What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-08-23 compared with 2020-08-21 · 325 added, 327 removed, 1070 unchanged (38% of the section changed)

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OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, in fiscal 2020 the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic No.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A.

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Inventories

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated inventories balance was $294.2 million as of June 30, 2021.

The Company generally values its inventories at lower of cost (first-in, first-out) or net realizable value.

The Company values its inventories at the lower of cost or net realizable value.

The Company writes down inventory for slow-moving and obsolete inventory based on historical usage, orders on hand, assessments of future demands and market conditions, among other items.

As disclosed by management, if these factors are less favorable than those projected, additional inventory write-downs may be required.

The valuation of inventories requires management to make significant assumptions and complex judgments about the future salability of the inventory and its net realizable value.

These assumptions include the assessment of net realizable value by inventory category considering retention periods, future usage and market demand for their products.

The valuation of inventories requires management to make significant assumptions and complex judgments about the methods and assumptions used to determine its net realizable value.

The assumptions included in the assessment of net realizable value by inventory category were retention periods, future usage and market demand for their products.

Additionally, management makes qualitative judgments related to discontinued, slow moving and obsolete inventories.

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● Testing management’s process for determining the valuation of inventories, including:

o Evaluating the reasonableness of the methodology selected to determine the net realizable value of inventories

o Evaluating the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage and backlog;

o Testing the completeness, accuracy, and relevance of the underlying data used in management’s estimate;

o Testing the calculations related to the application of the methodology to specific inventory categories;

o Testing the mathematical accuracy of management’s calculation

o Testing the calculations related to the application of Company policies to specific inventory categories within each division;

o Testing the completeness and appropriateness of specific reserves identified by management;

o Performing inquiries with appropriate non-financial personnel, including sales and production employees, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate management’s assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventories;

● Developing an independent expectation of inventory write-downs at year end based on historical trends and comparing it to management’s estimate.

● Performing substantive analytical procedures to assess the reasonableness of the reserve and management’s valuation adjustment.

/s/ Moss Adams LLP

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Provision for income taxes

Net income (loss)

Earnings (loss) per share:

Earnings per share:

Shares used in per share calculation:

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Year Ended June 30,

Net income (loss)

Other comprehensive income (loss):

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Other comprehensive income (loss)

Comprehensive income (loss)

Comprehensive income

See accompanying notes to Consolidated Financial Statements.

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Repurchase of common stock

( 1,021,458 )

Taxes paid related to net share settlement of equity awards

Other comprehensive income

Other comprehensive loss

Balance-June 30, 2019

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Taxes paid related to net share settlement of equity awards

Other comprehensive loss

Other comprehensive income

Balance-June 30, 2021

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CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

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

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

Depreciation and amortization

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Acquisition of property and equipment

Purchases of certificates of deposit

Proceeds from maturities of certificates of deposit

Acquisition of businesses, net of cash acquired

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CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (payments) on bank lines of credit

Net payments on bank lines of credit

Proceeds from long-term debt

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Description of Business —OSI Systems, Inc., together with our subsidiaries, is a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications.

We sell our products in diversified markets, including homeland security, healthcare, defense and aerospace.

We sell our products and provide related services in diversified markets, including homeland security, healthcare, defense and aerospace.

We have three reporting segments:

(i) Security, providing security inspection systems and related services, and turnkey security screening solutions;

(ii) Healthcare, providing patient monitoring, diagnostic cardiology, and connected care systems and associated accessories and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and electronic manufacturing services for our Security and Healthcare divisions as well as to external original equipment manufacturer (“OEM”) customers and end users for applications in the defense, aerospace, medical and industrial markets, among others.

(i) Security, providing security and inspection systems and turnkey security screening solutions;

(ii) Healthcare, providing patient monitoring, diagnostic cardiology and connected care systems and associated accessories;

and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and electronic manufacturing services for our Security and Healthcare divisions, as well as third parties for applications in the defense and aerospace markets, among others.

Through our Security segment, we provide security screening products and related services globally.

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Use of Estimates —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period.

The most significant of these estimates and assumptions for our company relate to contract revenue, profit and loss recognition, fair values of assets acquired and liabilities assumed in business combinations, values for inventories reported at lower of cost or net realizable value, stock-based compensation expense, income taxes, accrued warranty costs, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill.

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, 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.

Actual amounts may differ from these estimates and could differ materially.

C ash 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.

Due to the inherent uncertainty involved in making estimates, our actual amounts reported in future periods could differ materially from these estimates.

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 $ 80.6 million at June 30, 2021.

Of this amount, approximately 71 % 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, Canada and Australia, and to a lesser extent in 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.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

Our cash and cash equivalents totaled $ 76.1 million at June 30, 2020.

Of this amount, approximately 63 % was held by our foreign subsidiaries and subject to repatriation tax considerations.

These foreign funds were held primarily in Singapore, Mexico, the United Kingdom, Malaysia, Australia and Canada and to a lesser extent in India 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 high credit quality financial institutions throughout the world.

Accounts Receivable —We monitor collections and payments from our customers, and we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

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If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Components of accounts receivable consisted of (in thousands):

Accounts receivables

Less allowance for doubtful accounts

Inventories —Inventories are generally stated at the lower of cost (first-in, first-out) or net realizable value.

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Thus, we have determined that there is no goodwill impairment for any of the three reporting units.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

We evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

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See Note 10 for additional information.

Fair Value of Financial Instruments —Our financial instruments consist primarily of cash and cash equivalents, marketable securities, derivative instruments, accounts receivable, accounts payable and debt instruments.

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 June 30, 2021.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 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.

“Level 1” category includes assets and liabilities at quoted prices in active markets for identical assets and liabilities.

“Level 2” category includes assets and liabilities from observable inputs other than quoted market prices.

“Level 3” category includes assets and liabilities for which valuation techniques are unobservable and significant to the fair value measurement.

As of June 30, 2019 and 2020, there were no assets where “Level 3” valuation techniques were used.

