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OSIS OSI Systems

Filed: 30 Apr 21, 4:05pm

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 March 31, 2021

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 April 22, 2021, there were 17,980,207 shares of the registrant’s common stock outstanding.

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, 

March 31, 

    

2020

    

2021

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

76,102

$

92,465

Accounts receivable, net

 

269,840

 

258,594

Inventories

 

241,226

 

283,523

Prepaid expenses and other current assets

 

30,541

 

26,828

Total current assets

 

617,709

 

661,410

Property and equipment, net

 

127,936

 

125,477

Goodwill

 

310,627

 

319,211

Intangible assets, net

 

128,279

 

130,058

Other assets

 

83,990

 

89,804

Total assets

$

1,268,541

$

1,325,960

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Bank lines of credit

$

59,000

$

0

Current portion of long-term debt

 

926

 

925

Accounts payable

 

84,940

 

122,719

Accrued payroll and related expenses

 

46,127

 

40,860

Advances from customers

 

28,155

 

48,132

Other accrued expenses and current liabilities

 

110,953

 

113,433

Total current liabilities

 

330,101

 

326,069

Long-term debt

 

267,072

 

273,997

Deferred income taxes

 

5,846

 

1,507

Other long-term liabilities

 

93,370

 

108,494

Total liabilities

 

696,389

 

710,067

Commitments and contingencies (Note 10)

STOCKHOLDERS' EQUITY:

Preferred stock, $0.001 par value— 10,000,000 shares authorized; 0 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 17,980,207 shares at March 31, 2021

 

122,553

 

110,744

Retained earnings

 

474,793

 

522,948

Accumulated other comprehensive loss

 

(25,194)

 

(17,799)

Total stockholders’ equity

 

572,152

 

615,893

Total liabilities and stockholders’ equity

$

1,268,541

$

1,325,960

See accompanying notes to condensed consolidated financial statements.

3

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended March 31, 

Nine Months Ended March 31, 

    

2020

    

2021

    

2020

2021

Net revenues:

    

    

    

    

Products

$

213,257

$

217,124

$

646,790

$

608,238

Services

 

79,626

 

66,663

 

242,287

 

206,466

Total net revenues

 

292,883

 

283,787

 

889,077

 

814,704

Cost of goods sold:

Products

 

141,069

 

144,958

 

436,120

 

409,692

Services

 

42,707

 

34,810

 

133,866

 

103,161

Total cost of goods sold

 

183,776

 

179,768

 

569,986

 

512,853

Gross profit

 

109,107

 

104,019

 

319,091

 

301,851

Operating expenses:

Selling, general and administrative

 

65,576

 

57,906

 

191,655

 

172,624

Research and development

 

15,358

 

13,932

 

44,485

 

39,798

Impairment, restructuring and other charges (benefit), net

 

4,548

 

(285)

 

1,520

 

7,912

Total operating expenses

 

85,482

 

71,553

 

237,660

 

220,334

Income from operations

 

23,625

 

32,466

 

81,431

 

81,517

Interest and other expense, net

 

(4,706)

 

(4,167)

 

(14,286)

 

(12,589)

Income before income taxes

 

18,919

 

28,299

 

67,145

 

68,928

(Provision) benefit for income taxes

 

639

 

(9,526)

 

(5,858)

 

(20,773)

Net income

$

19,558

$

18,773

$

61,287

$

48,155

Earnings per share:

Basic

$

1.08

$

1.04

$

3.36

$

2.68

Diluted

$

1.06

$

1.03

$

3.28

$

2.63

Shares used in per share calculation:

Basic

 

18,182

 

17,969

 

18,251

 

17,981

Diluted

 

18,513

 

18,298

 

18,693

 

18,278

See accompanying notes to condensed consolidated financial statements.

4

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)

    

Three Months Ended March 31, 

Nine Months Ended March 31, 

2020

    

2021

    

2020

    

2021

Net income

$

19,558

$

18,773

$

61,287

$

48,155

Other comprehensive income (loss):

Foreign currency translation adjustment

 

(8,314)

 

(503)

 

(8,726)

 

7,219

Other

10

59

29

176

Other comprehensive income (loss)

(8,304)

(444)

(8,697)

7,395

Comprehensive income

$

11,254

$

18,329

$

52,590

$

55,550

See accompanying notes to condensed consolidated financial statements.

5

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)

Three Months Ended March 31, 2020

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—December 31, 2019

 

18,267,574

$

133,566

$

441,270

$

(17,120)

$

557,716

Exercise of stock options

 

1,041

80

80

Vesting of RSUs

 

1,671

Shares issued under employee stock purchase program

 

36,758

2,221

2,221

Stock-based compensation expense

 

5,837

5,837

Repurchase of common stock

(295,833)

(24,781)

(24,781)

Taxes paid related to net share settlement of equity awards

 

(586)

(51)

(51)

Net income

 

19,558

19,558

Other comprehensive loss

 

(8,304)

(8,304)

Balance—March 31, 2020

18,010,625

$

116,872

$

460,828

$

(25,424)

$

552,276

Three Months Ended March 31, 2021

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

Shares

Amount

Earnings

Loss

Total

Balance—December 31, 2020

17,933,256

$

100,816

$

504,175

$

(17,355)

$

587,636

Exercise of stock options

9,703

624

624

Vesting of RSUs

6,519

Shares issued under employee stock purchase program

35,539

2,193

2,193

Stock-based compensation expense

7,565

7,565

Repurchase of common stock

(2,452)

(235)

(235)

Taxes paid related to net share settlement of equity awards

(2,358)

(219)

(219)

Net income

18,773

18,773

Other comprehensive loss

(444)

(444)

Balance—March 31, 2021

 

17,980,207

$

110,744

$

522,948

$

(17,799)

$

615,893

6

Nine Months Ended March 31, 2020

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

 

201,003

 

4,112

 

 

 

4,112

Vesting of RSUs

 

388,756

 

 

 

 

Shares issued under employee stock purchase program

 

71,595

 

4,286

 

 

 

4,286

Stock-based compensation expense

 

 

18,097

 

 

 

18,097

Repurchase of common stock

(562,707)

(51,775)

(51,775)

Taxes paid related to net share settlement of equity awards

 

(255,042)

 

(26,761)

 

 

 

(26,761)

Net income

 

 

 

61,287

 

 

61,287

Other comprehensive loss

 

 

 

 

(8,697)

 

(8,697)

Balance—March 31, 2020

18,010,625

$

116,872

$

460,828

$

(25,424)

$

552,276

Nine Months Ended March 31, 2021

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

 

87,235

1,187

1,187

Vesting of RSUs

 

310,939

Shares issued under employee stock purchase program

 

68,180

4,215

4,215

Stock-based compensation expense

 

19,386

19,386

Repurchase of common stock

(322,588)

(25,051)

(25,051)

Taxes paid related to net share settlement of equity awards

 

(175,541)

(11,546)

(11,546)

Net income

 

48,155

48,155

Other comprehensive income

 

7,395

7,395

Balance—March 31, 2021

17,980,207

$

110,744

$

522,948

$

(17,799)

$

615,893

7

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

Nine Months Ended March 31, 

2020

2021

CASH FLOWS FROM OPERATING ACTIVITIES

    

    

    

Net income

$

61,287

$

48,155

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

Depreciation and amortization

 

37,807

 

31,433

Stock-based compensation expense

 

18,097

 

19,386

Provision for losses on accounts receivable

2,641

6,176

Deferred income taxes

(50)

 

(1,364)

Amortization of debt discount and issuance costs

 

6,984

7,277

Impairment charges

3,258

552

Other

 

137

 

(217)

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

Accounts receivable

 

(23,945)

 

6,714

Inventories

 

28,871

 

(43,162)

Prepaid expenses and other assets

 

(18,127)

 

(4,263)

Accounts payable

 

10,243

 

37,113

Accrued payroll and related expenses

(5,655)

