UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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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.
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).
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.
| 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
As of October 24, 2023, there were
OSI SYSTEMS, INC.
INDEX
PAGE | ||
3 | ||
3 | ||
Condensed Consolidated Balance Sheets at June 30, 2023 and September 30, 2023 | 3 | |
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
26 | ||
26 | ||
28 | ||
28 | ||
28 | ||
28 | ||
28 | ||
28 | ||
28 | ||
29 | ||
30 | ||
2
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share amounts and par value)
June 30, | September 30, | |||||
| 2023 |
| 2023 | |||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
| |
| | ||
Inventories |
| |
| | ||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
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Property and equipment, net |
| |
| | ||
Goodwill |
| |
| | ||
Intangible assets, net |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Bank lines of credit | $ | | $ | | ||
Current portion of long-term debt |
| |
| | ||
Accounts payable |
| |
| | ||
Accrued payroll and related expenses |
| |
| | ||
Advances from customers |
| |
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Other accrued expenses and current liabilities |
| |
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Total current liabilities |
| |
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Long-term debt |
| |
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Deferred income taxes |
| |
| | ||
Other long-term liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 10) | ||||||
STOCKHOLDERS’ EQUITY: | ||||||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
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 September 30, | ||||||
| 2022 |
| 2023 | |||
Net revenues: | ||||||
Products | $ | | $ | | ||
Services |
| |
| | ||
Total net revenues |
| |
| | ||
Cost of goods sold: | ||||||
Products |
| |
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Services |
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Total cost of goods sold |
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Gross profit |
| |
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Operating expenses: | ||||||
Selling, general and administrative |
| |
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Research and development |
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Impairment, restructuring and other charges, net |
| |
| | ||
Total operating expenses |
| |
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Income from operations |
| |
| | ||
Interest and other expense, net |
| ( |
| ( | ||
Income before income taxes |
| |
| | ||
Provision for income taxes |
| ( |
| ( | ||
Net income | $ | | $ | | ||
Earnings per share: | ||||||
Basic | $ | | $ | | ||
Diluted | $ | | $ | | ||
Shares used in per share calculation: | ||||||
Basic |
| |
| | ||
Diluted |
| |
| | ||
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 September 30, | |||||
| 2022 |
| 2023 | |||
Net income | $ | | $ | | ||
Other comprehensive loss: | ||||||
Foreign currency translation adjustment, net of tax |
| ( |
| ( | ||
Net unrealized gain on derivatives, net of tax | | | ||||
Other, net of tax | | | ||||
Other comprehensive loss | ( | ( | ||||
Comprehensive income | $ | | $ | | ||
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 September 30, 2022 | ||||||||||||||
Accumulated | ||||||||||||||
Common Stock | Other | |||||||||||||
| Number of |
|
| Retained |
| Comprehensive |
| |||||||
| Shares |
| Amount |
| Earnings |
| Loss |
| Total | |||||
Balance—June 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Exercise of stock options |
| | | — | — | | ||||||||
Vesting of RSUs |
| | — | — | — | — | ||||||||
Shares issued under employee stock purchase program |
| | | — | — | | ||||||||
Stock-based compensation expense |
| — | | — | — | | ||||||||
Repurchase of common stock | ( | ( | ( | — | ( | |||||||||
Taxes paid related to net share settlement of equity awards |
| ( | ( | ( | — | ( | ||||||||
Net income |
| — | — | | — | | ||||||||
Other comprehensive loss |
| — | — | — | ( | ( | ||||||||
Balance—September 30, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Three Months Ended September 30, 2023 | ||||||||||||||
Accumulated | ||||||||||||||
Common Stock | Other | |||||||||||||
| Number of |
|
| Retained |
| Comprehensive |
| |||||||
| Shares |
| Amount |
| Earnings |
| Loss |
| Total | |||||
Balance—June 30, 2023 | | $ | | $ | | $ | ( | $ | | |||||
Exercise of stock options | | | — | — | | |||||||||
Vesting of RSUs | | — | — | — | — | |||||||||
Shares issued under employee stock purchase program | | | — | — | | |||||||||
Stock-based compensation expense | — | | — | — | | |||||||||
Taxes paid related to net share settlement of equity awards | ( | ( | ( | — | ( | |||||||||
Net income | — | — | | — | | |||||||||
Other comprehensive loss | — | — | — | ( | ( | |||||||||
Balance—September 30, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
6
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Three Months Ended September 30, | ||||||
| 2022 |
| 2023 | |||
CASH FLOWS FROM OPERATING ACTIVITIES |
| |||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions: | ||||||
Depreciation and amortization |
| |
| | ||
Stock-based compensation expense |
| |
| | ||
Recovery of losses on accounts receivable | ( | ( | ||||
Deferred income taxes | |
| | |||
Amortization of debt discount and issuance costs |
| | — | |||
Other |
| | | |||
Changes in operating assets and liabilities—net of business acquisitions: | ||||||
Accounts receivable |
| ( |
| | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other assets |
| ( |
| ( | ||
Accounts payable |
| |
| | ||
Accrued payroll and related expenses | ( | ( | ||||
Advances from customers |
| |
| | ||
Deferred revenue | | ( | ||||
Other |
| ( |
| ( | ||
Net cash provided by operating activities |
| |
| | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Acquisition of property and equipment |
| ( |
| ( | ||
Proceeds from sale of property and equipment | | | ||||
Purchases of certificates of deposit | ( | ( | ||||
Proceeds from maturities of certificates of deposit | — | | ||||
Acquisition of businesses, net of cash acquired |
| ( |
| — | ||
Payments for intangible and other assets |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Net borrowings on bank lines of credit |
| |
| | ||
Proceeds from long-term debt |
| |
| | ||
Payments on long-term debt |
| ( |
| ( | ||
Proceeds from exercise of stock options and employee stock purchase plan |
| |
| | ||
Payments of contingent consideration | ( | ( | ||||
Repurchases of common stock |
| ( |
| — | ||
Taxes paid related to net share settlement of equity awards |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash |
| ( |
| | ||
Net change in cash and cash equivalents |
| ( |
| | ||
Cash and cash equivalents—beginning of period |
| |
| | ||
Cash and cash equivalents—end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: | ||||||
Cash paid, net during the period for: | ||||||
Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements.