As further discussed in Note 11 to the consolidated financial statements, our contingent payment obligations related to acquisitions are valued using “Level 3” valuation techniques on a recurring basis.

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 11 to the consolidated financial statements, are in the “Level 3” category for valuation purposes.

The fair values of our financial assets and liabilities as of June 30, 2020 and 2021 are categorized as follows (in thousands):

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Liabilities—Contingent consideration

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

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.

We settled the net investment hedge in the second quarter of fiscal 2021, and the amount recorded in other comprehensive loss was not significant.

There were no net investment hedges outstanding as of June 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 and the amounts reported in the consolidated income statement for the year ending June 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, we held foreign currency forward contracts with notional amounts totaling $ 26.1 million.

Unrealized gains and losses from the forward currency forward contracts as of June 30, 2021 were not significant.

There were no derivative instruments as of June 30, 2020.

Revenue Recognition

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ASC 606 further requires that companies disclose sufficient information to enable readers of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

On July 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of July 1, 2018.

Results for reporting periods beginning after July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting.

Product Sales.

We recognize revenue from sales of products upon shipment or delivery when control of the product transfers to the customer, depending on the terms of each sale, and when collection is probable.

In the circumstance where terms of a product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved the customer acceptance criteria unless such acceptance criteria are perfunctory or inconsequential.

In the circumstance where terms of a product sale

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

include subjective customer acceptance criteria, revenue is deferred until we have achieved the customer acceptance criteria unless such acceptance criteria are perfunctory or inconsequential.

We generally offer customers payment terms of less than one year.

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Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Multiple Performance Obligations.

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The timing of revenue recognition for each performance obligation may be dependent upon several milestones, including physical delivery of equipment, completion of factory acceptance test, completion of site acceptance test, installation and connectivity of equipment, certification of training of personnel and, in the case of after-market service deliverables, the passage of time (typically evenly over the post-warranty period of the service deliverable).

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

We often provide a guarantee to support our performance under multiple performance obligations.

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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 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer.

We recognize revenue and corresponding accounts receivable according to ASC 606.

When we recognize revenue in advance of the point in time at which contracts give us the right to invoice a customer, we record this as unbilled revenue, which is included in accounts receivable, net, on the consolidated balance sheet.

We may also receive consideration, per the terms of a contract, from customers prior to transferring goods to the customer.

We record customer deposits as contract liabilities.

Additionally, we may receive payments, most typically for service and warranty contracts, at the onset of the contract and before services have been performed.

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.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Practical Expedients.

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Credit risk on accounts receivable is minimized as a result of the large and diverse nature of our company’s worldwide customer base.

As of June 30, 2019, no customer accounted for greater than 10% of accounts receivable.

As of June 30, 2020, one customer accounted for 13 % of accounts receivable.

In fiscal year 2019 and 2020, no customer accounted for greater than 10% of revenues.

As of June 30, 2021, no customer accounted for greater than 10% of accounts receivable.

In fiscal years 2020 and 2021, no customer accounted for greater than 10% of revenues.

We perform ongoing credit evaluations of our customers’ financial condition and maintain allowances for potential credit losses.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

Our cash and cash equivalents totaled $ 76.1 million and $ 80.6 million at June 30, 2020 and 2021, respectively.

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While management believes that relying on key vendors improves the efficiency and reliability of business operations, relying on any one vendor for a significant aspect of business can have a significant negative impact on revenue and profitability if that vendor fails to perform at acceptable service levels for any reason, including financial difficulties of the vendor.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Foreign Currency Translation and Transactions —We transact business in various foreign currencies.

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In periods where a net loss is reported, basic and diluted net loss per share are the same since the effect of potential common shares is antidilutive and therefore excluded.

The underlying equity component of the 1.25 % convertible senior notes due 2022 (the “Notes”) discussed in Note 8 to the consolidated financial statements has been excluded from the calculation of diluted earnings per share as it was anti-dilutive since the average price of our common stock did not exceed the conversion price because the principal amount of the Notes is intended to be settled in cash upon conversion.

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

Net income (loss) available to common stockholders

Weighted average shares outstanding—basic

Dilutive effect of equity awards

Weighted average shares outstanding—diluted

Basic earnings (loss) per share

Diluted earnings (loss) per share

Weighted average shares excluded from diluted earnings (loss) per share due to their anti-dilutive effect

The underlying equity component of the 1.25 % convertible senior notes due 2022 (the “Notes”) discussed in Note 8 to the condensed consolidated financial statements will have a net impact on diluted earnings per share when the average price of our common stock exceeds the conversion price of $ 107.46 because the principal amount of the Notes is intended to be settled in cash upon conversion.

There was no dilutive effect of the Notes for the years ended June 30, 2019, 2020 and 2021.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

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

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

Weighted average shares excluded from diluted earnings per share due to their anti-dilutive effect

Warranty Provision —We offer our customers warranties on many of the products that we sell.

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Warranty provision as of June 30, 2021

Lease Accounting —Right of use ("ROU") assets represent our right to use an underlying asset during the reasonably certain lease terms, and lease liabilities represent our obligation to make lease payments arising from the leases.

Leases —Right of use ("ROU") assets represent our right to use an underlying asset during the reasonably certain lease terms, and lease liabilities represent our obligation to make lease payments arising from the leases.

We recognize ROU lease assets and lease liabilities at lease commencement on our consolidated balance sheet based on the present value of lease payments over the lease term using a discount rate determined based on our incremental borrowing rate since the rate implicit in each lease is not readily determinable.

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Most of the leases require us to pay for certain other costs such as common area maintenance and property taxes.

Rent expense for leases with periodic rent increases or escalation clauses is recognized on a straight-line basis over the minimum lease term.

The lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We also have finance leases for fleet vehicles that are not material to the consolidated financial statements.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

The components of operating lease expense for the year ended June 30, 2020 were as follows (in thousands):

Operating lease cost

Variable lease cost

Short-term lease cost

Supplemental balance sheet assets and liabilities related to operating leases were as follows (in thousands):

Balance Sheet Category

June 30, 2020

Operating lease ROU assets, net

Operating lease liabilities, current portion

Other accrued expenses and current liabilities

Operating lease liabilities, long-term

Other long-term liabilities

Total operating lease liabilities

Weighted average remaining lease term

Weighted average discount rate

Supplemental cash flow information related to operating leases for the year ended June 30, 2020 was as follows (in thousands):

Cash paid for operating lease liabilities

ROU assets obtained in exchange for new lease obligations

Maturities of operating lease liabilities under ASC 842 (defined below) at June 30, 2020 were as follows (in thousands):

June 30, 2020

Less than one year

Imputed interest

Total lease liabilities

Subsequent Events —In accordance with ASC 855 the Company's management reviewed all material events through August 21, 2020 the date these financial statements were available to be issued, and there are no material subsequent events.

Rent expense for leases with periodic rent increases or escalation clauses is recognized on a straight-line basis over the minimum

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

The lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We also have finance leases for fleet vehicles that are not material to the consolidated financial statements.

Subsequent Events —In accordance with ASC 855 the Company's management evaluated material events after the balance sheet date through the date of the filing of this report with the Securities and Exchange Commission, and there are no disclosable subsequent events.

Recent Accounting Guidance

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No.

2016-02, Leases (Topic 842) ("ASC 842"), which requires a lessee to recognize ROU assets and lease liabilities, initially measured at present value of the lease payments, on its balance sheet for leases and classify leases as either financing or operating.

We adopted ASC 842 on July 1, 2019, using the modified retrospective method, and we elected the package of practical expedients provided in ASC 842.

In accordance with ASC 842, we did not restate comparative periods and instead reported comparative prior year periods under ASC 840, "Leases."

The cumulative effect of the changes made to our July 1, 2019 consolidated condensed balance sheet for the adoption of the new lease standard was as follows (in thousands):

Balance Sheet

June 30, 2019

Other accrued expenses and current liabilities

Other long-term liabilities

The adoption of the new lease accounting guidance did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows for the year ended June 30, 2020.

Retirement Benefit Plans

In August 2018, the FASB issued authoritative guidance under Accounting Standards Update (“ASU”) 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General:

Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.

This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans.

We adopted this new guidance in the first quarter of fiscal 2021, and it did not have a significant impact on our disclosures in the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software:

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider.

We adopted this new guidance in the first quarter of fiscal 2021, and it did not have a significant impact on our consolidated financial statements.

Reference Interest Rate

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates.

For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met.

Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met.

Modifications to debt agreements for a change in the reference interest rate will be accounted for by prospectively adjusting the effective interest rate.

The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022.

We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates;

however, the adoption of this new guidance for modifications to contracts, if any, is not expected to have a significant impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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”).

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”).

Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital.

Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives.

Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives.

By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate.

ASU 2020-06 also provides for certain disclosures with regard to convertible instruments and associated fair values.

We are required to adopt this new guidance in the first quarter of fiscal 2023.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

ASU 2020-06 also provides for certain

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

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.

disclosures with regard to convertible instruments and associated fair values.

We are required to adopt this new guidance in the first quarter of fiscal 2023.

Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

We intend to early adopt the new guidance on July 1, 2021 using the modified retrospective approach and expect to record a $ 19 million increase to retained earnings and a reduction of $ 27 million previously recorded in common stock as if there had been no equity component.

Additionally, we also expect to record an increase to the convertible notes balance by approximately $ 10 million.

Interest expense recognized in future periods will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

ASU 2019-12 removes certain exceptions to the general principles of ASC 740 and is intended to improve consistency and simplify GAAP by clarifying and amending existing guidance for income taxes and related topics.

We are required to adopt this new guidance in the first quarter of fiscal 2022.

Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.

We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

Retirement Benefit Plans

In August 2018, the FASB issued authoritative guidance under ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General:

Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.

This ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans.

We are required to adopt this new guidance in the first quarter of fiscal 2021 which is not expected to have a significant impact on our disclosures in the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software:

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.

This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider.

We are required to adopt this new guidance in the first quarter of fiscal 2021 which is not expected to have a significant impact on our consolidated financial statements.

ACQUISITION ACTIVITY

Acquisition of Explosive Trace Detection Business

On July 7, 2017, we acquired the global explosive trace detection business ("ETD") from Smiths Group plc.

This acquisition was a carve out from a larger entity.

We financed the total purchase price of $ 80.5 million with a combination of cash on hand and borrowings under our existing revolving bank line of credit.

The value attributed to goodwill and intangible assets is partially non-deductible for income tax purposes.

Our consolidated statement of operations for fiscal year 2018 includes $ 76.5 million of revenue and $ 10.7 million of income from operations from ETD for the period from July 7, 2017 to June 30, 2018.

Pro forma adjustments assuming the ETD acquisition had occurred on July 1, 2017 would not be material to revenues and income from operations for fiscal year 2018.

BUSINESS COMBINATIONS

Under ASC 805, Business Combinations, the acquisition method of accounting requires us to record assets acquired less liabilities assumed in an acquisition at their estimated fair values at the date of acquisition.

Any excess of the total estimated purchase consideration over the estimated fair value of the assets acquired less liabilities assumed should be recorded as goodwill.

Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates.

Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

We may record adjustments to the assets acquired and liabilities assumed, with corresponding adjustments to goodwill, during the one-year post-acquisition measurement period as additional information becomes available.

Upon the conclusion of the measurement period, any subsequent adjustments are reflected in reported earnings.

Fiscal Year 2021 Business Acquisition

In July 2020, we (through our Healthcare division) acquired a privately-held software development company for $ 3.0 million, plus up to $ 12.0 million in potential contingent consideration.

The goodwill recognized for this business is deductible for income tax purposes.

This acquisition was financed with available cash on hand.