363

Advances from customers

 

(9,846)

 

19,468

Other

 

(6,149)

 

3,422

Net cash provided by operating activities

 

105,553

 

131,053

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

 

(16,062)

 

(11,155)

Purchases of certificates of deposit

(4,820)

Proceeds from maturities of certificates of deposit

2,690

Acquisition of business, net of cash acquired

 

(3,521)

 

(3,000)

Payments for intangible and other assets

 

(8,764)

 

(9,878)

Net cash used in investing activities

 

(28,347)

 

(26,163)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (repayments) on bank lines of credit

 

7,000

 

(59,000)

Proceeds from long-term debt

 

592

 

413

Payments on long-term debt

 

(723)

 

(778)

Proceeds from exercise of stock options and employee stock purchase plan

 

8,398

 

5,402

Payments of contingent consideration

(5,265)

(854)

Repurchases of common stock

 

(51,775)

 

(25,051)

Taxes paid related to net share settlement of equity awards

 

(26,761)

 

(11,546)

Net cash used in financing activities

 

(68,534)

 

(91,414)

Effect of exchange rate changes on cash

 

(3,962)

 

2,887

Net change in cash and cash equivalents

 

4,710

 

16,363

Cash and cash equivalents—beginning of period

 

96,316

 

76,102

Cash and cash equivalents—end of period

$

101,026

$

92,465

Supplemental disclosure of cash flow information:

Cash paid, net during the period for:

Interest

$

6,773

$

5,721

Income taxes

$

16,141

$

8,074

See accompanying notes to condensed consolidated financial statements.

8

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 and nine months ended March 31, 2021 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 of $107.46 because the principal amount of the Notes is intended to be settled in cash upon conversion. There was 0 dilutive effect of the Notes for the three and nine months ended March 31, 2020 and 2021.

9

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

Three Months Ended March 31, 

Nine Months Ended March 31, 

    

2020

    

2021

    

2020

    

2021

Net income available to common stockholders

$

19,558

$

18,773

$

61,287

$

48,155

Weighted average shares outstanding—basic

 

18,182

 

17,969

 

18,251

 

17,981

Dilutive effect of equity awards

 

331

 

329

 

442

 

297

Weighted average shares outstanding—diluted

 

18,513

 

18,298

 

18,693

 

18,278

Basic earnings per share

$

1.08

$

1.04

$

3.36

$

2.68

Diluted earnings per share

$

1.06

$

1.03

$

3.28

$

2.63

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

145

51

100

64

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 $92.5 million at March 31, 2021. Of this amount, approximately 58% 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 and India and to a lesser extent in Puerto Rico 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 March 31, 2021.

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

    

March 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets :

Insurance company contracts

$

$

37,155

$

$

37,155

$

$

45,015

$

$

45,015

Liabilities:

Contingent consideration

$

$

$

13,867

$

13,867

$

$

$

19,337

$

19,337

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 or used as a net investment hedge 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.

10

The net investment hedge has been designated as a hedge instrument and accounted for under Accounting Standards Codification ("ASC”) 815 “Derivatives and Hedging”. 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 settled the net investment hedge in the second quarter of fiscal 2021, and the amount recorded in other comprehensive loss was not significant. There were no net investment hedges outstanding as of March 31, 2021.

The net gains or losses from the foreign currency forward contracts, which are not designated as hedge instruments, are reported in the consolidated income statement. We initiated these forward contracts in the first quarter of fiscal 2021 and the amounts reported in the consolidated income statement for the three and nine months ended March 31, 2021 were not significant.  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 March 31, 2021, we held foreign currency forward contracts with notional amounts totaling $23.5 million. Unrealized gains and losses from the forward currency forward contracts as of March 31, 2021 were not significant. There were no derivative instruments as of June 30, 2020.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“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.

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.

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 did not have a significant impact on our consolidated financial statements. ASU 2020-04 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 future modifications to contracts, if any, is not expected to 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 for 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.

11

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.

12

3. Balance Sheet Details

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

June 30, 

March 31, 

Accounts receivable, net

    

2020

    

2021

Accounts receivable

$

287,488

    

$

281,970

Less allowance for doubtful accounts

 

(17,648)

 

(23,376)

Total

$

269,840

$

258,594

June 30, 

March 31, 

Inventories

    

2020

    

2021

Raw materials

$

132,797

    

$

144,043

Work-in-process

 

50,023

 

68,853

Finished goods

 

58,406

 

70,627

Total

$

241,226

$

283,523

June 30, 

March 31, 

Property and equipment, net

2020

2021

Land

    

$

16,516

    

$

16,345

Buildings, civil works and improvements

 

57,709

 

57,645

Leasehold improvements

 

9,052

 

8,654

Equipment, furniture and fixtures

 

149,310

 

156,006

Computer software

 

18,217

 

23,052

Computer software implementation in process

11,817

10,615

Construction in process

 

3,598

 

4,459

Total

 

266,219

 

276,776

Less accumulated depreciation and amortization

 

(138,283)

 

(151,299)

Property and equipment, net

$

127,936

$

125,477

Depreciation and amortization expense for property and equipment was $5.4 million and $5.5 million for the three months ended March 31, 2020 and 2021, respectively, and $15.9 million and $16.3 million for the nine months ended March 31, 2020 and 2021, respectively.

4. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the nine-month period ended March 31, 2021 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

 

1,905

 

3,244

 

 

5,149

Foreign currency translation adjustment

 

264

 

333

 

2,838

 

3,435

Balance as of March 31, 2021

$

205,796

$

43,560

$

69,855

$

319,211

13

Intangible assets consisted of the following (in thousands):

June 30, 2020

March 31, 2021

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

$

45,421

$

(14,817)

$

30,604

Patents

 

19 years

 

9,962

 

(2,584)

 

7,378

 

9,890

 

(2,790)

 

7,100

Developed technology

 

10 years

 

55,719

 

(19,556)

 

36,163

 

60,923

 

(24,352)

 

36,571

Customer relationships/backlog

 

7 years

 

64,128

 

(32,110)

 

32,018

 

62,577

 

(35,929)

 

26,648

Total amortizable assets

 

171,141

 

(70,545)

 

100,596

 

178,811

 

(77,888)

 

100,923

Non-amortizable assets:

In-process research and development

533

533

533

533

Trademarks

 

27,150

 

 

27,150

 

28,602

 

 

28,602

Total intangible assets

$

198,824

$

(70,545)

$

128,279

$

207,946

$

(77,888)

$

130,058

Amortization expense related to intangible assets was $4.9 million and $4.8 million for the three months ended March 31, 2020 and 2021, respectively. For the nine months ended March 31, 2020 and 2021, amortization expense related to intangible assets was $14.3 million and $15.1 million, respectively.

At March 31, 2021, the estimated future amortization expense for intangible assets was as follows (in thousands):

2021 (remaining 3 months)

$

4,660

2022

 

17,152

2023

 

17,377

2024

 

16,705

2025

 

13,986

Thereafter

 

31,043

Total

$

100,923

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 March 31, 2020 and 2021, we capitalized software development costs in the amounts of $4.5 million and $2.6 million, respectively. For the nine months ended March 31, 2020 and 2021, we capitalized software development costs in the amounts of $7.7 million and $9.1 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.

14

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

    

June 30, 

    

March 31, 

    

    

 

Contract Assets:

2020

2021

$ Change

% Change

 

Unbilled revenue

$

43,011

$

46,866

$

3,855

 

9

%

Contract Liabilities:

    

    

    

    

 

Advances from customers

$

28,155

$

48,132

$

19,977

71

%

Deferred revenue—current

 

32,863

 

37,075

 

4,212

13

%

Deferred revenue—long-term

 

13,214

 

13,470

 

256

2

%

Contract assets increased during the nine months ended March 31, 2021 primarily due to satisfaction of performance obligations for aviation, cargo and vehicle inspection customers in our Security division which have not yet been billed. The increase in contract liabilities was primarily due to receipt of upfront deposits from customers 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 March 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $322.8 million. We expect to recognize revenue on approximately 67% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the nine months ended March 31, 2021, we recognized revenue of $45.0 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.

