SEC Filing | OSI Systems, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2021

☐

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

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		33-0238801
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	OSIS	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ☐

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

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

Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of October 25, 2021, there were 17,942,081 shares of the registrant’s common stock outstanding.

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OSI SYSTEMS, INC.

INDEX


		PAGE

PART I — FINANCIAL INFORMATION		3

Item 1 —	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2021 and September 30, 2021	3
	Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2021	4
	Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2020 and 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2020 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3 —	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4 —	Controls and Procedures	27

PART II — OTHER INFORMATION		29
Item 1 —	Legal Proceedings	29
Item 1A —	Risk Factors	29
Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3 —	Defaults Upon Senior Securities	29
Item 4 —	Mine Safety Disclosures	29
Item 5 —	Other Information	29
Item 6 —	Exhibits	30
Signatures		31

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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, 2021		September 30, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	80,613	$	54,663
Accounts receivable, net		290,653		292,004
Inventories		294,208		320,673
Prepaid expenses and other current assets		43,930		62,870
Total current assets		709,404		730,210
Property and equipment, net		118,004		116,814
Goodwill		320,304		319,345
Intangible assets, net		127,608		127,262
Other assets		109,047		117,008
Total assets	$	1,384,367	$	1,410,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit	$	—	$	26,000
Current portion of long-term debt		846		286,954
Accounts payable		141,263		140,544
Accrued payroll and related expenses		50,816		36,998
Advances from customers		38,463		34,564
Other accrued expenses and current liabilities		113,379		131,728
Total current liabilities		344,767		656,788
Long-term debt		276,421		692
Deferred income taxes		7,157		4,685
Other long-term liabilities		116,202		125,162
Total liabilities		744,547		787,327
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value— 10,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock, $0.001 par value—100,000,000 shares authorized; issued and outstanding, 17,854,110 shares at June 30, 2021 and 17,941,393 shares at September 30, 2021		105,724		53,377
Retained earnings		548,842		586,850
Accumulated other comprehensive loss		(14,746)		(16,915)
Total stockholders’ equity		639,820		623,312
Total liabilities and stockholders’ equity	$	1,384,367	$	1,410,639

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)


	Three Months Ended September 30,
	2020		2021
Net revenues:
Products	$	182,747	$	207,212
Services		72,161		72,045
Total net revenues		254,908		279,257
Cost of goods sold:
Products		124,841		142,906
Services		34,316		37,021
Total cost of goods sold		159,157		179,927
Gross profit		95,751		99,330
Operating expenses:
Selling, general and administrative		58,617		57,323
Research and development		12,082		14,817
Impairment, restructuring and other charges, net		8,359		2,510
Total operating expenses		79,058		74,650
Income from operations		16,693		24,680
Interest and other expense, net		(4,189)		(2,016)
Income before income taxes		12,504		22,664
Provision for income taxes		(3,160)		(3,612)
Net income	$	9,344	$	19,052
Earnings per share:
Basic	$	0.52	$	1.06
Diluted	$	0.51	$	1.04
Shares used in per share calculation:
Basic		18,051		17,947
Diluted		18,335		18,306

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)


	Three Months Ended September 30,
	2020		2021
Net income	$	9,344	$	19,052
Other comprehensive income (loss):
Foreign currency translation adjustment		3,454		(2,302)
Other		59		133
Other comprehensive income (loss)		3,513		(2,169)
Comprehensive income	$	12,857	$	16,883

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)


	Three Months Ended September 30, 2020
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2020	18,011,982	$	122,553	$	474,793	$	(25,194)	$	572,152
Exercise of stock options	69,195		80		—		—		80
Vesting of RSUs	286,701		—		—		—		—
Shares issued under employee stock purchase program	32,641		2,022		—		—		2,022
Stock-based compensation expense	—		6,109		—		—		6,109
Repurchase of common stock	(320,136)		(24,816)		—		—		(24,816)
Taxes paid related to net share settlement of equity awards	(167,842)		(10,864)		—		—		(10,864)
Net income	—		—		9,344		—		9,344
Other comprehensive income	—		—		—		3,513		3,513
Balance—September 30, 2020	17,912,541	$	95,084	$	484,137	$	(21,681)	$	557,540