This business acquisition was not material to our consolidated financial statements.

Accordingly, pro-forma historical results of operations and certain other disclosures related to this business have not been presented.

Other Business Acquisitions

In fiscal 2020 we paid $ 8.9 million for four business acquisitions, plus an insignificant amount of future contingent consideration.

In fiscal 2020 we paid an aggregate of $ 8.9 million, plus an insignificant amount of future contingent consideration, for four business acquisitions.

The goodwill recognized for these businesses are deductible for income tax purposes.

These acquisitions were financed with available cash on hand.

In fiscal 2019 we paid $ 18.3 million for three business acquisitions, plus up to $ 6 million in future contingent consideration, which may be earned over a five-year period.

In fiscal 2019 we paid an aggregate of $ 18.3 million, plus up to $ 6 million in future contingent consideration, which may be earned over a five-year period, for three business acquisitions.

The majority of the goodwill recognized for these businesses are deductible for income tax purposes.

These acquisitions were financed with cash on hand and borrowings under our credit facility.

These business acquisitions, individually and in the aggregate, were not material to our consolidated financial statements.

Accordingly, pro-forma historical results of operations related to these businesses have not been presented.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

In January 2018, we (through our Optoelectronics and Manufacturing division) acquired an electronics component designer and manufacturer for approximately $ 22 million, plus up to $ 6 million in potential earnout consideration.

In aggregate, $ 12.6 million was attributed to intangible assets, $ 14.0 million was attributed to goodwill, and $ 3.3 million was attributed to net assets acquired.

The acquisition was financed with cash on hand and borrowings under our existing revolving bank line of credit.

In July 2017, we (through our Security division) completed an acquisition of a privately held technology company.

The acquisition purchase price was financed with cash on hand and was in an amount (including potential earnout consideration) determined to be insignificant by management.

These business acquisitions, individually and in the aggregate, were not material to our consolidated financial statements.

Accordingly, pro-forma historical results of operations related to these businesses have not been presented.

CONTRACT ASSETS AND LIABILITIES

The table below shows the balance of contract assets and liabilities as of June 30, 2019 and 2020, including the change between the periods.

There were no substantial non-current contract assets for the periods presented.

Contract Assets (in thousands)

Unbilled revenue (included in accounts receivable, net)

Contract Liabilities (in thousands)

Advances from customers

Deferred revenue—current

Deferred revenue—long-term

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 June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 171.7 million.

We expect to recognize revenue on approximately 59 % of the remaining performance obligations over the next 12 months , and the remainder is expected to be recognized thereafter.

During the year ended June 30, 2020, we recognized revenue of $ 72.7 million from contract liabilities existing as of July 1, 2019.

Inventory consisted of the following (in thousands):

BALANCE SHEET DETAILS

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

Accounts receivable, net

Accounts receivable

Less allowance for doubtful accounts

Raw materials

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Finished goods

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (amounts in thousands):

Property and equipment, net

Buildings, civil works and improvements

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Balance as of June 30, 2021

The measurement periods for the valuation of assets and liabilities acquired may extend up to one year.

Adjustments in acquisitions accounting may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

Intangible assets subject to amortization consisted of the following (amounts in thousands):

Intangible assets consisted of the following (amounts in thousands):

June 30, 2020

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Non-amortizable assets:

In-process R&D

Total intangible assets

During fiscal 2018 and 2020, we recorded impairment charges related to intangible assets for IPR&D of $ 2.5 million and $ 3.3 million, respectively, due to changes in facts and circumstances associated with shifts in strategic directions of the intended use of the assets which led us to conclude that the carrying values of the intangible assets were not recoverable.

These intangible assets impairment charges were included in impairment, restructuring and other charges in our consolidated statements of operations.

During fiscal 2019 there were no impairment charges related to intangible assets.

Amortization expense for fiscal 2018, 2019 and 2020 was $ 19.5 million, $ 21.4 million and $ 20.7 million, respectively.

Future acquisitions could cause these amounts to increase.

Amortization expense related to intangible assets was $ 21.4 million, $ 20.7 million and $ 21.5 million for fiscal 2019, 2020 and 2021, respectively.

At June 30, 2021, the estimated future amortization expense was as follows (in thousands):

Thereafter, including assets that have not yet begun to be amortized

Software development costs for software products incurred before establishing technological feasibility are charged to operations.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

CONTRACT ASSETS AND LIABILITIES

The table below shows the balance of contract assets and liabilities as of June 30, 2020 and 2021, including the change between the periods.

There were no substantial non-current contract assets for the periods presented.

Contract Assets (in thousands)

Unbilled revenue (included in accounts receivable, net)

Contract Liabilities (in thousands)

Advances from customers

Deferred revenue—current

Deferred revenue—long-term

Remaining Performance Obligations .

As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 251.5 million.

We expect to recognize revenue on approximately 57 % of the remaining performance obligations over the next 12 months , and the remainder is expected to be recognized thereafter.

During the year ended June 30, 2021, we recognized revenue of $ 58.6 million from contract liabilities existing as of July 1, 2020.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

The components of operating lease expense for the fiscal years ended June 30, 2020 and 2021 were as follows (in thousands):

Year Ended June 30,

Operating lease cost

Variable lease cost

Short-term lease cost

Supplemental balance sheet assets and liabilities related to operating leases were as follows (in thousands):

Balance Sheet Category

June 30, 2020

June 30, 2021

Operating lease ROU assets, net

Operating lease liabilities, current portion

Other accrued expenses and current liabilities

Operating lease liabilities, long-term

Other long-term liabilities

Total operating lease liabilities

Weighted average remaining lease term

Weighted average discount rate

Supplemental cash flow information related to operating leases for the year ended June 30, 2021 was as follows (in thousands):

Year Ended June 30,

Cash paid for operating lease liabilities

ROU assets obtained in exchange for new lease obligations

Maturities of operating lease liabilities under ASC 842 (defined below) at June 30, 2021 were as follows (in thousands):

June 30, 2021

Less than one year

Imputed interest

Total lease liabilities

IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES

During fiscal 2020, we impaired an intangible asset for IPR&D in the Security division due to a strategic shift in the direction of the project and abandoned a non-core product line in our Healthcare division which resulted in the write-off of assets, including intangible and fixed assets.