6. Leases

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

    

Three Months Ended March 31, 

    

Nine Months Ended March 31, 

2020

    

2021

2020

    

2021

Operating lease cost

$

2,525

$

2,216

$

7,771

$

7,120

Variable lease cost

 

237

 

280

 

551

 

723

Short-term lease cost

 

350

 

258

 

745

 

649

$

3,112

$

2,754

$

9,067

$

8,492

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

    

Balance Sheet Category

    

June 30, 2020

    

March 31, 2021

Operating lease ROU assets, net

 

Other assets

$

27,936

$

23,856

Operating lease liabilities, current portion

 

Other accrued expenses and current liabilities

$

8,537

$

7,646

Operating lease liabilities, long-term

 

Other long-term liabilities

 

19,713

 

16,742

Total operating lease liabilities

$

28,250

$

24,388

Weighted average remaining lease term

 

 

4.2 years

Weighted average discount rate

 

 

4.2 %

15

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

    

Nine Months Ended March 31, 

2020

    

2021

Cash paid for operating lease liabilities

$

7,664

$

7,773

ROU assets obtained in exchange for new lease obligations

 

3,718

 

1,810

Maturities of operating lease liabilities at March 31, 2021 were as follows (in thousands):

    

March 31, 2021

Less than one year

$

8,475

1 – 2 years

 

5,929

2 – 3 years

 

4,866

3 – 4 years

 

3,215

4 – 5 years

 

2,060

Thereafter

 

2,421

 

26,966

Less: imputed interest

 

(2,578)

Total lease liabilities

$

24,388

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 three months ended March 31, 2021, we recognized a total net benefit of ($0.3) million which included a net benefit of ($0.7) million for reimbursements from our insurance carriers for covered legal charges. We also incurred charges of $0.2 million for employee terminations and $0.2 million for facility closure and operational efficiency activities.

During the nine months ended March 31, 2021, we incurred a total net expense of $7.9 million which included $7.2 million for exit activities associated with an expired turnkey contract in Mexico. Such exit costs include $2.8 million for employee terminations, $1.1 million for facility closure and other exit costs, direct transaction costs of $2.7 million, and $0.6 million for right-of-use asset impairment for a leased facility. We also incurred costs of $1.6 million for other employee terminations and facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities.  We also recognized a net benefit of ($1.2) million for reimbursements from our insurance carriers for covered legal charges.

During the three and nine  months ended March 31, 2020, we abandoned a non-core product line in our Healthcare division which resulted in the write-off of assets, including intangible and fixed assets, totaling $3.3 million as we determined that these assets had no value and were permanently impaired. In addition, we continued to recover certain legal costs related to class action litigation and government investigations through insurance reimbursement. We also incurred additional legal fees related to these matters as well as restructuring charges by the divisions as noted in the tables below. This resulted in a net expense of $4.5 million and $1.5 million during the three and nine months ended March 31, 2020, respectively.

16

The following tables summarize impairment, restructuring and other charges (benefit), net for the periods set forth below (in thousands):

Three Months Ended March 31, 2020

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Impairment charges

$

$

3,258

$

$

$

3,258

Acquisition-related costs

107

    

41

155

303

Employee termination costs

328

466

259

50

1,103

Facility closures/consolidation

 

30

 

 

 

 

30

Legal costs (recoveries), net

 

 

 

 

(146)

 

(146)

Total expensed

$

465

$

3,724

$

300

$

59

$

4,548

Three Months Ended March 31, 2021

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Acquisition-related costs

$

22

$

$

$

$

22

Employee termination costs

213

213

Facility closures/consolidation costs (benefit)

166

166

Legal costs (recoveries), net

 

 

 

 

(686)

 

(686)

Total expensed (benefit), net

$

401

$

$

$

(686)

$

(285)

Nine Months Ended March 31, 2020

    

    

    

Optoelectronics and

    

    

Healthcare

Manufacturing

Security Division

Division

Division

Corporate

Total

Impairment charges

$

$

3,258

$

$

$

3,258

Acquisition-related costs

 

107

 

 

41

 

155

303

Employee termination costs

734

466

277

119

1,596

Facility closures/consolidation

 

30

 

 

 

 

30

Legal costs (recoveries), net

 

 

 

 

(3,667)

 

(3,667)

Total expensed

$

871

$

3,724

$

318

$

(3,393)

$

1,520

Nine Months Ended March 31, 2021

    

    

    

Optoelectronics and

    

    

Healthcare

Manufacturing

Security Division

Division

Division

Corporate

Total

Impairment charges

$

552

$

$

$

$

552

Acquisition-related costs

250

27

277

Employee termination costs

 

4,010

 

 

146

 

 

4,156

Mexico transaction costs

2,691

2,691

Facility closures/consolidation costs

 

1,420

 

 

 

 

1,420

Legal costs (recoveries), net

 

 

 

 

(1,184)

 

(1,184)

Total expensed (benefit), net

$

8,923

$

27

$

146

$

(1,184)

$

7,912

The accrued liability for restructuring and other charges is included in other accrued expenses and current liabilities in the condensed consolidated balance sheet. The changes in the accrued liability for restructuring and other charges for the nine-month period ended March 31, 2021 were as follows (in thousands):

Facility

Employee

Closure/

Termination

Consolidation

Acquisition-

Legal Costs and

    

Costs

    

Cost

    

Related Costs

    

Settlements

    

Total

Balance as of June 30, 2020

$

545

$

201

$

$

1,882

$

2,628

Restructuring and other charges (benefit), net

 

4,156

 

1,420

 

277

 

(1,184)

 

4,669

Payments, adjustments and reimbursements, net

 

(4,570)

 

(1,501)

 

(277)

 

748

 

(5,600)

Balance as of March 31, 2021

$

131

$

120

$

0

$

1,446

$

1,697

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8. Borrowings

Revolving Credit Facility

We have a revolving credit facility with an aggregate committed amount of up to $535 million which matures in April 2024. The credit facility includes a $300 million sub-limit for letters of credit. Under certain circumstances, we have the ability to increase the facility by the greater of $250 million or such amount as would not cause our secured leverage ratio to exceed a specified level. Borrowings under this facility bear interest at LIBOR plus a margin of 1.0% as of March 31, 2021 (which margin can range from 1.0% to 1.75% based on our consolidated net leverage ratio as defined in the credit facility). The LIBOR index is expected to be discontinued by the end of calendar year 2021. The terms of our credit facility allow for replacement if that occurs. Letters of credit reduce the amount available to borrow under the credit facility by their face value amount. The unused portion of the facility bears a commitment fee of 0.10% as of March 31, 2021 (which fee can range from 0.10% to 0.25% based on our consolidated net leverage ratio as defined in the credit facility). Our borrowings under the credit agreement are guaranteed by certain of our U.S.-based subsidiaries and are secured by substantially all of our assets and substantially all the assets of certain of our subsidiaries. The credit facility contains various representations and warranties, affirmative, negative and financial covenants and events of default. As of March 31, 2021, there were no borrowings outstanding under the revolving credit facility and $66.7 million outstanding under the letters of credit sub facility. The amount available to borrow under the credit facility as of March 31, 2021 was $468.3 million. Loan amounts under the revolving credit facility may be borrowed, repaid and re-borrowed during the term. The principal amount of each revolving loan is due and payable in full on the maturity date. We have the right to repay each revolving loan in whole or in part from time to time without penalty. It is our practice to routinely borrow and repay several times per year under this revolving facility and therefore, borrowings under the credit facility are included in current liabilities. As of March 31, 2021, we were in compliance with all covenants under this credit facility.