7
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, 2023 filed with the SEC. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the operating results to be expected for the full 2024 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, costs of sales and expenses during the reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, 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, contingent consideration, allowance for doubtful accounts, 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 following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| Three Months Ended September 30, | |||||
2022 |
| 2023 | ||||
Net income available to common stockholders | $ | | $ | | ||
Weighted average shares outstanding—basic |
| |
| | ||
Dilutive effect of equity awards |
| |
| | ||
Weighted average shares outstanding—diluted |
| |
| | ||
Basic earnings per share | $ | | $ | | ||
Diluted earnings per share | $ | | $ | | ||
Shares excluded from diluted earnings per share due to their anti-dilutive effect | | | ||||
8
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 $
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable, debt instruments, an interest rate swap contract and foreign currency forward contracts. The carrying values of financial instruments, other than long-term debt instruments and the interest rate swap contract, 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 because 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 June 30, 2023 and September 30, 2023.
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 at quoted prices in active markets for identical assets and liabilities. The “Level 2” category includes assets and liabilities from observable inputs other than quoted market prices. The “Level 3” category includes assets and liabilities for which valuation techniques 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, 2023 |
| September 30, 2023 | |||||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||||||
Assets—Insurance company contracts | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | ||||||||
Assets – Interest rate swap contract | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | ||||||||
Liabilities—Contingent consideration | $ | — | $ | — | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||||
Derivative Instruments and Hedging Activity
Our use of derivatives consists of foreign currency forward contracts and an interest rate swap contract. The foreign currency 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 also manage our risk to changes in interest rates using derivative instruments. We use fixed interest rate swaps to effectively convert a portion of the variable interest rate payments to fixed interest rate payments. We do not use hedging instruments for speculative purposes.
The net gains or losses from our foreign currency forward contracts, which are not designated as hedge instruments, are reported in the consolidated statements of operations, and the amounts reported for the three months ended September 30, 2022 and 2023 were not significant. The fair value of our foreign currency forward 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 June 30, 2023 and September 30, 2023, we held foreign currency forward contracts with notional amounts totaling $
9
The interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to our variable, Secured Overnight Financing Rate (“SOFR”) based debt. The interest rate swap matures in December 2026. The interest rate swap is considered an effective cash flow hedge, and as a result, the net gains or losses on such instrument are reported as a component of other comprehensive income in the consolidated financial statements and are reclassified as net income when the underlying hedged interest expense impacts earnings. A qualitative and quantitative assessment over the hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate that the hedge may no longer be highly effective.
As of June 30, 2023 and September 30, 2023, the notional amount of the derivative instruments designated as an interest rate swap hedge was $
The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows:
| Three Months Ended September 30, | |||||
2022 |
| 2023 | ||||
Total interest and other expense, net presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | ( | $ | ( | ||
Gain recognized in other comprehensive income, net of tax |
| |
| | ||
Benefit (expense) reclassified from accumulated other comprehensive income to interest expense, net |
| ( |
| | ||
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption. There were no new pronouncements adopted in the first quarter of fiscal year 2024.
2. Business Combinations
Under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805"), the acquisition method of accounting requires us to record assets acquired less liabilities assumed from an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase price over the estimated fair value of the net assets acquired 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 which are believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is up to one year from the acquisition date, as additional information that existed at the acquisition date becomes available for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are included in earnings.
Fiscal Year 2024 Business Acquisition
In October 2023, we (through our Security Division) acquired a privately held provider of radiation detection technology for approximately $
The goodwill recognized for this business acquisition is not deductible for income tax purposes.