As a result, $ 5.5 million of assets, including intangible and fixed assets, were written off as we determined that these assets had no value and were permanently impaired.

During fiscal 2019, there were no impairment charges.

During fiscal 2018, we impaired (i) a product line in our Security division that became redundant as a result of the ETD acquisition, (ii) two product lines in our Healthcare division, and (iii) certain trademarks in our Optoelectronics and Manufacturing division that are no longer used.

As a result, $ 7.8 million of assets, including intangible and fixed assets, were written off as we determined that these assets had no value and were permanently impaired.

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.

Acquisition and integration costs.

During fiscal 2020, we incurred $ 0.4 million in costs for professional fees relating to acquisitions.

Facility consolidation / employee termination.

During fiscal 2020, we incurred $ 4.0 million in employee termination costs as part of operational efficiency initiatives.

We also incurred $ 0.2 million in costs associated with the consolidation of facilities in our Security division.

Legal fees and settlement costs.

During fiscal 2020, legal fees and settlement costs resulted in a net recovery of $ 3.6 million as a result of insurance reimbursements of certain legal costs.

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

During the year ended June 30, 2021, we incurred $ 7.2 million for exit activities associated with an expired turnkey contract in Mexico.

Such exit costs include $ 2.8 million for employee terminations, $ 1.1 million for facility closure and other exit costs, direct

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

transaction costs of $ 2.7 million, and $ 0.6 million for right-of-use asset impairment for a leased facility.

We also incurred costs of $ 1.6 million for other employee terminations and $ 0.5 million for other facility closure costs for operational efficiency activities, $ 0.3 million for acquisition-related activities, and $ 0.5 million for certain legal charges, net of insurance reimbursements.

During fiscal 2020, we incurred $ 0.4 million in costs for professional fees relating to acquisitions, $ 4.0 million in employee termination costs as part of operational efficiency initiatives, and $ 0.2 million in costs associated with the consolidation of facilities in our Security division.

Additionally, legal fees and settlement costs resulted in a net recovery of $ 3.6 million as a result of insurance reimbursements of certain legal costs.

During the year ended June 30, 2020, we also impaired an intangible asset for IPR&D in the Security division due to a strategic shift in the direction of the project and abandoned a non-core product line in our Healthcare division which resulted in the write-off of assets, including intangible and fixed assets.

As a result, $ 5.5 million of assets, including intangible and fixed assets, were written off as we determined that these assets had no value and were permanently impaired.

These impairment charges were included in impairment, restructuring and other charges in our consolidated statements of operations.

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

Optoelectronics

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Facility closures/consolidation

Legal and accrued settlement costs

Legal costs (recoveries), net

Total expensed

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Optoelectronics

Manufacturing

Impairment charges

Acquisition-related costs

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Facility closures/consolidation

Legal and accrued settlement costs, net

Legal costs (recoveries), net

Total expensed

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Manufacturing

Impairment charges

Acquisition-related costs

Employee termination costs

Mexico transaction costs

Facility closures/consolidation

Legal and accrued settlement costs, net

Legal costs (recoveries), net

Total expensed

The changes in the accrual for restructuring and other charges for fiscal 2019 and 2020 were as follows (in thousands):

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

The accrued liability for restructuring and other charges is included in other accrued expenses and current liabilities in the consolidated balance sheet.

The changes in the accrued liability for restructuring and other charges for fiscal 2020 and 2021 were as follows (in thousands):

Consolidation

Balance as of June 30, 2019

Restructuring and other charges

Payments and other adjustments

Restructuring and other charges (benefit), net

Payments, adjustments and reimbursements, net

Balance as of June 30, 2020

Restructuring and other charges, net

Payments and other adjustments

Payments, adjustments and reimbursements, net

Balance as of June 30, 2021

The following table summarizes the impairment, restructuring and other charges for fiscal 2018, 2019 and 2020 (in thousands):

Impairment of assets

Facility closure / consolidations

Employee termination costs

Legal fees, settlements and related costs, net

Acquisition-related costs

Total impairment, restructuring and other charges

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

BORROWINGS AND DEBT

Revolving Credit Facility

In April 2019, we entered into an amendment to our revolving credit facility, which, among other things, increased the aggregate committed amount available to us from $ 525 million to $ 535 million and extended the maturity date to April 2024.

We have a revolving credit facility with an aggregate committed amount of up to $ 535 million which matures in April 2024.

The credit facility includes a $ 300 million sub-limit for letters of credit.

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Borrowings under this facility bear interest at LIBOR plus a margin of 1.0 % as of June 30, 2021 (which margin can range from 1.0 % to 1.75 % based on our consolidated net leverage ratio as defined in the credit facility).

The LIBOR index will be discontinued by the end of calendar year 2021.

The LIBOR index is expected to be discontinued by the end of calendar year 2021.

The terms of our credit facility allow for replacement if that occurs.

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The agreement contains various representations and warranties, affirmative, negative and financial covenants and conditions of default.

As of June 30, 2020, there was $ 59.0 million of borrowings outstanding under the revolving credit facility and $ 46.5 million outstanding under the letters of credit sub facility.The amount available to borrow under the credit facility as of June 30, 2020 was $ 429.5 million.

As of June 30, 2021, there were no borrowings outstanding under the revolving credit facility and $ 63.2 million outstanding under the letters of credit sub facility.The amount available to borrow under the credit facility as of June 30, 2021 was $ 471.8 million.

Loan amounts under the revolving credit facility may be borrowed, repaid and re-borrowed during the term.

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Therefore, borrowings under the credit facility are included in current liabilities.

As of June 30, 2020, we are in compliance with all covenants under this credit facility.