1.25% Convertible Senior Notes (“Notes”) Due 2022

In February 2017, we issued $287.5 million of the Notes in a private offering. The Notes are governed by an indenture dated February 22, 2017. The maturity for the payment of principal is September 1, 2022. The Notes bear interest at the rate of 1.25% and are payable in cash semiannually in arrears on each March 1 and September 1.

Pursuant to ASC 470-20, we allocated the $287.5 million gross proceeds of the Notes between liability and equity components. The initial $242.4 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature for similar terms and priced on the same day the Notes were issued. The initial $45.1 million equity component represents the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes. Issuance costs of $7.7 million were allocated between debt ($6.5 million) and equity ($1.2 million) components with the portion allocated to the debt presented as an offset against long-term debt in the consolidated balance sheet. The debt discount is amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.5%. The debt issuance cost is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes. Total interest expense recognized for the three and nine months ended March 31, 2021 related to the Notes was $3.3 million and $10.0 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $2.2 million and $6.4 million of debt discount amortization and $0.3 million and $0.9 million of amortization of debt issuance costs. For the three and nine months ended March 31, 2020, total interest expense was $3.3 million and $9.7 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $2.1 million and $6.1 million of debt discount amortization and $0.3 million and $0.9 million of amortization of debt issuance costs.

Other Borrowings

Several of our foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies and U.S. dollars, primarily for the issuance of letters-of-credit. As of March 31, 2021, $63.0 million was outstanding under these letter-of-credit facilities. As of March 31, 2021, the total amount available under these credit facilities was $12.9 million.

18

Long-term debt consisted of the following (in thousands):

    

June 30, 

    

March 31, 

2020

2021

1.25% convertible notes due September 1, 2022:

Principal amount

$

287,500

$

287,500

Unamortized discount

(19,075)

(12,680)

Unamortized debt issuance costs

(2,547)

(1,665)

265,878

273,155

Other long-term debt

 

2,120

 

1,767

 

267,998

 

274,922

Less current portion of long-term debt

 

(926)

 

(925)

Long-term portion of debt

$

267,072

$

273,997

9. Stockholders’ Equity

Stock-based Compensation

As of March 31, 2021, we maintained the Amended and Restated 2012 Incentive Award Plan (the "2012 Plan ") and the Amended and Restated 2006 Equity Participation Plan ("2006 Plan") as stock-based employee compensation plans. NaN further grants may be made under the 2006 Plan. The 2012 Plan and the 2006 Plan are collectively referred to as the "OSI Plans."

We recorded stock-based compensation expense in the consolidated statements of operations as follows (in thousands):

    

Three Months Ended March 31, 

    

Nine Months Ended March 31, 

2020

    

2021

    

2020

    

2021

Cost of goods sold

$

189

$

199

$

517

$

571

Selling, general and administrative

 

5,520

7,223

 

17,153

 

18,391

Research and development

 

128

143

 

427

 

424

Stock-based compensation expense

$

5,837

$

7,565

$

18,097

$

19,386

As of March 31, 2021, total unrecognized compensation cost related to share-based compensation grants under the OSI Plans were estimated at $0.5 million for stock options and $20.7 million for restricted stock units (“RSUs”). We expect to recognize these costs over a weighted average period of 2.1 years with respect to the stock options and 1.9 years for grants of RSUs.

The following summarizes stock option activity during the nine months ended March 31, 2021:

Weighted

Average

Weighted-Average

Aggregate

Number of

Exercise

Remaining Contractual

Intrinsic Value

    

Options

    

Price

    

Term

    

(in thousands)

Outstanding at June 30, 2020

 

326,304

 

$

44.41

 

Granted

 

22,171

82.17

Exercised

 

(87,235)

34.44

Expired or forfeited

 

(2,710)

78.71

Outstanding at March 31, 2021

 

258,530

50.65

2.8 years

$

11,818

Exercisable at March 31, 2021

222,512

45.03

 

1.8 years

11,387

19

The following summarizes RSU award activity during the nine months ended March 31, 2021:

Weighted-

Average

    

Shares

    

Fair Value

Nonvested at June 30, 2020

 

423,590

$

88.68

Granted

 

337,778

80.32

Vested

 

(310,939)

86.20

Forfeited

 

(8,244)

84.47

Nonvested at March 31, 2021

 

442,185

$

84.12

In December 2020, our shareholders authorized an increase of 1.65 million shares for the 2012 Plan resulting in a maximum pool of 7.1 million shares. As of March 31, 2021, there were approximately 2.1 million shares available for grant under the 2012 Plan.  Under the terms of the 2012 Plan, RSUs and restricted stock granted from the pool of shares available for grant reduce the pool by 1.87 shares for each award granted. RSUs and restricted stock forfeited and returned to the pool of shares available for grant increase the pool by 1.87 shares for each award forfeited.

We granted 81,621 and 136,242 performance-based RSUs during the nine months ended March 31, 2020 and 2021, respectively. These performance based RSU awards are contingent on the achievement of certain performance metrics. The payout related to these awards can range from 0 to 400% of the original number of shares or units awarded. Compensation cost associated with these performance based RSUs are recognized based on the estimated number of shares that we ultimately expect will vest. If the estimated number of shares to vest is revised in the future, then stock based compensation expense will be adjusted accordingly.

Stock Repurchase Program

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. This program does not expire unless our Board of Directors acts to terminate the program. The timing and actual numbers of shares purchased depends on a variety of factors, including stock price, general business and market conditions and other investment opportunities. Repurchases may be made from time to time under the program through open-market purchases or privately-negotiated transactions at our discretion. Upon repurchase, the shares are restored to the status of authorized but unissued shares and we record them in our consolidated financial statements as a reduction in the number of shares of common stock issued and outstanding.

During the nine months ended March 31, 2021, we repurchased 322,588 shares of our common stock.

Dividends

We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay any cash dividends in the foreseeable future. Our Board of Directors will determine the payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of cash dividends and future borrowings may contain similar restrictions.

10. Commitments and Contingencies

Acquisition-Related Contingent Obligations

Under the terms and conditions of the purchase agreements associated with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain sales or profitability milestones through the acquired operations.  For agreements that contain contingent consideration caps, the remaining maximum amount of such potential future payments is $30.2 million as of March 31, 2021.

We account for such contingent payments for acquisitions which occurred through the end of fiscal year 2009 as additions to the purchase price of the acquired business. We made contingent payments relating to such acquisitions of $0.2 million and $1.5 million, respectively, during the three and nine months ended March 31, 2020 and $0.2 million and $0.9 million, respectively, during the three and nine months ended March 31, 2021.

20

For acquisitions completed after fiscal 2009, pursuant to Financial Accounting Standard 141R, which was codified into ASC 805, the estimated fair value of these obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling, general and administrative expense in the consolidated financial statements. The estimated fair value measurements of contingent earnout obligations are primarily based on unobservable inputs, which may include projected revenues, gross margins, operating income and the estimated probability of achieving the earnouts.

These projections and probabilities are used to estimate future contingent earnout payments, which are discounted back to present value to compute contingent earnout liabilities. The following table provides a roll-forward from June 30, 2020 to March 31, 2021 of the contingent consideration liability, which is included in other accrued expenses and current liabilities and other long-term liabilities in our consolidated balance sheets (in thousands):

Beginning fair value, June 30, 2020

$

13,867

Addition of contingent earnout obligations

7,304

Foreign currency translation adjustment

523

Changes in fair value for contingent earnout obligations

 

(2,357)

Payments on contingent earnout obligations

 

Ending fair value, March 31, 2021

$

19,337

Environmental Contingencies

We are subject to various environmental laws. Our practice is to conduct environmental investigations at our manufacturing facilities in North America, Asia-Pacific and Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation, potential areas of environmental concern related to past and present activities or from nearby operations. In certain cases, we have conducted further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate by independent environmental consultants.