Fiscal Year 2023 Business Acquisitions
In April 2023, we (through our Optoelectronics and Manufacturing division) acquired a privately held provider of engineering and contract manufacturing solutions for approximately $
10
In February 2023, we (through our Healthcare division) acquired a privately held provider of software and solutions for approximately $
Through our Security division, we acquired (i) in December 2022 certain assets of a provider of baggage and parcel inspection systems for approximately $
The goodwill recognized for each of the fiscal year 2023 business acquisitions is not deductible for income tax purposes. These business acquisitions in fiscal 2023 and 2024, individually and in the aggregate, were not material to our consolidated financial statements. Accordingly, pro-forma historical results of operations and other disclosures related to these businesses have not been presented.
3. Balance Sheet Details
The following tables set forth details of selected balance sheet accounts (in thousands):
June 30, | September 30, | |||||
Accounts receivable, net |
| 2023 |
| 2023 | ||
Accounts receivable | $ | | $ | | ||
Less allowance for doubtful accounts |
| ( |
| ( | ||
Total | $ | | $ | | ||
June 30, | September 30, | |||||
Inventories |
| 2023 |
| 2023 | ||
Raw materials | $ | | $ | | ||
Work-in-process |
| |
| | ||
Finished goods |
| |
| | ||
Total | $ | | $ | | ||
June 30, | September 30, | |||||
Property and equipment, net |
| 2023 |
| 2023 | ||
Land | $ | | $ | | ||
Buildings, civil works and improvements |
| |
| | ||
Leasehold improvements |
| |
| | ||
Equipment and tooling |
| |
| | ||
Furniture and fixtures |
| |
| | ||
Computer equipment |
| |
| | ||
Computer software |
| |
| | ||
Computer software implementation in process | | | ||||
Construction in process |
| |
| | ||
Total |
| |
| | ||
Less accumulated depreciation and amortization |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | | ||
Depreciation and amortization expense for property and equipment was $
11
4. Goodwill and Intangible Assets
The changes in the carrying value of goodwill by segment for the three-month period ended September 30, 2023 were as follows (in thousands):
Optoelectronics | ||||||||||||
And | ||||||||||||
Security | Healthcare | Manufacturing | ||||||||||
| Division |
| Division |
| Division |
| Consolidated | |||||
Balance as of June 30, 2023 | $ | | $ | | $ | | $ | | ||||
Foreign currency translation adjustment |
| ( | ( | ( | ( | |||||||
Balance as of September 30, 2023 | $ | | | | | |||||||
Intangible assets consisted of the following (in thousands):
June 30, 2023 | September 30, 2023 | |||||||||||||||||||
Weighted | Gross | Gross | ||||||||||||||||||
Average | Carrying | Accumulated | Intangibles | Carrying | Accumulated | Intangibles | ||||||||||||||
| Lives |
| Value |
| Amortization |
| Net |
| Value |
| Amortization |
| Net | |||||||
Amortizable assets: | ||||||||||||||||||||
Software development costs |
| $ | | $ | ( | $ | | | ( | | ||||||||||
Patents |
|
| |
| ( |
| | | ( | | ||||||||||
Developed technology |
|
| |
| ( |
| | | ( | | ||||||||||
Customer relationships |
|
| |
| ( |
| | | ( | | ||||||||||
Total amortizable assets |
| | ( | | | ( | | |||||||||||||
Non-amortizable assets: | ||||||||||||||||||||
In-process R&D | | — | | | — | | ||||||||||||||
Trademarks |
| | — | | | — | | |||||||||||||
Total intangible assets | $ | | $ | ( | $ | | | ( | | |||||||||||
Amortization expense related to intangible assets was $
At September 30, 2023, the estimated future amortization expense for amortizable intangible assets was as follows (in thousands):
Fiscal Year
2024 (remaining 9 months) |
| $ | |
2025 |
| | |
2026 |
| | |
2027 | | ||
2028 | | ||
Thereafter |
| ||
Total | $ | |
Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product-by-product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight-line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended September 30, 2022 and 2023, we capitalized software development costs in the amounts of $
12
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 Topic 606, Revenue from Contracts with Customers (“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 sheets. We may also receive consideration, per the terms of a contract, from customers prior to transferring control of 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 in either Other accrued expenses and current liabilities or Other long-term liabilities. We recognize these contract liabilities as sales after all revenue recognition criteria are met.
The table below shows the balance of contract assets and liabilities as of June 30, 2023 and September 30, 2023, including the change between the periods. There were no substantial non-current contract assets for the periods presented.
Contract Assets (in thousands)
| June 30, |
| September 30, |
|
|
| ||||||
| 2023 |
| 2023 |
| Change |
| % Change |
| ||||
Unbilled revenue (included in accounts receivable, net) | $ | | $ | | $ | |
| | % | |||
Contract Liabilities (in thousands)
| June 30, |
| September 30, |
|
|
| ||||||
| 2023 |
| 2023 |
| Change |
| % Change | |||||
Advances from customers | $ | | $ | | $ | | | % | ||||
Deferred revenue—current |
| |
| |
| ( | ( | % | ||||
Deferred revenue—long-term |
| |
| |
| ( | ( | % | ||||
Contract assets increased during the three months ended September 30, 2023 primarily from the timing and nature of milestones met in contracts for a number of customers in our Security Division where we met the revenue recognition criteria under ASC 606 in advance of the time when contracts give us the right to invoice customers.
Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the portion of the transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of September 30, 2023, the portion of the transaction price allocated to remaining performance obligations was approximately $
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
13
6. Leases
The components of operating lease expense were as follows (in thousands):
Three Months Ended September 30, | ||||||
| 2022 |
| 2023 | |||
Operating lease cost | $ | | $ | | ||
Variable lease cost | |
| | |||
Short-term lease cost | |
| | |||
$ | | $ | | |||
Supplemental disclosures related to operating leases were as follows (in thousands):
| Balance Sheet Category |
| June 30, 2023 |
| September 30, 2023 | ||||
Operating lease right of use (“ROU”) assets, net |
| $ | | $ | | ||||
Operating lease liabilities, current portion |
| $ | | $ | | ||||
Operating lease liabilities, long-term |
|
| |
| | ||||
Total operating lease liabilities | $ | | $ | | |||||
Weighted average remaining lease term |
|
| |||||||
Weighted average discount rate |
|
| | % | |||||
Supplemental cash flow information related to operating leases was as follows (in thousands):
| Three Months Ended September 30, | |||||
| 2022 |
| 2023 | |||
Cash paid for operating lease liabilities | $ | | $ | | ||
ROU assets obtained in exchange for new lease obligations |
| |
| | ||
Maturities of operating lease liabilities at September 30, 2023 were as follows (in thousands):
| September 30, 2023 | ||
Less than one year | $ | | |
1 – 2 years |
| | |
2 – 3 years |
| | |
3 – 4 years |
| | |
4 – 5 years |
| | |
Thereafter |
| | |
| | ||
Less: imputed interest |
| ( | |
Total lease liabilities | $ | | |
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 September 30, 2023, we recognized $
14
During the three months ended September 30, 2022, we recognized $
The following tables summarize impairment, restructuring and other charges (benefits), net for the periods set forth below (in thousands):
Three Months Ended September 30, 2022 | |||||||||||||||
|
|
| Optoelectronics and |
|
| ||||||||||
Healthcare | Manufacturing | ||||||||||||||
| Security Division |
| Division |
| Division |
| Corporate |
| Total | ||||||
Employee termination costs | $ | | $ | — | $ | — | $ | — | $ | | |||||
Facility closures/consolidation | | — | | — | | ||||||||||
Legal costs, net |
| |
| |
| — |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
Three Months Ended September 30, 2023 | |||||||||||||||
Optoelectronics and | |||||||||||||||
Healthcare | Manufacturing | ||||||||||||||
| Security Division |
| Division |
| Division |
| Corporate |
| Total | ||||||
Employee termination costs | $ | | $ | — | $ | — | $ | | $ | | |||||
Facility closures/consolidation | — | — | | — | | ||||||||||
Acquisition-related costs | | — | — | — | | ||||||||||
Legal costs, net |
| | — | — | | | |||||||||
Total | $ | | $ | — | $ | | $ | | $ | | |||||
The accrued liability for restructuring and other charges is included in other accrued expenses and current liabilities in the condensed consolidated balance sheets. The changes in the accrued liability for restructuring and other charges for the three-month period ended September 30, 2023 were as follows (in thousands):
Facility | |||||||||||||||
Acquisition- | Employee | Closure/ | Legal | ||||||||||||
Related | Termination | Consolidation | Costs and | ||||||||||||
| Costs |
| Costs |
| Cost |
| Settlements |
| Total | ||||||
Balance as of June 30, 2023 | $ | | $ | | $ | | $ | | $ | | |||||
Restructuring and other charges, net |
| |
| |
| |
| |
| | |||||
Payments, adjustments and reimbursements, net |
| ( |
| |
| ( |
| ( |
| ( | |||||
Balance as of September 30, 2023 | $ | | $ | | $ | | $ | | $ | | |||||
8. Borrowings
Revolving Credit Facility
In December 2021, we entered into an amendment to the senior secured credit facility that increased the aggregate amount available to borrow from $
15
without penalty. It is our practice to routinely borrow and repay several times per year under the revolving facility and therefore, borrowings under the revolving credit facility are included in current liabilities. As of September 30, 2023, we were in compliance with all financial covenants under this credit facility. In September 2022, we entered into an interest rate swap in order to mitigate the interest rate risk on a portion of the interest payments expected to be made on the borrowings outstanding under the revolving credit facility and term loan. Refer to Note 1 for details. Interest expense related to the credit facility and term loan was $
1.25% Convertible Senior Notes (“Notes”)
In February 2017, we issued $
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 September 30, 2023, $
Long-term debt consisted of the following (in thousands):
| June 30, | September 30, | ||||
| 2023 |
| 2023 | |||
Term loan | $ | | $ | | ||
Other long-term debt |
| |
| | ||
| |
| | |||
Less current portion of long-term debt |
| ( |
| ( | ||
Long-term portion of debt | $ | | $ | | ||
9. Stockholders’ Equity
Stock-based Compensation
As of September 30, 2023, we maintained the Amended and Restated 2012 Incentive Award Plan (the “OSI Plan”) as a stock-based employee compensation plan.