As of June 30, 2021, we are in compliance with all financial covenants under this credit facility.

1.25% Convertible Senior Notes Due 2022

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and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries, as well as any of our existing and future indebtedness that may be guaranteed by our subsidiaries to the extent of such guarantees (including the guarantees of certain of our subsidiaries under our existing revolving credit facility).

The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and are, thereafter convertible, at any time, in each case at an initial conversion rate of 9.3056 per $1,000 principal amount of the Notes, which is equal to an initial conversion price of approximately $ 107.46 per share or a 38.5 % premium to our stock price at the time of the issuance.

The conversion rate is subject to adjustment upon certain events.

Upon conversion, the Notes may be settled, at our election, in shares of our common stock, cash or a combination of cash and shares of common stock.

We have initially elected a combination settlement method to satisfy the conversion obligation, which allows us to settle the principal amount of the Notes in cash and to settle the excess conversion value, if any, in shares of common stock, as well as cash in lieu of fractional shares.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

The conversion rate is subject to adjustment upon certain events.

Upon conversion, the indenture provides that the Notes may be settled, at our election, in shares of our common stock, cash or a combination of cash and shares of common stock.

We have irrevocably elected a combination settlement method to satisfy the conversion obligation, which provides for us to settle the principal amount of the Notes in cash and to settle the excess conversion value, if any, in shares of common stock, as well as cash in lieu of fractional shares.

We may redeem the Notes if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days.

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For fiscal year ended June 30, 2019, the total interest expense was $ 12.6 million, which consisted of $ 3.6 million of contractual interest expense, $ 7.8 million of debt discount amortization and $ 1.2 million of amortization of debt issuance costs.

As of June 30, 2019 and 2020, the unamortized debt discount was $ 27.3 million and $ 19.1 million, respectively, which is being amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.50 %.

As of June 30, 2020 and 2021, the unamortized debt discount was $ 19.1 million and $ 10.5 million, respectively, which was being amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.50 %.

The unamortized debt issuance cost of $ 2.5 million and $ 1.4 million as of June 30, 2020 and 2021, respectively, is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes.

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As of June 30, 2021, the total amount available under these credit facilities was $ 8.8 million.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

Long-term debt consisted of the following at June 30, 2020 and 2021 (in thousands):

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Long-term portion of debt

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Fiscal year principal payments of long-term debt as of June 30, 2021 are as follows (in thousands):

2026 and thereafter

STOCKHOLDERS’ EQUITY

Stock-based Compensation

As of June 30, 2020, we maintained the Amended and Restated 2012 Incentive Award Plan (the “2012 Plan”) and the Amended and Restated 2006 Equity Participation Plan (“2006 Plan”) as stock-based employee compensation plans.

As of June 30, 2021, we maintained the Amended and Restated 2012 Incentive Award Plan (the “2012 Plan”) and the Amended and Restated 2006 Equity Participation Plan (the “ 2006 Plan”) as stock-based employee compensation plans.

No further grants may be made under the 2006 Plan.

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Stock-based compensation expense

As of June 30, 2020, total unrecognized compensation cost related to share-based compensation grants under the OSI Plans were estimated at $ 0.4 million for stock options and $ 13.7 million for RSUs.

As of June 30, 2021, total unrecognized compensation cost related to share-based compensation grants under the OSI Plans were estimated at $ 0.5 million for stock options and $ 13.9 million for restricted stock units (“RSUs”).

We expect to recognize these costs over a weighted-average period of 1.9 years with respect to the stock options and 2.1 years for grants of RSUs.

Employee Stock Purchase Plan —We have an employee stock purchase plan under which eligible employees may purchase a limited number of shares of Common Stock at a discount of up to 15 % of the market value of such stock at pre-determined, plan-defined dates.

During the three years ended June 30, 2018, 2019 and 2020, employees purchased 80,115 70,857 , and 69,399 shares, respectively.

As of June 30, 2020, there were 601,434 shares of our Common Stock available for issuance under the plan.

Awards are granted in the form of incentive options, nonqualified options, restricted stock awards, stock appreciation rights, RSUs, performance shares and stock bonuses, amongst other forms of equity, to qualified employees, directors and consultants.

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Stock options granted under the OSI Plans typically vest over three years based on continued service.

Restricted stock and RSUs typically vest over three to four years based on continued service.

Certain restricted stock awards granted to senior management vest based on the achievement of pre-established performance criteria.

Restricted stock

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

and RSUs typically vest over three to four years based on continued service.

Certain restricted stock awards granted to senior management vest based on the achievement of pre-established performance criteria.

Stock Option Fair Value Estimation Assumptions.

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We use historical stock option exercise data to estimate the expected holding period.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

Changes in assumptions can materially impact the estimated fair value of stock options.

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Exercisable at June 30, 2021

The per-share weighted-average grant-date fair value of stock options granted under the OSI Plans was $ 20.45 , $ 24.88 and $ 18.37 for fiscal 2019, 2020 and 2021, respectively.

The total intrinsic value of options exercised during fiscal 2021 was $ 3.9 million.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

The per-share weighted-average grant-date fair value of stock options granted under the OSI Plans was $ 23.64 , $ 20.45 and $ 24.88 for fiscal 2018, 2019 and 2020, respectively.

The total intrinsic value of options exercised during fiscal 2020 was $ 16.8 million.

Restricted Stock Awards and Restricted Stock Units —A summary of restricted stock award and RSU activity for the periods indicated was as follows:

Restricted Stock Units —A summary of RSU activity for the periods indicated was as follows:

Nonvested at June 30, 2018

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The total fair value of shares vested during fiscal 2019, 2020 and 2021 was $ 25.8 million, $ 26.8 million, and $ 27.0 million, respectively.

In December 2020, our shareholders authorized an increase of 1.65 million shares for the 2012 Plan resulting in a maximum pool of 7.1 million shares.

As of June 30, 2021, there were approximately 2.1 million shares available for grant under the 2012 Plan.