	Three Months Ended September 30, 2021
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2021	17,854,110	$	105,724	$	548,842	$	(14,746)	$	639,820
Exercise of stock options	162,393		155		—		—		155
Vesting of RSUs	310,077		—		—		—		—
Shares issued under employee stock purchase program	27,960		1,990		—		—		1,990
Stock-based compensation expense	—		7,113		—		—		7,113
Repurchase of common stock	(168,506)		(16,231)		—		—		(16,231)
Taxes paid related to net share settlement of equity awards	(244,641)		(18,611)		—		—		(18,611)
Adoption of ASU 2020-06 for convertible notes	—		(26,763)		18,956		—		(7,807)
Net income	—		—		19,052		—		19,052
Other comprehensive loss	—		—		—		(2,169)		(2,169)
Balance—September 30, 2021	17,941,393	$	53,377	$	586,850	$	(16,915)	$	623,312

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)


	Three Months Ended September 30,
	2020		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,344	$	19,052
Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of effects from acquisitions:
Depreciation and amortization		10,002		9,697
Stock-based compensation expense		6,109		7,113
Provision (recoveries) for losses on accounts receivable		2,916		(1,365)
Deferred income taxes		96		82
Amortization of debt discount and issuance costs		2,400		348
Impairment charges		552		—
Other		16		68
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable		14,356		(850)
Inventories		(14,278)		(27,764)
Prepaid expenses and other assets		3,377		(17,611)
Accounts payable		7,358		(408)
Accrued payroll and related expenses		(9,469)		(13,579)
Advances from customers		12,773		(3,813)
Deferred revenue		5,355		6,280
Other		2,925		11,731
Net cash provided by (used in) operating activities		53,832		(11,019)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(3,780)		(3,474)
Purchases of certificates of deposit		(1,815)		(106)
Proceeds from maturities of certificates of deposit		700		—
Acquisition of business, net of cash acquired		(3,000)		—
Payments for intangible and other assets		(4,446)		(4,254)
Net cash used in investing activities		(12,341)		(7,834)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on bank lines of credit		(8,000)		26,000
Proceeds from long-term debt		156		82
Payments on long-term debt		(303)		(286)
Proceeds from exercise of stock options and employee stock purchase plan		2,102		2,145
Payments of contingent consideration		(121)		(304)
Repurchases of common stock		(24,816)		(16,231)
Taxes paid related to net share settlement of equity awards		(10,864)		(18,611)
Net cash used in financing activities		(41,846)		(7,205)
Effect of exchange rate changes on cash		1,178		108
Net change in cash and cash equivalents		823		(25,950)
Cash and cash equivalents—beginning of period		76,102		80,613
Cash and cash equivalents—end of period	$	76,925	$	54,663
Supplemental disclosure of cash flow information:
Cash paid, net during the period for:
Interest	$	3,015	$	2,400
Income taxes	$	1,735	$	4,800

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 filed with the SEC. The results of operations for the three months ended September 30, 2021 are not necessarily indicative of the operating results to be expected for the full 2022 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, 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, legal contingencies and recoveries, 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 7 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 no dilutive effect of the Notes for the three months ended September 30, 2020 and 2021.

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,
	2020		2021
Net income available to common stockholders	$	9,344	$	19,052
Weighted average shares outstanding—basic		18,051		17,947
Dilutive effect of equity awards		284		359
Weighted average shares outstanding—diluted		18,335		18,306
Basic earnings per share	$	0.52	$	1.06
Diluted earnings per share	$	0.51	$	1.04
Shares excluded from diluted earnings per share due to their anti-dilutive effect		87		20

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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 $54.7 million at September 30, 2021. Of this amount, approximately 83% 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, India, Malaysia, Singapore and Canada, and to a lesser extent in Australia, Albania and Germany among other countries. We have cash holdings in financial institutions that exceed insured limits for such financial 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 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 September 30, 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 9 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, 2021								September 30, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets—Insurance company contracts	$	—	$	47,113	$	—	$	47,113	$	—	$	48,416	$	—	$	48,416
Liabilities—Contingent consideration	$	—	$	—	$	19,431	$	19,431	$	—	$	—	$	16,954	$	16,954

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.