We recorded stock-based compensation expense in the consolidated statements of operations as follows (in thousands):
Three Months Ended September 30, | ||||||
| 2022 |
| 2023 | |||
Cost of goods sold | $ | | $ | | ||
Selling, general and administrative | | | ||||
Research and development | | | ||||
Stock-based compensation expense | $ | | $ | | ||
As of September 30, 2023, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $
16
The following summarizes stock option activity during the three months ended September 30, 2023:
Weighted | ||||||||||
Average | Weighted-Average | Aggregate | ||||||||
Number of | Exercise | Remaining Contractual | Intrinsic Value | |||||||
| Options |
| Price |
| Term |
| (in thousands) | |||
Outstanding at June 30, 2023 |
| |
| $ | |
| ||||
Granted |
| — | — | |||||||
Exercised |
| ( | | |||||||
Expired or forfeited |
| — | — | |||||||
Outstanding at September 30, 2023 |
| | $ | | $ | | ||||
Exercisable at September 30, 2023 | | $ | |
| $ | | ||||
The following summarizes RSU award activity during the nine months ended September 30, 2023:
Weighted- | |||||
Average | |||||
| Shares |
| Fair Value | ||
Nonvested at June 30, 2023 |
| | $ | | |
Granted |
| | | ||
Vested |
| ( | | ||
Forfeited |
| ( | | ||
Nonvested at September 30, 2023 |
| | $ | | |
As of September 30, 2023, there were approximately
We granted
Stock Repurchase Program
In September 2022, our Board of Directors increased the stock repurchase authorization to a total of
During the three months ended September 30, 2023, we did not repurchase shares of our common stock. As of September 30, 2023, there were
Dividends
We have not paid any dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay any dividends in the foreseeable future. Our Board of Directors will determine the payment of future dividends, if any. Certain of our current bank credit facilities restrict the payment of dividends and future borrowings may contain similar restrictions.
17
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 obligations that are capped, the remaining maximum amount of such potential future payments is $
Projections and estimated probabilities are used to estimate future contingent earnout payments, which are discounted back to present value to compute contingent earnout liabilities.
Beginning fair value, June 30, 2023 |
| $ | |
Foreign currency translation adjustment | ( | ||
Changes in fair value for contingent earnout obligations |
| ( | |
Payments on contingent earnout obligations |
| ( | |
Ending fair value, September 30, 2023 | $ | |
Environmental Contingencies
We are subject to various environmental laws. We often 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 have not accrued for loss contingencies relating to 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 September 30, 2023.
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 $
18
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):
Three Months Ended September 30, | ||||||
| 2022 |
| 2023 | |||
Balance at beginning of period | $ | | $ | | ||
Additions | | | ||||
Reductions for warranty repair costs and adjustments |
| ( |
| ( | ||
Balance at end of period | $ | | $ | | ||
Legal Proceedings
In February 2023, one of our subsidiaries received a subpoena from the U.S. Department of Justice (“DoJ”) relating to a federal investigation involving a former employee of an OSI Systems subsidiary. The DoJ is currently prosecuting the former employee for embezzlement and other conduct occurring before he was hired by our subsidiary and while he was employed by another company in the United States and Mexico. The subpoena requests documents and records relating to, among other things, the former employee and the Company's business dealings in Mexico since 2020. We have produced documents in response to this subpoena and intend to cooperate with any further subpoenas or other requests in connection with this or any ensuing investigation.
In September 2023, an employee demanded a $4 million payment claiming that he was retaliated against for internally reporting that a Mexican government official solicited a payment in connection with a $35 million opportunity. The opportunity has not been awarded, no payment was actually made, and we have reported the employee’s allegations to the U.S. Department of Justice. We have denied the employee’s claim of retaliation and intend to vigorously contest any potential lawsuit that may be filed as lacking in credibility and merit.
We are involved in various other potential or actual 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 non-ordinary course 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.
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 September 30, 2022 and 2023 were
19
12. Segment Information
We have determined that we operate in
The following tables present our results of operations and identifiable assets by industry segment (in thousands):
Three Months Ended | ||||||
September 30, | ||||||
| 2022 |
| 2023 | |||
Revenues (1) —by Segment: | ||||||
Security division | $ | | $ | | ||
Optoelectronics and Manufacturing division, including intersegment revenues | | | ||||
Healthcare division | | | ||||
Intersegment revenues elimination | ( | ( | ||||
Total | $ | | $ | | ||
Income (loss) from operations —by Segment: | ||||||
Security division | $ | | $ | | ||
Optoelectronics and Manufacturing division | | | ||||
Healthcare division | | | ||||
Corporate | ( | ( | ||||
Intersegment Eliminations | | | ||||
Total | $ | | $ | | ||
June 30, | September 30, | |||||
| 2023 |
| 2023 | |||
Assets (2) —by Segment: | ||||||
Security division | $ | | $ | | ||
Optoelectronics and Manufacturing division |
| |
| | ||
Healthcare division | |
| | |||
Corporate |
| |
| | ||
Eliminations (3) |
| ( |
| ( | ||
Total | $ | | $ | | ||
20
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 September 30, 2023 and results of operations for the three months ended September 30, 2023 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 filed with the SEC.