We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California facility that resulted from unspecified on-and off-site releases occurring prior to our occupancy. We believe the releases are of a historical nature and not uncommon to the region in general. We continue to take voluntary actions, in cooperation with the local governing agency, to fully investigate the site and develop appropriate remedial actions.

We have not accrued for loss contingencies relating to the Hawthorne facility or any other environmental matters because we believe that, although unfavorable outcomes are possible, they are not considered by our management to be probable and reasonably estimable. If one or more of these environmental matters are resolved in a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be material.

Indemnifications and Certain Employment-Related Contingencies

In the normal course of business, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from breaches of representations, warranties or covenants, or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our directors and certain of our officers. It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. We have not recorded any liability for costs related to contingent indemnification obligations as of March 31, 2021.

On December 31, 2017, we and Deepak Chopra, our Chief Executive Officer, entered into an amendment to Mr. Chopra's employment agreement that, among other things, provides for a $13.5 million bonus payment to Mr. Chopra on or within 45 days of January 1, 2024 contingent upon Mr. Chopra's continued employment with us through that date, subject to accelerated payout terms in the event of Mr. Chopra's death or disability. The bonus is recorded in the financial statements over the remaining term of the employment agreement and is included in other long-term liabilities.

21

Product Warranties

We offer our customers warranties on many of the products that we sell. These warranties typically provide for repairs and maintenance of the products if problems arise during a specified time period after original shipment. Concurrent with the sale of products, we record a provision for estimated warranty expenses with a corresponding increase in cost of goods sold. We periodically adjust this provision based on historical experience and anticipated expenses. We charge actual expenses of repairs under warranty, including parts and labor, to this provision when incurred. The current obligation for warranty provision is included in other accrued expenses and current liabilities and the noncurrent portion is included in other long-term liabilities in the consolidated balance sheets.

The following table presents changes in warranty provisions (in thousands):

Nine Months Ended March 31, 

    

2020

    

2021

Balance at beginning of period

$

21,724

$

20,825

Additions and adjustments

6,105

3,759

Reductions for warranty repair costs

 

(6,557)

 

(4,975)

Balance at end of period

$

21,272

$

19,609

Legal Proceedings

In December 2017, a short seller released a report regarding our compliance with the FCPA. Following that report, we and certain of our executive officers have been named as defendants in several lawsuits in the District Court that were filed in December 2017 and February 2018. Each of the complaints closely tracks the allegations set forth in the short seller's report. All of the actions, which were consolidated by the District Court in March 2018 in an action captioned Arkansas Teacher Retirement System et al. v. OSI Systems, Inc. et al., No. 17 cv 08841, allege violations of Sections 10(b) and 20(a) of the Exchange Act, relating to certain of our public statements and filings with the SEC, and seek damages and other relief based upon the allegations in the complaints. In April 2018 and March 2019, two shareholder derivative complaints were filed purportedly on behalf of the Company against certain members of our Board of Directors (as individual defendants), a former member of our Board of Directors, and a member of management. The derivative actions, which were consolidated by the District Court in November 2019 in an action captioned Kocen and Riley v. Chopra, et al. No. 18 CV 03371, allege, among other things, breach of fiduciary duties relating to the allegations contained in the above-mentioned short seller report and seek damages, restitution, injunctive relief, attorneys' and experts' fees, costs, expenses, and other unspecified relief. We believe that the actions are without merit and intend to defend them vigorously, and we expect to incur costs associated with defending against these actions. At this early stage of the litigations, the ultimate outcomes are uncertain and we cannot reasonably predict the timing or outcomes, or estimate the amount of loss, if any, or their effect, if any, on our financial statements.

The SEC and the DOJ are conducting an investigation of trading in our securities and have each subpoenaed information regarding trading by executives, directors, and employees, as well as our operations and disclosures in and around the time of certain trades. With respect to these trading related matters, in fiscal year 2018, we took action with respect to a senior level employee. At this time, we are unable to predict what, if any, action may be taken by the DOJ or SEC as a result of these trading related investigations, or any penalties or remedial measures these agencies may seek. We place a high priority on compliance with our anticorruption and securities trading policies and are cooperating with each of the government investigations.

We are involved in various other claims and legal proceedings arising in the ordinary course of business. In our opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on our business, financial condition, results of operations or cash flows. We have not accrued for loss contingencies relating to any such matters because we believe that, although unfavorable outcomes in the proceedings are possible, they are not considered by management to be probable and reasonably estimable. If one or more of these matters are resolved in a manner adverse to our company, the impact on our business, financial condition, results of operations and cash flows could be material.

22

11. Income Taxes

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which we operate and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, our tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The effective tax rates for the three months ended March 31, 2021 and 2020 were 33.7% and (3.4)%, respectively. During the three months ended March 31, 2021, we recognized a net discrete tax expense of $2.2 million for return-to-provision true-up adjustments of $2.4 million, offset by a discrete tax benefit of ($0.2) million for equity-based compensation under ASU 2016-09. During the three months ended March 31, 2020, we recognized a discrete tax benefit of $5.1 million for a return to provision true-up adjustment.  

The effective tax rate for the nine months ended March 31, 2021 and 2020 was 30.1% and 8.7%, respectively. During the nine months ended March 31, 2021, we recognized a net discrete tax expense of $2.3 million for return-to-provision true-up adjustments of $2.8 million, offset by a ($0.5) million tax benefit from equity-based compensation under ASU 2016-09. During the nine months ended March 31, 2020, we recognized a discrete tax benefit of $12.0 million for equity-based compensation under ASU 2016-09 of $6.8 million and a return to provision true-up adjustment of $5.2 million.

12. Segment Information

We have determined that we operate in 3 identifiable industry segments: (a) security and inspection systems (Security division), (b) medical monitoring and diagnostic cardiology systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division). We also have a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses; expenses related to stock issuances and legal, audit and other professional service fees not allocated to industry segments. Both the Security and Healthcare divisions comprise primarily end-product businesses, whereas the Optoelectronics and Manufacturing division primarily supplies components and subsystems to external OEM customers, as well as to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values. All other accounting policies of the segments are the same as described in Note 1, Basis of Presentation.

23

The following tables present our results of operations and identifiable assets by industry segment (in thousands):

Three Months Ended March 31, 

Nine Months Ended March 31, 

    

2020

    

2021

    

2020

    

2021

Revenues (1) —by Segment:

Security division

$

187,076

$

151,409

$

578,477

$

431,420

Healthcare division

45,662

54,023

 

127,862

 

160,421

Optoelectronics and Manufacturing division, including intersegment revenues

70,240

90,278

 

216,684

 

257,713

Intersegment revenues elimination

(10,095)

(11,923)

 

(33,946)

 

(34,850)

Total

$

292,883

$

283,787

$

889,077

$

814,704

Income (loss) from operations —by Segment:

Security division

$

24,525

$

23,969

$

73,405

$

52,651

Healthcare division

1,682

7,333

 

5,793

 

25,640

Optoelectronics and Manufacturing division

7,309

10,484

 

25,096

 

29,638

Corporate

(10,161)

(9,078)

 

(23,578)

 

(25,895)

Intersegment eliminations

270

(242)

 

715

 

(517)

Total

$

23,625

$

32,466

$

81,431

$

81,517

June 30, 

March 31, 

    

2020

    

2021

Assets (2) —by Segment:

Security division

$

758,054

$

751,008

Healthcare division

 

208,857

 

211,226

Optoelectronics and Manufacturing division

 

232,408

 

275,976

Corporate

 

109,178

 

126,157

Eliminations (3)

 

(39,956)

 

(38,407)

Total

$

1,268,541

$

1,325,960

(1)For each of the three and nine month periods ended March 31, 2020 and March 31, 2021, 0 customer accounted for greater than 10% of total net revenues.
(2)NaN customer accounted for 13% of accounts receivable, net as of June 30, 2020. A different customer accounted for 10% of accounts receivable, net as of March 31, 2021.
(3)Eliminations in assets reflect the amount of inter-segment profits in inventory and inter-segment ROU assets under ASC 842 as of the balance sheet date. Such inter-segment profit will be realized when inventory is shipped to the external customers of the Security and Healthcare divisions.