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. There were no net investment hedges outstanding as of September 30, 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. The amounts reported in the consolidated income statement for the three months ended September 30, 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 June 30, 2021 and September 30, 2021, we held foreign currency forward contracts with notional amounts totaling $26.1 million and $22.4 million, respectively. Unrealized gains and losses from the forward currency forward contracts as of September 30, 2021 were not significant.

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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.

Recently Adopted Accounting Pronouncements

Convertible Debt

In August 2020, the FASB issued Accounting Standards Update 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, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments typically will be closer to the coupon interest rate. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. We early adopted the new guidance on July 1, 2021 using the modified retrospective approach and recorded a $19 million increase to retained earnings and a reduction of $27 million in common stock as if there had been no equity component. Additionally, we recorded an increase to the convertible notes balance by approximately $10 million. Interest expense recognized subsequent to adoption on July 1, 2021 will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.

Income Taxes

In December 2019, the FASB issued Accounting Standards Update 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 in several other areas of ASC 740 by clarifying and amending existing guidance. The ASU applies to all entities that pay income taxes under GAAP. We adopted this accounting pronouncement on July 1, 2021 using the modified prospective approach. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

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2. Balance Sheet Details

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


	June 30,		September 30,
Accounts receivable, net	2021		2021
Accounts receivable	$	315,926	$	315,864
Less allowance for doubtful accounts		(25,273)		(23,860)
Total	$	290,653	$	292,004


	June 30,		September 30,
Inventories	2021		2021
Raw materials	$	160,313	$	179,445
Work-in-process		59,594		59,773
Finished goods		74,301		81,455
Total	$	294,208	$	320,673


	June 30,		September 30,
Property and equipment, net	2021		2021
Land	$	16,357	$	16,349
Buildings, civil works and improvements		57,555		56,353
Leasehold improvements		8,874		9,083
Equipment and tooling		129,735		130,411
Furniture and fixtures		3,275		3,382
Computer equipment		19,349		20,108
Computer software		23,090		23,298
Computer software implementation in process		11,102		11,040
Construction in process		4,011		3,797
Total		273,348		273,821
Less accumulated depreciation and amortization		(155,344)		(157,007)
Property and equipment, net	$	118,004	$	116,814

Depreciation and amortization expense for property and equipment was $5.2 million and $5.3 million for the three months ended September 30, 2020 and 2021, respectively.

3. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the three-month period ended September 30, 2021 were as follows (in thousands)


					Optoelectronics
					And
	Security		Healthcare		Manufacturing
	Division		Division		Division		Consolidated
Balance as of June 30, 2021	$	206,426	$	43,584	$	70,294	$	320,304
Goodwill acquired or adjusted during the period		212		—		—		212
Foreign currency translation adjustment		(150)		(94)		(927)		(1,171)
Balance as of September 30, 2021	$	206,488	$	43,490	$	69,367	$	319,345

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Intangible assets consisted of the following (in thousands):


		June 30, 2021						September 30, 2021
	Weighted	Gross						Gross
	Average	Carrying		Accumulated		Intangibles		Carrying		Accumulated		Intangibles
	Lives	Value		Amortization		Net		Value		Amortization		Net
Amortizable assets:
Software development costs	8-9 years	$	49,183	$	(15,679)	$	33,504	$	53,326	$	(16,436)	$	36,890
Patents	19 years		8,753		(2,597)		6,156		8,501		(2,697)		5,804
Developed technology	10 years		60,665		(25,923)		34,742		60,612		(27,505)		33,107
Customer relationships	7 years		50,676		(26,588)		24,088		50,099		(27,750)		22,349
Total amortizable assets			169,277		(70,787)		98,490		172,538		(74,388)		98,150
Non-amortizable assets:
In-process R&D			533		—		533		533		—		533
Trademarks			28,585		—		28,585		28,579		—		28,579
Total intangible assets		$	198,395	$	(70,787)	$	127,608	$	201,650	$	(74,388)	$	127,262

Amortization expense related to intangible assets was $4.8 million and $4.4 million for the three months ended September 30, 2020 and 2021, respectively.