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 our expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (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; the impact of potential information technology, cybersecurity or data security breaches; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; the impact of the Russia-Ukraine conflict, including the potential for broad economic disruption; global economic uncertainty; material delays and cancellations of orders or deliveries thereon, supply chain disruptions, plant closures, or other adverse impacts on our ability to execute business plans; 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; contract and regulatory compliance matters, and actions, which if brought, could result in judgments, settlements, fines, injunctions, debarment or penalties; as well as other risks and uncertainties, including but not limited to those factors described 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 Section. Moreover, we operate in a very competitive and rapidly changing environment and 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, cardiology and remote monitoring, and connected care systems and associated 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.
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
21
for weapons, explosives, drugs, radioactive and nuclear materials and other contraband. Revenues from our Security division accounted for 54% and 59% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.
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 also provide our optoelectronic devices and electronics manufacturing services to OEM customers and to our own Security and Healthcare divisions. Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 30% and 28% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.
Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, cardiology and remote monitoring, and connected care systems 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 16% and 13% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, 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.
Global Economic Considerations. Our products and services are sold in numerous countries worldwide, with a large percentage of our sales generated outside the United States. Therefore, we are exposed to and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. There is uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, and labor shortages. These global macroeconomic factors, coupled with the volatile U.S. political climate and political unrest internationally, have created uncertainty and impacted demand for certain of our products and services. In October 2023, the war between Israel and Hamas in Gaza has created political and potential economic uncertainty in the Middle East. Also, the continued conflict between Russia and Ukraine and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition or results of operations. 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. 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.
Healthcare Considerations. As described below, our Healthcare division experienced some increased demand for its patient monitoring products as a result of the COVID-19 pandemic during the earlier stages of the pandemic. Certain hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, higher interest rates make access to credit more expensive, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. To the extent macroeconomic conditions remain challenging, it is likely that hospitals’ spend on capital equipment will be adversely impacted.
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.
U.S. Budget Environment. U.S. government spending levels and timely funding thereof can affect our financial performance. The House and Senate continue the legislative process on the FY 2024 budget. The President signed a continuing resolution to fund the U.S government at FY 2023 levels through the earlier of November 17, 2023 or until FY 2024 appropriations bills are enacted. During periods covered by continuing resolutions, we may experience delays in new awards of our products and services, and those delays may adversely affect our results of operations. If Congress fails to enact FY 2024 appropriations bills or extend the continuing resolution on
22
a timely basis, the U.S. government will undergo a complete or partial shutdown. The impact of any government shutdown is uncertain. If a government shutdown were to occur and were to continue for an extended period, we could be at risk of program cancellations, schedule delays, and other disruptions and nonpayment regarding products and services, which could adversely affect our results of operations.
Changes in Costs and Supply Chain Disruptions. Our costs are subject to fluctuations, particularly due to changes in raw material, component, and logistics costs. Our manufacturing and supply chain operations, including freight and shipping activities, have been and may continue to be impacted by increased vendor costs as well as the current global supply chain challenges. Specifically, we are impacted by the global shortage of electronic components and other materials needed for production and freight availability. We expect continued disruptions in obtaining material and freight availability as the world economies react to and recover from supply chain shortages. If we are unable to mitigate the impact of increased costs through pricing or other actions, there could be a negative impact on our business, results of operations, and financial condition.
Russia’s Invasion of Ukraine. The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. This has the potential to indirectly disrupt our supply chain and access to certain resources. While we have not experienced significant adverse impacts to date and will continue to monitor for any impacts and seek to mitigate disruption that may arise, we have certain research and development activities within Ukraine for our Healthcare division which have been somewhat impacted. The conflict also has increased the threat of malicious cyber activity from nation states and other actors.
Currency Exchange Rates. On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 1.9% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the strengthening of the U.S. dollar against other foreign currencies in 2023. Any further strengthening of the U.S. dollar against foreign currencies would adversely impact our sales for the remainder of the year, and any weakening of the U.S. dollar against foreign currencies would positively impact our sales for the remainder of the year.
Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic dramatically impacted the global health and economic environment, with millions of confirmed cases, business slowdowns and shutdowns, and market volatility. The COVID-19 pandemic caused, and may continue to cause, significant economic disruptions and impacted, and may continue to impact, our operations and the operations of our suppliers, logistics providers and customers as a result of supply chain disruptions and delays, as well as labor challenges. During the early stages of the pandemic, our Healthcare division experienced increased demand for certain products as a result of COVID-19. In our Security division, throughout the pandemic, receipt of certain orders was delayed, most notably with respect to our aviation and cargo products, and our revenues were adversely impacted as a result of the pandemic.
Significant International Security Contracts. During fiscal year 2023, our Security division was awarded two significant international contracts valued in aggregate greater than $700 million with expected revenues to be recognized over multiple years.
