OSI Systems, Inc. (NASDAQ: OSIS) today announced financial results for the third fiscal quarter ended March 31, 2014, including, among other things, the introduction of reporting Adjusted EBITDA, a discussion of which can be found below, under the caption, "New Presentation of Non-GAAP Financial Measure."
"During the third quarter, we produced outstanding cash flow and generated record Adjusted EBITDA. Our earnings, however, fell short of the third quarter in the prior year primarily due to much higher depreciation in the current year as a result of the ramp-up of our Mexican turnkey operations, and several significant sales opportunities that slipped to our fourth quarter. We believe we are positioned to deliver very strong fourth quarter results," said Deepak Chopra, OSI Systems' Chairman and CEO.
The Company reported revenues of $204 million for the third quarter of fiscal 2014, an increase of 3% as compared to the same period a year ago. Net income for the third quarter of fiscal 2014 was $4.8 million, or $0.23 per diluted share, compared to net income of $13.5 million, or $0.66 per diluted share, for the third quarter of fiscal 2013. Excluding the impact of impairment, restructuring and other charges, and the impact of tax elections discussed below, net income for the third quarter of fiscal 2014 would have been $14.3 million, or $0.70 per diluted share, compared to net income of $15.2 million, or $0.74 per diluted share for the comparable quarter of the prior year.
For the nine months ended March 31, 2014, the Company reported revenues of $646.6 million, an increase of 13% over the same period a year ago. Net income in this period was $25.8 million, or $1.25 per diluted share, compared to net income of $32.3 million, or $1.57 per diluted share, in the same period a year ago. On a non-GAAP basis, which excludes the impact of impairment, restructuring and other charges, and the impact of tax elections discussed below, net income for the nine months ended March 31, 2014 would have been $39.9 million, or $1.94 per diluted share, compared to net income of $35.9 million, or $1.75 per diluted share, for the comparable period in the prior year.
During the third quarter, the Company made certain tax elections related to the turnkey program in Mexico to accelerate depreciation and realize immediate cash tax savings of approximately $21 million. The Company made a similar election during the fourth quarter of our previous fiscal year. In doing so, the Company forfeited tax basis in certain fixed assets that resulted in a charge to income tax of $7.6 million, resulting in an effective tax rate of 71.2% and 44.2% for the three months and nine months ended March 31, 2014, respectively. Had these elections not been made, the effective tax rate would have been 25.3% and 27.7% for the three months and nine months ended March 31, 2014, respectively. We made a similar election during the fourth quarter of our previous fiscal year. Effective for tax years beginning January 1, 2014, the election to accelerate depreciation is no longer available in the Mexican tax code.
As of March 31, 2014 the Company's backlog was approximately $0.8 billion. During the third quarter, the Company generated cash flow from operations of $48.9 million and capital expenditures totaled $6.4 million.
Mr. Chopra continued, "During the third quarter, the Security Division's revenues decreased 5% from the prior year as the timing for certain orders moved to the fourth quarter. Strong operational execution led to gross margin improvement and resulted in a solid 17% non-GAAP operating margin, which excludes the impact of impairment, restructuring and other charges. As our opportunity pipeline remains robust, we remain optimistic of our prospects of strong growth in our Security Division."
Mr. Chopra concluded, "Sales in our Healthcare Division grew 2% while operating income increased by 14%. We continue to aggressively develop and launch new products and expect this will result in stronger growth in the future. Our Optoelectronics Division reported third party revenue growth of 20% as we continue to serve a blue chip OEM customer base."
Fiscal Year 2014 Outlook
The Company is reiterating its sales guidance for fiscal 2014 of $890 million - $920 million, representing an 11% to 15% increase over fiscal 2013. In addition, the Company is updating its fiscal 2014 earnings guidance and expects non-GAAP earnings per diluted share to increase at a rate of 12% - 19% to between $3.10 to $3.29, excluding the impact of impairment, restructuring and other charges, and the impact of certain tax elections. However, actual sales and non-GAAP diluted EPS could vary from this guidance due to the risks and uncertainties applicable to our business and industry, including the timing of certain awards and the outcome of issues with the U.S. government.
New Presentation of Non-GAAP Financial Measure; Non-GAAP Figures
This earnings release includes a presentation of Adjusted EBITDA, a new non-GAAP financial measure for the Company. Adjusted EBITDA is presented as a supplemental measure of the Company's financial performance that we believe is useful to investors because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company's operating activities across reporting periods. Its introduction coincides with the Company's shift to increased levels of capital intensive turnkey screening services and the accompanying increased depreciation. Adjusted EBITDA is defined as net income, plus net interest expense, provision for income taxes and depreciation and amortization, as further adjusted to eliminate the impact of stock-based compensation, and impairment, restructuring and other charges. Not all companies use identical calculations and, accordingly, the Company's presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States and does not purport to be a substitute for net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. In addition, the Company uses Adjusted EBITDA to evaluate the effectiveness of the Company's business strategies and because the Company's credit agreements use measures similar to Adjusted EBITDA to measure compliance with certain covenants.
Discussion of adjustments to arrive at non-GAAP net income and earnings per share figures and Adjusted EBITDA per share for the three and nine months ended March 31, 2014 and 2013 is provided to allow for the comparison of underlying earnings, net of impairment, restructuring and other charges, and their related tax benefit, and the impact from certain tax elections related to the turnkey program in Mexico. We believe that providing these non-GAAP figures provides additional insight into the ongoing operations of the Company. Non-GAAP financial measures should not be considered in isolation or a substitute for measures of financial performance prepared in accordance with GAAP. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding the Company's results primarily because they exclude amounts that we do not view as reflective of ongoing operating results when planning and forecasting and when assessing the performance of the business. We believe that our non-GAAP financial measures also facilitate the comparison of results for current periods and guidance for future periods with results for past periods.