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, “OSI”, the “Company”, “we”, “us”, “our” and similar terms refer to OSI Systems, Inc. together with our wholly-owned subsidiaries.

This management’s discussion and analysis of financial condition as of March 31, 2021 and results of operations for the three and nine months ended March 31, 2021 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, 2020 filed with the SEC.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to our current expectations, beliefs, and projections concerning matters that are not historical facts. Words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” “should,” “will,” “would,” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve uncertainties, risks, assumptions and contingencies, many of which are outside our control. Assumptions upon which our forward-looking statements are based could prove to be inaccurate, and actual results may differ materially from those expressed in or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (including Part I, Item 1, “Business,” Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and other documents filed by us from time to time with the SEC. Such factors, of course, do not include all factors that might affect our business and financial condition.  We could be exposed to a variety of negative consequences as a result of delays related to the award of domestic and international contracts; failure to secure the renewal of key customer contracts; delays in customer programs; delays in revenue recognition related to the timing of customer acceptance; unanticipated impacts of sequestration and other U.S. Government budget control provisions; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; global economic uncertainty; impacts on our business related to or resulting from the COVID-19 pandemic; unfavorable currency exchange rate fluctuations; effect of changes in tax legislation; market acceptance of our new and existing technologies, products and services; our ability to win new business and convert any orders received to sales within the fiscal year; enforcement actions in respect of any noncompliance with laws and regulations including export control and environmental regulations and the matters that are the subject of some or all of our investigations and compliance reviews, contract and regulatory compliance matters, and actions, which if brought, could result in judgments, settlements, fines, injunctions, debarment or penalties; and other risks and uncertainties, including but not limited to those detailed herein and from time to time in our other SEC filings, which could have a material and adverse impact on our business, financial condition and results of operation. All forward-looking statements contained in this report are qualified in their entirety by this statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation other than as may be required under securities laws to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We are a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. We sell our products and provide related services in diversified markets, including homeland security, healthcare, defense and aerospace. We have three operating divisions: (a) Security, providing security and inspection systems and turnkey security screening solutions; (b) Healthcare, providing patient monitoring, diagnostic cardiology and connected care systems and related supplies and accessories; and (c) Optoelectronics and Manufacturing, providing specialized electronic components for our Security and Healthcare divisions, as well as to third parties for applications in the defense and aerospace markets, among others.

25

Security Division. Through our Security division, we provide security screening products and services globally, as well as turnkey security screening solutions. These products and services are used to inspect baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear materials and other contraband. Revenues from our Security division accounted for 65% and 53% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.  We were impacted by the COVID-19 pandemic as discussed in the “Trends and Uncertainties-Coronavirus Pandemic” section below.

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and connected care systems and related supplies and accessories globally for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the hospital and provide information, through wired and wireless networks, to physicians and nurses who may be at the patient’s bedside, in another area of the hospital or even outside the hospital. Revenues from our Healthcare division accounted for 14% and 20% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and flex circuits and provide electronics manufacturing services globally for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, telecommunications, office automation, computer peripherals, industrial automation and consumer products. 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 21% and 27% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.

Trends and Uncertainties

The following is a discussion of certain trends and uncertainties that we believe have influenced, and may continue to influence, our results of operations.

Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic has dramatically impacted the global health and economic environment, with millions of confirmed cases, business slowdowns and shutdowns, and market volatility.  The COVID-19 pandemic has caused, and is likely to continue to cause, significant economic disruptions and has impacted, and is expected to continue to impact, our operations and the operations of our suppliers, logistics providers and customers as a result of quarantines, facility closures and travel and logistics restrictions. Our ability to continue to operate without significant negative impacts will in part depend on our ability to protect our employees and our supply chain and to keep our manufacturing facilities open and operating effectively. We have endeavored to implement government and health authority recommendations to protect our employees worldwide. While we do not expect these pandemic-related impacts to be long-term, there is substantial uncertainty regarding the duration and ultimate impact of the COVID-19 pandemic. Our Healthcare division has experienced increased demand for certain products as a result of COVID-19. In our Security division, during the latter part of fiscal 2020 and in fiscal 2021, receipt of certain orders was delayed, most notably with respect to our aviation and cargo products, and our service revenues were adversely impacted as a result of the pandemic. During the first nine months of fiscal 2021, bookings accelerated, but as many of our customers in our Security division are being impacted by the pandemic we have received and could receive further requests to delay deliveries of equipment and modify service arrangements or the scheduling of factory or site acceptance tests, which could impact timing of revenue recognition. In addition, as a result of COVID-19 related government regulations, certain of our global manufacturing facilities have had to limit operations and might have to limit operations in the future. If these business interruptions resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be materially and adversely impacted. We intend to continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in our best interests and the best interests of our employees, suppliers and customers.

Global Economic Considerations.  In addition to the COVID-19 pandemic, other global macroeconomic factors, coupled with the U.S. political climate, have created uncertainty and impacted demand for certain of our products and services. We do not know how long this uncertainty will continue. These factors could have a material negative effect on our business, results of operations and financial condition.

Global Trade.  In addition to the COVID-19 pandemic, the current domestic and international political environment, including in relation to recent and further potential changes by the U.S. and other countries in policies on global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy and global trade. This uncertainty is exacerbated by sanctions imposed by the U.S. government against certain businesses and individuals in select countries. Continued or increased uncertainty regarding global trade due to these or other factors may require us to modify our current business practices and could have a material adverse effect on our business, results of operations and financial condition.

26

Healthcare Considerations. As described above, our Healthcare division has experienced increased demand for its patient monitoring products as a result of the COVID-19 pandemic. Increased healthcare capital purchases made in prior periods may result in fewer capital purchases during the balance of fiscal 2021 and subsequent periods. The pandemic may also impact our ability to manufacture products needed to timely fill orders if we experience supply chain disruptions or need to close any manufacturing facility due to employee COVID-19 cases or local government regulations.

European Union Threat Detection Standards.  The EU has implemented regulations for all airports within the EU that use explosive detection systems to have hold baggage screening systems that are compliant with the European Civil Aviation Conference (ECAC) Standard 3. The deadline for compliance with this mandate was initially set for September 2020. Given the uncertainty surrounding the COVID-19 situation, the EU revised the regulations, and the date whereby airports using explosive detection systems for hold baggage screening must meet Standard 3 has been changed to March 2024, with certain larger airports required to meet earlier installation dates. Our Security division’s real time tomography (RTT) product has passed the ECAC explosive detection system Standard 3 threat detection requirement.

Government Policies.  Our results of operations and cash flows could be materially affected by changes in U.S. or foreign government legislative, regulatory or enforcement policies, including U.S. and foreign government policies to manage the COVID-19 pandemic, such as travel restrictions or site closures.

Results of Operations for the Three Months Ended March 31, 2020 (Q3 2020) Compared to the Three Months Ended March 31, 2021 (Q3 2021) (amounts in millions)

Net Revenues

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.

    

Q3

    

% of

    

Q3

    

% of

    

    

2020

Net Revenues

2021

Net Revenues

$ Change

% Change

Security

$

187.1

64

%

$

151.4

53

%

$

(35.7)

(19)

%

Healthcare

 

45.7

16

54.0

 

19

8.3

18

Optoelectronics and Manufacturing

 

60.1

20

78.4

 

28

18.3

30

Total net revenues

$

292.9

100

%

$

283.8

100

%

$

(9.1)

(3)

%

Revenues for the Security division during the three months ended March 31, 2021 continued to be impacted by the COVID-19 pandemic most notably in our aviation and cargo businesses, as we experienced delays in the timing of delivery and installation of equipment and related services, as well as the timing of receipt of new orders.  Our cargo business revenues decreased by $17.4 million. We also experienced a decrease in revenues of $15.8 million associated with the expiration of a contract in Mexico in June 2020.