Results of Operations for the Three Months Ended September 30, 2022 (Q1 Fiscal 2023) Compared to the Three Months Ended September 30, 2023 (Q1 Fiscal 2024) (amounts in millions)
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.
| Q1 |
| % of |
| Q1 |
| % of |
|
|
| ||||||
| Fiscal 2023 |
| Net Revenues |
| Fiscal 2024 |
| Net Revenues |
| $ Change |
| % Change |
| ||||
Security |
| $ | 145.0 | 54 | % | $ | 164.6 | 59 | % | $ | 19.6 | 14 | % | |||
Optoelectronics and Manufacturing | 79.5 |
| 30 | 76.8 | 28 | (2.7) | (3) | |||||||||
Healthcare | 43.6 |
| 16 | 37.8 | 13 | (5.8) | (13) | |||||||||
Total net revenues |
| $ | 268.1 | 100 | % | $ | 279.2 | 100 | % | $ | 11.1 | 4 | % | |||
Revenues for the Security division during Q1 fiscal 2024 increased year-over-year due to increases in product and service revenues of approximately $12.3 million and $7.3 million, respectively. The increase in product revenue was primarily driven by delivery of systems for our new contracts in Mexico. The increase in service revenue was due primarily to the increase in the installed base of products.
23
Revenues for the Optoelectronics and Manufacturing division during Q1 fiscal 2024 decreased year-over year as a result of a decrease in revenue in our optoelectronics business of approximately $4.5 million, offset by an increase in revenue of approximately $1.8 million in our contract manufacturing business.
Revenues for the Healthcare division during Q1 fiscal 2024 decreased year-over-year due to a reduction in patient monitoring sales of $6.2 million offset by an increase in cardiology sales of $0.6 million.
Gross Profit
Q1 | % of | Q1 | % of | ||||||||
| Fiscal 2023 |
| Net Revenues |
| Fiscal 2024 |
| Net Revenues |
| |||
Gross profit | $ | 87.5 | 32.6 | % | $ | 98.7 | 35.4 | % | |||
Gross profit is impacted by sales volume, productivity, and changes in overall manufacturing-related costs, such as raw materials and component costs, warranty expense, provision for inventory, freight, and logistics. Our cost of goods sold increased year-over-year primarily as a result of the increase in net revenues described above which was driven by our Security division. Gross profit as a percentage of net revenues during the quarter ended September 30, 2023 increased on a year-over-year basis due to an increase in the Security division gross margins due to a more favorable sales mix partially offset by a reduction in the sales in the Healthcare division, which carries the highest gross margin of our three divisions.
Operating Expenses
Q1 |
| % of |
| Q1 | % of | |||||||||||
| Fiscal 2023 |
| Net Revenues |
| Fiscal 2024 |
| Net Revenues |
| $ Change |
| % Change | |||||
Selling, general and administrative |
| $ | 53.4 |
| 19.6 | % | $ | 59.8 | 21.4 | % | $ | 6.4 | 12.0 | % | ||
Research and development |
| 14.5 |
| 5.4 | 15.9 | 5.7 |
| 1.4 | 9.7 | |||||||
Impairment, restructuring and other charges, net |
| 1.2 |
| 0.5 | 0.5 | 0.2 |
| (0.7) | (58.3) | |||||||
Total operating expenses | $ | 69.1 |
| 25.8 | % | $ | 76.2 | 27.3 | % | $ | 7.1 | 10.3 | % | |||
Selling, general and administrative. Our significant selling, general and administrative (“SG&A”) expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, foreign currency translation, changes in fair value of contingent earnout liabilities and depreciation and amortization expense. SG&A expense for Q1 fiscal 2024 was $6.4 million higher than in the same prior-year period primarily due to a benefit recognized in the prior year attributable to favorable foreign exchange rates and lower recovery of losses on accounts receivable in Q1 fiscal 2024 compared to the same prior-year period.
Research and development. Research and development (“R&D”) expenses include research related to new product development and product enhancements. R&D expense during Q1 fiscal 2024 was $1.4 million higher than the same prior-year period with investments to support new product development initiatives primarily in our Security and Healthcare divisions.
Impairment, restructuring and other charges. Impairment, restructuring and other charges generally consist of charges relating to reductions in our workforce, facilities consolidation, impairment of assets, costs related to acquisition activity, and other non-recurring charges. During Q1 fiscal 2024, impairment, restructuring and other charges consisted of $0.2 million for acquisition activity and $0.3 million in charges for employee terminations, legal charges and other costs. During Q1 fiscal 2023, impairment, restructuring and other charges consisted of $0.9 million for legal charges and $0.3 million in charges for employee terminations from operational efficiency activities.
Interest and Other Expense, Net
Q1 | % of | Q1 | % of |
| |||||||
| Fiscal 2023 |
| Net Revenues |
| Fiscal 2024 |
| Net Revenues |
| |||
Interest and other expense, net | $ | 3.4 |
| 1.3 | % | $ | 5.7 |
| 2.0 | % | |
24
Interest and other expense, net. For Q1 fiscal 2024, interest and other expense, net was $5.7 million as compared to $3.4 million in the same prior-year period. This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during Q1 fiscal 2024 in comparison with the levels of borrowing during the same period in the prior year. The 1.25% convertible notes were outstanding for the first two months of the quarter ended September 30, 2022 and were retired on September 1, 2022 using borrowings from our credit facility. Interest expense for Q1 fiscal 2024 and 2023 included a benefit of $0.9 million and an expense of $0.1 million, respectively, from the interest rate swap.
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 Q1 fiscal 2024 and 2023, we recognized a provision for income taxes of $3.9 million and $3.6 million, respectively. The effective tax rates for Q1 fiscal 2024 and 2023 were 23.4% and 24.4%, respectively. During the Q1 fiscal 2024 and 2023, we recognized a net discrete tax benefit of $0.4 million and $0.1 million, respectively, related to equity-based compensation under ASU 2016-09.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit facilities. Cash and cash equivalents totaled $82.6 million at September 30, 2023, an increase of $5.8 million, or 7.6%, from $76.8 million at June 30, 2023. We currently anticipate that our available funds, credit facilities and cash flow from operations will be sufficient to meet our operational cash needs for the next 12 months and the foreseeable future beyond that. In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S. subsidiaries, and our credit facilities will be sufficient to satisfy our obligations in the U.S.
We have a $750 million credit facility that is comprised of a $600 million revolving credit facility, which includes a $300 million sub-facility for letters of credit, and a $150 million term loan. The term loan was available to us to draw through December 2026. As of September 30, 2023, there was $235.0 million outstanding under our revolving credit facility, $37.7 million of outstanding letters of credit, and $141.3 million outstanding under the term loan.
Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows. During Q1 fiscal 2024, we generated cash from operations of $17.1 million which was consistent with the prior period. The increase in net income in Q1 fiscal 2024 compared to the same period last year was offset by changes in net working capital.
Cash Used in Investing Activities. Net cash used in investing activities was $9.6 million for Q1 fiscal 2024 as compared to $9.1 million in the same prior-year period. Cash used to acquire businesses was nil during the three-month period ended September 30, 2023 compared to $1.9 in the prior year. Capital expenditures in the three-month period ended September 30, 2023 were $5.2 million compared to $3.3 million in the same prior-year period. Expenditures for intangible and other assets in the three-month period ended September 30, 2023 were $4.2 million compared to $3.9 million in the same prior-year period.
Cash Used in Financing Activities. Net cash used in financing activities was $1.9 million during Q1 fiscal 2024, compared to $13.9 million during the same prior-year period. The decrease in cash used in financing activities was due to (1) no repurchases of common stock during Q1 fiscal 2024 compared to $17.3 million in the same prior-year period and (2) higher net borrowings in Q1 fiscal 2024 compared to the same prior-year period, which were partially offset by higher taxes paid related to settlement of equity awards of $22.2 million during Q1 fiscal 2024 compared to $11.1 million in the same prior-year period.
Borrowings
See Note 8 to the condensed consolidated financial statements for a detailed discussion regarding our revolving credit facility and other borrowings.
25
Cash Held by Foreign Subsidiaries
Our cash and cash equivalents totaled $82.6 million at September 30, 2023. Of this amount, approximately 91% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by our subsidiaries in the United Kingdom, Qatar, Singapore, India, Malaysia and Canada, and to a lesser extent in Indonesia, Australia, Germany, Mexico and Egypt among other countries. 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
We did not repurchase any shares of Common Stock during the first quarter of fiscal year 2024.
Contractual Obligations
During the first quarter of fiscal year 2024, there were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023. See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption. There were no new pronouncements adopted in the first quarter of fiscal year 2024.
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, 2023. There have been no material changes in our exposure to market risk during the three months ended September 30, 2023 from that described in the Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2023, 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.
26
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of fiscal 2024 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.
27
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of our business or otherwise. More information regarding legal proceedings in which we are involved can be found under Note 10, “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated by reference into this Item 1.
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 September 30, 2023 should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on August 29, 2023, 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, 2023.
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 incorporated by reference into this Item 2.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
28
ITEM 6. EXHIBITS
Exhibit |
| 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) |
29
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 27th day of October 2023.
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) | ||
30
EXHIBIT 31.1
CERTIFICATION
Certification required by Rule 13a-14(a) or Rule 15d-14(a)
and under Section 302 of the Sarbanes-Oxley Act of 2002
I, Deepak Chopra, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of OSI Systems, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 27, 2023 | |
| |
| /s/ Deepak Chopra |
| Deepak Chopra |
| Chief Executive Officer |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
Certification required by Rule 13a-14(a) or Rule 15d-14(a)
and under Section 302 of the Sarbanes-Oxley Act of 2002
I, Alan Edrick, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of OSI Systems, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 27, 2023 | |
| |
| /s/ Alan Edrick |
| Alan Edrick |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Deepak Chopra, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented in the Report. |
Date: October 27, 2023 | |
| |
| /s/ Deepak Chopra |
| Deepak Chopra |
| Chief Executive Officer |
| (Principal Executive Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing. The signed original of this certification required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan Edrick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented in the Report. |
Date: October 27, 2023 | |
| |
| /s/ Alan Edrick |
| Alan Edrick |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing. The signed original of this certification required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.