At September 30, 2021, the estimated future amortization expense for intangible assets was as follows (in thousands):

Fiscal Year


2022 (remaining 9 months)	$	12,764
2023		19,482
2024		18,962
2025		15,668
2026		11,736
Thereafter		19,538
Total	$	98,150

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 each of the three months ended September 30, 2020 and 2021, we capitalized software development costs in the amount of $4.1 million.

4. 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 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. We recognize these contract liabilities as sales after all revenue recognition criteria are met.

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The table below shows the balance of contract assets and liabilities as of June 30, 2021 and September 30, 2021, 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,
	2021		2021		Change		% Change
Unbilled revenue (included in accounts receivable, net)	$	40,853	$	41,107	$	254	1	%

Contract Liabilities (in thousands)



	June 30,		September 30,
	2021		2021		Change		% Change
Advances from customers	$	38,463	$	34,564	$	(3,899)	(10)	%
Deferred revenue—current		32,689		35,615		2,926	9	%
Deferred revenue—long-term		14,898		18,150		3,252	22	%

Contract assets were comparable with the beginning of the fiscal year. The increase in contract liabilities was primarily due to deferred revenue from receipt of payments under service and warranty contracts primarily in our Security division.

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of September 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $414.1 million. We expect to recognize revenue on approximately 34% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the three months ended September 30, 2021, we recognized revenue of $22.8 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.

5. Leases

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


	Three Months Ended September 30,
	2020		2021
Operating lease cost	$	2,533	$	2,275
Variable lease cost		258		184
Short-term lease cost		212		279
	$	3,003	$	2,738

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


	Balance Sheet Category	June 30, 2021		September 30, 2021
Operating lease ROU assets, net	Other assets	$	23,439	$	29,787

Operating lease liabilities, current portion	Other accrued expenses and current liabilities	$	7,499	$	7,591
Operating lease liabilities, long-term	Other long-term liabilities		16,317		22,526
Total operating lease liabilities		$	23,816	$	30,117

Weighted average remaining lease term					3.9 years
Weighted average discount rate					4.1 %

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


	Three Months Ended September 30,
	2020		2021
Cash paid for operating lease liabilities	$	2,580	$	2,327
ROU assets obtained in exchange for new lease obligations		122		1,643

Maturities of operating lease liabilities at September 30, 2021 were as follows (in thousands):


	September 30, 2021
Less than one year	$	8,378
1 – 2 years		7,298
2 – 3 years		6,044
3 – 4 years		4,395
4 – 5 years		3,635
Thereafter		2,751
		32,501
Less: imputed interest		(2,384)
Total lease liabilities	$	30,117

6. 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, 2021, we recognized $2.5 million in restructuring and other charges which included $2.2 million in legal charges net of insurance recoveries, $0.3 million for employee terminations, and an insignificant net benefit for facility closure and operational efficiency activities.

During the three months ended September 30, 2020, we commenced exit activities associated with an expired turnkey contract in Mexico whereby we incurred non-recurring charges totaling $6.9 million comprised of exit costs of $2.5 million for employee terminations, facility closure and other exit costs of $1.1 million, direct transaction costs of $2.7 million and impairment of a right-of-use asset of $0.6 million. We also conducted other operational efficiency activities which resulted in employee termination costs of $1.4 million and other costs of $0.1 million.

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


	Three Months Ended September 30, 2020
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Impairment charges	$	552	$	—	$	—	$	—	$	552
Employee termination costs		3,737		—		146		—		3,883
Mexico transaction costs		2,692		—		—		—		2,692
Facility closures/consolidation		1,272		—		—		—		1,272
Legal costs (recoveries), net		—		—		—		(40)