Revenues for the Healthcare division during the three months ended March 31, 2021 increased year-over-year due to higher sales of $8.3 million attributable to patient monitoring systems and cardiology equipment and related service revenue.

Revenues for the Optoelectronics and Manufacturing division during the three months ended March 31, 2021 increased year-over-year as a result of higher revenue of $14.6 million from our contract manufacturing business and $3.6 million from our optoelectronics business.

Gross Profit

Q3

% of

Q3

% of

    

2020

    

Net Revenues

    

2021

    

Net Revenues

Gross profit

$

109.1

37.3

%

$

104.0

    

36.7

%

27

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. The overall decrease in gross profit resulted from decreased revenues in the Security division, mitigated by higher sales in our Healthcare and Optoelectronics and Manufacturing divisions. There were no significant changes in overall manufacturing-related costs.  Gross profit as a percentage of net revenues during the three months ended March 31, 2021 decreased on a year-over-year basis due to (i) a reduced gross margin within the Optoelectronics and Manufacturing division due to a less favorable sales mix, and (ii) an increase in Optoelectronics and Manufacturing revenues as a percentage of total net revenues, which inherently carries the lowest gross margin of each of the divisions. This was somewhat offset by an improved gross margin in our Healthcare division as a result of the benefit of economies of scale associated with increased sales, combined with operating efficiencies.

Operating Expenses

Q3

    

% of

    

Q3

    

% of

    

    

2020

Net Revenues

2021

Net Revenues

$ Change

% Change

Selling, general and administrative

    

$

65.6

    

22.4

%

$

57.9

    

20.4

%

$

(7.7)

    

(11.7)

%

Research and development

 

15.4

 

5.2

 

13.9

 

4.9

(1.5)

(9.3)

Impairment, restructuring and other charges (benefit), net

 

4.5

 

1.6

 

(0.3)

 

(0.1)

(4.8)

(106.3)

Total operating expenses

$

85.5

 

29.2

%

$

71.5

 

25.2

%

$

(14.0)

(16.3)

%

Selling, general and administrative. 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 March 31, 2021 decreased as compared to the same prior-year period due to reduced travel and entertainment and marketing expenses of $2.0 million and $2.1 million, respectively, resulting from the COVID-19 pandemic, lower employee compensation of $1.3 million, decreased third-party sales commissions of $1.5 million, and a reduction in the provision for bad debt of $1.0 million.

Research and development. Research and development (R&D) expenses include research related to new product development and product enhancements. The decrease in R&D expenses during the three months ended March 31, 2021 from the same prior-year period reflected lower materials and supplies consumed in research activities of $1.0 million and a decrease in travel expenses of $0.3 million resulting from the COVID-19 pandemic.

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. The net benefit in the three months ended March 31, 2021 consisted of ($0.7) million benefit for net reimbursements from our insurance carriers for covered legal charges, a $0.2 million charge for employee terminations from operational efficiency activities, and a $0.2 million charge for facility closure and operational efficiency activities. The net expense in the three months ended March 31, 2020 included $3.3 million from impairment of assets in our Healthcare division for the exit of a product line, $1.1 million of employee termination and facility closure costs, and $0.1 million of other net costs.

Interest and other expense, net. For the three months ended March 31, 2021, interest and other expense, net was $4.2 million as compared to $4.7 million in the comparable prior-year period. This decrease was driven most significantly by lower average levels of borrowing under our revolving credit facility as well as lower average interest rates during the three months ended March 31, 2021 compared to the same period in the prior year. Interest expense included $2.2 million of non-cash interest expense primarily related to the Notes during each of the three months ended March 31, 2021 and 2020 (see Note 8 to the condensed consolidated financial statements for further discussion).

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 the three months ended March 31, 2021, we recognized a provision for income taxes of $9.5 million compared to a benefit for income taxes of $(0.6) million for the comparable prior-year period. The effective tax rates for the three months ended March 31, 2021 and 2020 were 33.7% and (3.4)%, respectively. During the three months ended March 31, 2021, we recognized a net discrete tax expense of $2.2 million for return-to-provision true-up adjustments of $2.4 million, offset by a discrete tax benefit of ($0.2) million for equity-based compensation under ASU 2016-09. During the three months ended March 31, 2020, we recognized a discrete tax benefit of ($5.1) million for a return-to-provision true-up adjustment.

28

Results of Operations for the Nine Months Ended March 31, 2020 (YTD Q3 2020) Compared to the Nine Months Ended March 31, 2021 (YTD Q3 2021) (amounts in millions)

Net Revenues

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.

YTD Q3

% of

YTD Q3

% of

    

    

 

    

2020

    

Net Revenues

    

2021

    

Net Revenues

    

$ Change

    

% Change

 

Security

$

578.5

 

65

%  

$

431.4

 

53

%  

$

(147.1)

 

(25)

%

Healthcare

 

127.9

 

14

 

160.4

 

20

 

32.5

 

25

Optoelectronics and Manufacturing

 

182.7

 

21

 

222.9

 

27

 

40.2

 

22

Total net revenues

$

889.1

 

100

%  

$

814.7

 

100

%  

$

(74.4)

 

(8)

%

Revenues for the Security division during the nine months ended March 31, 2021 decreased on a year-over-year basis due to the continued impact of the COVID-19 pandemic, most notably in our aviation and cargo businesses, as we experienced delays in the timing of delivery and installation of equipment and related services, as well as the timing of receipt of new orders.  Our cargo business revenues decreased by $67 million and advanced security screening business revenues decreased by $34 million. We also experienced a decrease in revenues of approximately $50 million associated with the expiration of a contract in Mexico in June 2020.

Revenues for the Healthcare division during the nine months ended March 31, 2021 increased year-over-year due to increased sales of patient monitoring systems, cardiology equipment and related supplies and accessories totaling approximately $32 million.

Revenues for the Optoelectronics and Manufacturing division during the nine months ended March 31, 2021 increased year-over year  as a result of an increase in revenue in our contract manufacturing business of approximately $32 million coupled with an increase in sales of approximately $8 million in our optoelectronics business, which includes a $7 million increase in revenues from a small business acquired in February 2020.

Gross Profit

YTD Q3

% of

YTD Q3

% of

 

    

2020

    

Net Revenues

    

2021

    

Net Revenues

 

Gross profit

$

319.1

 

35.9

%  

$

301.9

 

37.1

%

The overall decrease in gross profit was driven by the decrease in revenues for the Security division which was somewhat mitigated by higher sales in our Healthcare and Optoelectronics and Manufacturing divisions. There were no significant changes in manufacturing-related costs. Gross profit as a percentage of net revenues during the nine months ended March 31, 2021 increased on a year-over-year basis due to (i) an improved gross margin in our Healthcare division (which has the highest gross margin among our divisions) as a result of the benefit of economies of scale associated with increased sales, combined with operating efficiencies, (ii) increase in Healthcare revenue as a percentage of total net revenues, and (iii) an increase in service gross margin in our Security division. Our gross margin decreased within the Optoelectronics and Manufacturing division due to a less favorable sales mix.

Operating Expenses

YTD Q3

% of

YTD Q3

% of

    

    

 

    

2020

    

Net Revenues

    

2021

    

Net Revenues

    

$ Change

    

% Change

 

Selling, general and administrative

$

191.7

 

21.6

%  

$

172.6

 

21.2

%  

$

(19.1)

 

(9.9)

%

Research and development

 

44.5

 

5.0

 

39.8

 

4.9

 

(4.7)

 

(10.5)

Impairment, restructuring and other charges (benefit), net

 

1.5

 

0.1

 

7.9

 

0.9

 

6.4

 

420.5

Total operating expenses

$

237.7

 

26.7

%  

$

220.3

 

27.0

%  

$

(17.4)

 

(7.3)

%

29

Selling, general and administrative. SG&A expense for the nine months ended March 31, 2021 decreased as compared to the same prior-year period due to reduced travel and entertainment and marketing expenses of $6.8 million and $3.4 million, respectively, due to the COVID-19 pandemic, decreased third-party sales commissions of $6.5 million, and reduced employee compensation expense of $4.8 million resulting from implementation of cost containment measures.  These decreases were offset by an increase in the provision for loss on accounts receivable of $3.5 million.  