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The payout related to these awards can range from zero to 400 % of the original number of shares or units awarded.

The following is a geographical breakdown of income before the provision for income taxes (in thousands):

Pre-tax income (loss):

United States

Total pre-tax income

Employee Stock Purchase Plan

We have an employee stock purchase plan under which eligible employees may purchase a limited number of shares of Common Stock at a discount of up to 15 % of the market value of such stock at pre-determined, plan-defined dates.

During the three years ended June 30, 2019, 2020 and 2021, employees purchased 70,857 , 69,399 , and 63,499 shares, respectively.

As of June 30, 2021, there were 537,935 shares of our Common Stock available for issuance under the plan.

Stock Repurchase Program

During fiscal 2019, 2020 and 2021, we repurchased 288,316 shares, 562,707 shares and 452,005 shares, respectively, of Common Stock under our then current programs.

In April 2020, the Board of Directors authorized a new share repurchase program of up to 1,000,000 shares of Common Stock.

In August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares authorized under the stock repurchase program.

Repurchases may be made from time to time under the program through open-market purchases or privately-negotiated transactions at our discretion.

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

As of June 30, 2021, 2,547,995 shares were available for repurchase under the current program.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay any cash dividends in the foreseeable future.

Our Board of Directors will determine the payment of future cash dividends, if any.

Certain of our current bank credit facilities restrict the payment of cash dividends and future borrowings may contain similar restrictions.

The following is a geographical breakdown of income before the provision for income taxes (in thousands):

Pre-tax income:

United States

Total pre-tax income

Our provision (benefit) for income taxes consists of the following (in thousands):

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As of June 30, 2020 and 2021, our liability for uncertain tax positions was $ 6.0 million and $ 10.0 million, respectively.

The $ 6.0 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $ 9.4 million.

We recognize potential interest and penalties related to income tax matters in income tax expense.

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Since the ultimate resolution of uncertain tax positions depends on many factors and assumptions, we are not able to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such changes.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

A summary of activity of unrecognized tax benefits for fiscal 2020 and 2021 is as follows (in thousands).

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Balance at June 30, 2021

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and significantly changed U.S.

tax law and included numerous provisions that affect our business.

In the fiscal year ended June 30, 2018, we recorded tax expense of $ 55 million related to the enactment of the Tax Act.

OSI SYSTEMS, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Deferred income tax assets (liabilities) consisted of the following (in thousands):

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Net deferred income tax liability

The components of the net deferred income tax asset are classified in the consolidated balance sheets as follows (in thousands):

The components of the net deferred income tax liability are classified in the consolidated balance sheets as follows (in thousands):

Long term deferred income tax asset, included in other assets

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Net deferred income tax liability

The components of current taxes receivable and payable and prepaid taxes are classified in the consolidated balance sheets as follows (in thousands):

Current taxes receivable and prepaid taxes, included in prepaid expenses and other current assets

Current taxes payable, included in other accrued expenses and current liabilities

Net tax receivable (payable)

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2021

The components of current taxes receivable and payable and prepaid taxes are classified in the consolidated balance sheets as follows (in thousands):

Current taxes receivable and prepaid taxes, included in prepaid expenses and other current assets

Current taxes payable, included in other accrued expenses and current liabilities

Net tax receivable

As of June 30, 2021, we had state and foreign net operating loss carryforwards of approximately $ 25.7 million and $ 8.9 million, respectively.

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We recognized all excess tax benefits and tax deficiencies as income tax expense or benefit in the current year.

An income tax benefit of approximately $ 3.1 million and expense of approximately $ 1.4 million was recognized in fiscal 2019 and 2020, respectively.

An income tax expense of approximately $ 1.4 million and $ 4.2 million was recognized in fiscal 2020 and 2021, respectively.

The consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to the following:

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Foreign income subject to tax at other than federal statutory rate

Stock compensation excess tax benefit

Stock compensation

Officers’ compensation

Change in valuation allowance

Unrecognized tax (benefit) expense

Meals and entertainment

Unrecognized tax expense

Tax on foreign currency gains and losses

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Changes in prior year estimates

Mexico imputed income or expense

Global intangible low-taxed income, net of foreign tax credits

Remeasurement of U.S.

net deferred tax assets from 35% to 21%

Deemed repatriation of non-U.S.

Withholding tax on deemed repatriation foreign earnings

Foreign Derived Intangible Income Benefit

Withholding tax on foreign earnings

Effective income tax rate

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COMMITMENTS AND CONTINGENCIES

Contingent Acquisition 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.

Acquisition-Related Contingent Obligations —Under the terms and conditions of the purchase agreements associated with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain sales or profitability milestones through the acquired operations.

For agreements that contain contingent consideration caps, the remaining maximum amount of such potential future payments is $ 30.2 million as of June 30, 2021.

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We account for such contingent payments for acquisitions which occurred through the end of fiscal year 2009 as additions to the purchase price of the acquired business.

and we made $ 1.6 million of such payments during the fiscal year ended June 30, 2020.

For acquisitions completed after fiscal 2009, pursuant to Financial Accounting Standard 141R, which was codified into ASC 805, the estimated fair value of these obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling, general and administrative expense in the consolidated financial statements.

We made contingent payments relating to such acquisitions of $ 1.6 million and $ 1.0 million, respectively, during the fiscal years ended June 30, 2020 and 2021, respectively.

For acquisitions completed after fiscal 2009, pursuant to ASC 805, the estimated fair value of these obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling, general and administrative expense in the consolidated financial statements.

The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs, which may include projected revenues, gross margins, operating income, and the estimated probability of achieving the earn-outs.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Indemnifications and Certain Employment-Related Contingencies —In the normal course of business, we have agreed to indemnify certain parties with respect to certain matters.

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Chopra on or within 45 days of January 1, 2024 contingent upon Mr.

Chopra's continued employment with us through that date, subject to accelerated payout terms in the event of Mr.

