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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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

For the transition period from              to             

Commission File Number 000-23125

Graphic

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

33-0238801

(State or other jurisdiction of
incorporation or organization)

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

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

OSIS

The Nasdaq Global Select Market

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

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

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

Large accelerated filer 

   

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

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

Table of Contents

OSI SYSTEMS, INC.

INDEX

PAGE

PART I — FINANCIAL INFORMATION

3

Item 1 —

Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets at June 30, 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

2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

    

June 30, 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.

3

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended September 30, 

    

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.

4

Table of Contents

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.

5

Table of Contents

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)

Three Months Ended September 30, 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

6

Table of Contents

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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Table of Contents

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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Table of Contents

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)