Research and development. The decrease in R&D expense during the nine months ended March 31, 2021 from the same prior-year period reflected lower employee compensation expenses of $1.9 million, a decrease in materials and supplies consumed in research activities of $1.8 million, and reduced travel expenses of $1.0 million due to the COVID-19 pandemic.

Impairment, restructuring and other charges (benefit). During the nine months ended March 31, 2021, we incurred $7.2 million for exit activities associated with an expired turnkey contract in Mexico. Such exit costs include $2.8 million for employee terminations, $1.1 million for facility closure and other exit costs, direct transaction costs of $2.7 million, and $0.6 million for right-of-use asset impairment for a leased facility. We also incurred costs of $1.6 million for other employee terminations and  facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities. This was offset by a net benefit of ($1.2) million for reimbursements from our insurance carriers for covered legal charges. During the nine months ended March 31, 2020, we incurred impairment, restructuring and other charges, net of $3.3 million related to the exit of a product line in our Healthcare division, $1.6 million of employee termination and facility closure costs, and $0.3 million of acquisition costs, which were offset by a net recovery of $3.7 million for certain legal costs through insurance reimbursements.

Other Income and Expenses

Interest and other expense, net. For the nine months ended March 31, 2021, interest and other expense, net was $12.6 million as compared to $14.3 million in the comparable prior-year period. This decrease was driven by lower average levels of borrowing under our revolving credit facility as well as lower average interest rates during the nine months ended March 31, 2021 compared to the same period in the prior year. Interest expense included $6.7 million and $6.6 million of non-cash interest expense during the nine months ended March 31, 2021 and 2020, respectively, mainly related to the Notes (see Note 8 to the condensed consolidated financial statements for further discussion).

Income taxes. For the nine months ended March 31, 2021 and 2020, we recognized a provision for income taxes of $20.8 million and $5.9 million, respectively. The effective tax rate for the nine months ended March 31, 2021 and 2020 was 30.1% and 8.7%, respectively. During the nine months ended March 31, 2021, we recognized a net discrete tax expense of $2.3 million for return-to-provision true-up adjustments of $2.8 million, offset by a ($0.5) million tax benefit from equity-based compensation under ASU 2016-09. During the nine months ended March 31, 2020, we recognized a discrete tax benefit of $12.0 million for equity-based compensation under ASU 2016-09 of $6.8 million and a return to provision true-up adjustment of $5.2 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 $92.5 million at March 31, 2021, an increase of $16.4 million, or 21.5%, from $76.1 million at June 30, 2020. 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. In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S. subsidiaries, will be sufficient to satisfy our obligations in the U.S.

We have a five-year revolving credit facility that allows us to borrow up to $535 million. As of March 31, 2021, there were no borrowings outstanding under the revolving credit facility and letters of credit outstanding totaled $66.7 million.

Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows. During the nine months ended March 31, 2021, we generated cash from operations of $131.1 million compared to $105.6 million in the same prior-year period. This increase was driven by favorable changes in net working capital.

30

Cash Used in Investing Activities. Net cash used in investing activities was $26.2 million for the nine months ended March 31, 2021 as compared to $28.3 million in the same prior-year period. During the nine months ended March 31 2021, we used cash of $3.0 million for the acquisition of a business. Capital expenditures in the nine month period ended March 31, 2021 were $11.2 million compared to $16.1 million in the same prior-year period. Expenditures for intangible and other assets in the nine month period ended March 31, 2021 were $9.9 million compared to $8.8 million in the same prior-year period.  Purchases of certificates of deposit in the nine month period ended March 31, 2021 were $4.8 million while there were none in the same prior-year period.

Cash Used in Financing Activities. Net cash used in financing activities was $91.4 million during the nine months ended March 31, 2021, compared to $68.5 million during the same prior-year period. The significant changes in cash used in financing activities relate to (i) net repayments of borrowings on bank lines of credit totaling $59.0 million in the nine month period ended March 31, 2021 compared to net borrowings of $7.0 million in the same prior-year period and (ii) $36.6 million used for share repurchases and taxes paid related to the net share settlement of equity awards in the nine month period ended March 31, 2021 compared to $78.5 million for the same prior-year period.

Borrowings

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

Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $92.5 million at March 31, 2021. Of this amount, approximately 58% 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 and India and to a lesser extent in Puerto Rico and Albania 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. operations. In the event we repatriate cash from certain foreign operations and if taxes have not previously been withheld on the related earnings, we would provide for withholding taxes at the time we change our intention with regard to the reinvestment of those earnings.

Issuer Purchases of Equity Securities

The following table contains information about the shares of common stock we purchased during the quarter ended March 31, 2021:

Maximum number (or

approximate dollar

value) of

Total number of

shares (or

shares (or units)

units)

purchased as

that may

Total number of

Average price

part of publicly

yet be purchased

shares (or units)

paid per share (or

announced plans or

under the plans or

    

Purchased 

    

unit)

    

Programs

    

programs (1)

January 1 to January 31, 2021

 

$

 

 

2,679,864

February 1 to February 28, 2021

 

 

 

2,679,864

March 1 to March 31, 2021

 

2,452

95.74

 

2,452

 

2,677,412

 

2,452

 

2,452

(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.  Upon repurchase, the shares are restored to the status of authorized but unissued shares, and we record them as a reduction in the number of shares of common stock issued and outstanding in our consolidated financial statements.

Contractual Obligations

During the nine months ended March 31, 2021, 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, 2020. See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

31

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the potential impact of those pronouncements on our condensed consolidated financial statements, see Note 1 to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. There have been no material changes in our exposure to market risk during the nine months ended March 31, 2021 from that described in the Annual Report.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 31, 2021, the end of the period covered by this report, our management, including our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon management's review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud within the Company have been detected.

32

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The material legal proceedings in which we are involved are discussed in Note 10, “Commitments and Contingencies,” of the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

ITEM 1A. RISK FACTORS

The discussion of our business, financial condition and results of operations in this Quarterly Report on Form 10-Q for the period ended March 31, 2021 should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on August 21, 2020, which describe various risks and uncertainties that could materially affect our business, financial condition and results of operations in the future. There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. Further, COVID-19 and its impact on the global health and economic environment, as well as reactions to resurgences of COVID-19 or other future pandemics, could also amplify the other risk factors described in our Annual Report on Form 10-K and thus materially affect our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

See Issuer Purchases of Equity Securities discussion under Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is hereby incorporated by reference.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

On April 28, 2021, our Compensation Committee approved an amendment to our long-term incentive program as applicable to our Chief Executive Officer to extend the program to include fiscal years 2022 and 2023 and to increase for the current and all remaining performance periods the potential additional shares that our Chief Executive Officer can earn under the compound annual operating income growth metric in accordance with the chart below. Ninety percent of any additional shares earned under the program will vest on the date such shares are granted, and ten percent will vest on the one-year anniversary of the date such shares are granted.

Operating Income Metric

 

    

Potential

  

Additional Shares

 

CAGR EBIT

as % of Initial

 

Growth

Grant

 

9.5

%

70

%

10.0

%

80

%

10.5

%

90

%

11.0

%

100

%

33

ITEM 6. EXHIBITS

Exhibit
Number

    

Description

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

34

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Hawthorne, State of California on the 30th day of April 2021.

OSI SYSTEMS, INC.

By:

/s/ Deepak Chopra

Deepak Chopra

President and Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Alan Edrick

Alan Edrick

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

35