0.6 million. We also conducted other operational efficiency activites which resulted in employee termination costs of $1.4 million and other costs of $0.1 million. The following tables summarize impairment, restructuring and other charges (benefit), net for the periods set forth below (in thousands):

Three Months Ended September 30, 2019

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Employee termination costs (benefit)

$

$

$

(13)

$

71

$

58

Legal recoveries, net

 

 

 

 

(2,157)

 

(2,157)

$

$

$

(13)

$

(2,086)

$

(2,099)

Three Months Ended September 30, 2020

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Impairment charges

$

552

$

$

$

$

552

Employee termination costs

3,737

146

3,883

Mexico transaction costs

2,692