Chopra’s continued employment with us through that date, subject to accelerated payout terms in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

the event of Mr.

Chopra’s death or disability.

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18 CV 03371, allege, among other things, breach of fiduciary duties relating to the allegations contained in the above-mentioned short seller report and seek damages, restitution, injunctive relief, attorneys’ and experts’ fees, costs, expenses, and other unspecified relief.

The derivative actions have been dismissed and an appeal is pending.

We believe that the actions are without merit and intend to defend them vigorously, and we expect to incur costs associated with defending against these actions.

At this early stage of the litigations, the ultimate outcomes are uncertain and we cannot reasonably predict the timing or outcomes, or estimate the amount of loss, if any, or their effect, if any, on our financial statements.

The Arkansas Teacher Retirement System consolidated action is in its early discovery stage.

The ultimate outcomes are uncertain and we cannot reasonably predict the timing or outcomes, or estimate the amount of loss, if any, or their effect, if any, on our financial statements.

The SEC and the DOJ are conducting an investigation of trading in our securities and have each subpoenaed information regarding trading by executives, directors, and employees, as well as our operations and disclosures in and around the time of certain trades.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

STOCKHOLDERS’ EQUITY

Stock Repurchase Program

In March 2018, the Board of Directors authorized a stock repurchase program of up to 1,000,000 shares of Common Stock, which was completed during the quarter ended March 31, 2020.

During fiscal 2018, 2019 and 2020, we repurchased 1,021,458 shares, 288,316 shares and 562,707 shares, respectively, of Common Stock under our then current programs.

In April 2020, the Board of Directors authorized a new share repurchase program of up to 1,000,000 shares of Common Stock.

Repurchases may be made from time to time under the program through open-market purchases or privately-negotiated transactions at our discretion.

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

As of June 30, 2020, 1,000,000 shares were available for repurchase under the program authorized in April 2020.

In August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares authorized under the stock repurchase program.

We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay any cash dividends in the foreseeable future.

Our Board of Directors will determine the payment of future cash dividends, if any.

Certain of our current bank credit facilities restrict the payment of cash dividends and future borrowings may contain similar restrictions.

RELATED-PARTY TRANSACTIONS

In 1994, we, together with an unrelated company, formed ECIL-Rapiscan Security Products Limited, a joint venture organized under the laws of India.

We own a 36 % interest in the joint venture, our Chairman and Chief Executive Officer owns a 10.5 % interest, and our Executive Vice President and Director owns a 4.5 % ownership interest.

Our initial investment was approximately $ 0.1 million.

We own a 36 % interest in the joint venture, our Chairman and Chief Executive Officer owns a 10.5 % interest, and one of our Executive Vice Presidents owns a 4.5 % ownership interest.

Our initial investment in the joint venture was approximately $ 0.1 million.

For each of the years ended June 30, 2019, 2020 and 2021 our equity earnings in the joint venture were less than $ 0.1 million.

We, our Chairman and Chief Executive Officer and our Executive Vice President and Director collectively control less than 50 % of the board of directors voting power in the joint venture.

We, our Chairman and Chief Executive Officer and our Executive Vice President collectively control less than 50 % of the board of directors voting power in the joint venture.

As a result, we account for the investment under the equity method of accounting.

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Receivables from the joint venture were $ 0.3 million and $ 0.5 million as of June 30, 2020 and 2021, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

EMPLOYEE BENEFIT PLANS

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We contributed approximately $ 6.4 million, $ 6.5 million and $ 6.7 million to the plans for the fiscal years ended June 30, 2019, 2020 and 2021, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Deferred Compensation Plan

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We measure our pension and postretirement benefit plans’ assets and benefit obligations as of June 30.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for fiscal years 2020 and 2021, and a statement of the funded status as of June 30, 2020 and 2021 (in thousands):

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Interest costs

Service costs

Actuarial (gain) loss

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Accumulated other comprehensive income

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

One of our defined benefit pension plans is considered a nonqualified plan, therefore we have funded a separate rabbi trust which comprises insurance company contracts with fair values of $ 10.7 million and $ 14.3 million as of June 30, 2020 and 2021, respectively.

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The weighted average is based on the actual proportion of each major asset class held, rather than a benchmark portfolio of assets.

The expected returns for each major asset class have been derived from a combination of both historical market returns and current market data as well as the views of a range of investment managers.

The expected returns for each major asset class have been derived from a combination of both historical market returns and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

current market data as well as the views of a range of investment managers.

There is no assumed rate of compensation increase as most of the plan participants are retirees or no longer employed by OSI.

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The equity holdings are maintained in balanced funds under the control of investment managers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Day-to-day equities selection decisions are delegated to investment managers, although these are monitored against performance and risk targets.

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As of June 30, 2021, our weighted average contribution rate is under 1 % of pensionable salaries.

No significant company contributions are expected for fiscal 2021.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

SEGMENT INFORMATION

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All other accounting policies of the segments are the same as described in Note 1, Summary of Significant Accounting Policies.

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

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

Optoelectronics

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Depreciation and amortization

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

Optoelectronics

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Depreciation and amortization

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

The following tables present the revenues and identifiable assets by geographical area (in thousands):

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Other Europe, Middle East and Africa

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2020

tangible assets

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Research and development

Impairment, restructuring and other charges

Impairment, restructuring and other charges (benefit), net

Total operating expenses

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Research and development

Impairment, restructuring and other charges

Impairment, restructuring and other charges (benefit), net

Total operating expenses

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(v) the consolidated statements of cash flows

EXHIBIT DESCRIPTION

(vi) the notes to the consolidated financial statements, tagged in summary and detail

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

Filed herewith

† Denotes a management contract or compensatory plan or arrangement.

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(18) Previously filed with our Quarterly Report on Form 10-Q filed on May 2, 2019.

(19) Previously filed with our Annual Report on Form 10-K filed on August 21, 2020.

Pursuant to the requirements of Section 13 or 15(d) 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures