What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-08-19 compared with 2021-08-23 · 236 added, 269 removed, 1126 unchanged (31% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm—Moss Adams LLP

Report of Independent Registered Public Accounting Firm (Moss Adams LLP , Los Angeles, CA, PCAOB ID:

Consolidated Balance Sheets

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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, 2022, 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, the Company changed its method of accounting for its convertible notes as of July 1, 2021 due to the adoption of Accounting Standards Update No.

2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” .

Basis for Opinions

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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 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 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.

Revenue recognition - Security Division

As described in Note 1 to the consolidated financial statements, the Company’s contracts with customers in its Security division may contain multiple performance obligations and frequently include an obligation to deliver an equipment product.

Revenue is recognized when control of each distinct performance obligation is transferred to the customer.

Revenues for the Security division were $663.2 million for the year ended June 30, 2022.

The Company’s revenue recognition for the Security division requires subjective considerations, particularly related to the identification and determination of the timing of revenue recognition for delivery of products, due to contractual terms and conditions that required judgment to determine when control of the product was deemed to be transferred to the customer.

We identified the auditing of the transfer of control of equipment products to be a critical audit matter.

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls over the valuation of inventories, including those related to the Company’s methodology for valuing specific inventory categories;

● 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 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;

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

● Testing the design, implementation, and operating effectiveness of controls relating to revenue occurrence, including controls over the timing of revenue recognition;

● Performing substantive tests over the timing and occurrence of revenue recognition, which included, among other procedures, reading the executed contract or purchase order to understand the contract, evaluating the contract-specific terms and the reasonableness of the Company’s judgments about the transfer of control of the performance obligation, and obtaining evidence that the transfer of control had occurred for the revenue recognized.

/s/ Moss Adams LLP

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Research and development

Impairment, restructuring and other charges

Impairment, restructuring and other charges, net

Total operating expenses

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Other comprehensive income (loss):

Foreign currency translation adjustment

Foreign currency translation adjustment, net of tax

Other, net of tax

Other comprehensive income (loss)

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Comprehensive

Income (Loss)

Balance-July 1, 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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Repurchase of common stock

( 1,294,594 )

Taxes paid related to net share settlement of equity awards

Other comprehensive income

Adoption of ASU 2020-06 for convertible notes

Other comprehensive loss

Balance-June 30, 2022

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Stock-based compensation

Provision for losses on accounts receivable

Provision for (recovery of) losses on accounts receivable

Deferred income taxes

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Impairment charges

Gain on sale of property and equipment

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

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Acquisition of property and equipment

Proceeds from sale of property and equipment

Purchases of certificates of deposit

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CASH FLOWS FROM FINANCING ACTIVITIES

Net payments on bank lines of credit

Net borrowings (repayments) on bank lines of credit

Proceeds from long-term debt

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(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;

(ii) Healthcare, providing patient monitoring, cardiology and remote monitoring 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.

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We also provide turnkey security screening solutions, which can include the construction, staffing and long-term operation of security screening checkpoints for our customers.

Through our Healthcare segment, we design, manufacture, market and service patient monitoring, diagnostic cardiology, and connected care systems and associated accessories globally.

Through our Healthcare segment, we design, manufacture, market and service patient monitoring, cardiology and remote monitoring, and connected care systems and associated accessories globally.

These products are used by care providers in critical care, emergency and perioperative areas within hospitals as well as physicians’ offices, medical clinics and ambulatory surgery centers, among others.

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Investments over which we do not have significant influence or control are not material and are carried at cost as there is no readily determinable fair value for the equity interests.

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, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill.

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Of this amount, approximately 78 % 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.

These foreign funds were held primarily by our subsidiaries in the United Kingdom, Singapore, Malaysia, Canada, India, 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;

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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.

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

Inventories —Inventories are generally stated at the lower of cost or net realizable value.

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

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Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the useful life of the asset or the lease term.

Leased capital assets are included in property and equipment.

Amortization of property and equipment under capital leases is included with depreciation expense.

Right-of-use assets from finance leases are included in property and equipment.

Amortization of property and equipment under finance leases is included with depreciation expense.

In the event that property and equipment are idle, as a result of excess capacity or the early termination, non-renewal or reduction in scope of a turnkey screening operation, such assets are assessed for impairment on a periodic basis or if any indicators of impairment exist.

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Assets—Insurance company contracts

Liabilities—Convertible debt

Liabilities—Contingent consideration

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

Derivative Instruments and Hedging Activity —Our use of derivatives consists of foreign currency forward contracts.

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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.

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

There were no net investment hedges outstanding as of June 30, 2022.

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.

The net gains or losses from our foreign currency forward contracts, which are not designated as hedge instruments, are reported in the consolidated statements of operations, and the amounts reported for the years ending June 30, 2020, 2021 and 2022 were not significant.

The fair value of our foreign currency forward contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term.

Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.

As of June 30, 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.

As of June 30, 2021 and 2022, we held foreign currency forward contracts with notional amounts totaling $ 26.1 million and $ 22.9 million, respectively.

Unrealized gains and losses from our foreign currency forward contracts as of June 30, 2021 and 2022 were not significant.

Revenue Recognition

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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

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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.

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.

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

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Deferred revenue for such services arises from payments received from customers for services not yet performed.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

Contract Revenue.

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In certain instances, contracts can contain multiple performance obligations as discussed in the paragraph below.

According to the terms of a sale contract, we may receive consideration from a customer prior to transferring goods to the customer, and we record these prepayments as a contract liability.

According to the terms of a sale contract, we may receive consideration from a customer prior to transferring goods to the customer, and we record these prepayments as an advance receipt.

We also record deferred revenue, typically related to service contacts, when consideration is received before the services have been performed.

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The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of revenue recognition.

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

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

Multiple Performance Obligations.

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When a contract contains multiple performance obligations, the standalone selling price is first estimated using the observable price, which is generally a list price net of applicable discount, or the price used to sell the good or service in similar circumstances.

In circumstances when a selling price is not directly observable, we will estimate the standalone selling price using information available to us including our market assessment and expected cost plus margin.

The timetable for fulfilment of each of the distinct performance obligations can range from completion in a short amount of time and entirely within a single reporting period to completion over several reporting periods.

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).

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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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Refer to Note 14 for additional details of revenues by reporting segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

Contract Assets and Liabilities.

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The fair value of performance-based awards is estimated at the date of grant based upon the probability that the specified performance criteria will be met, adjusted for estimated forfeitures.

Each quarter we update our assessment of the probability that the specified performance criteria will be achieved and adjust the estimate of the fair value of the performance-based awards if necessary.

Each quarter we update our assessment of the probability that the specified performance criteria will be achieved and adjust the estimate of the expenses of the performance-based awards if necessary.

We amortize the fair value of performance-based awards over the requisite service period for each separately vesting tranche of the award.

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

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

As of June 30, 2021 and 2022, no customer accounted for greater than 10% of accounts receivable.

In fiscal years 2020, 2021 and 2022, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

Our cash and cash equivalents totaled $ 80.6 million and $ 64.2 million at June 30, 2021 and 2022, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

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

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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.

During the measurement period, which is one year from the acquisition date, as additional information becomes available for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed.

During the measurement period, which is up to one year from the acquisition date, as additional information that existed at the acquisition date becomes available for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed.

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

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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 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.

The underlying equity component of the 1.25 % convertible senior notes due 2022 (the “Notes”) discussed in Note 8 to the 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, 2020, 2021 and 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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):

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

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, 2022

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.

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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We also elected the hindsight practical expedient, which allows us to use hindsight in determining the lease term.

We do not record an ROU asset and corresponding lease liability for leases with an initial term of one year or less ("short-term leases").

We do not record an ROU asset and corresponding lease liability for leases with an initial term of one year or less (“short-term leases”).

The terms in our leases may include options to extend or terminate the lease.

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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

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.

Subsequent Events — In accordance with ASC 855, our management evaluated material events after the balance sheet date through the date of the filing of this report with the SEC, and there are no disclosable subsequent events.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

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

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

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 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

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 of $ 10 million.

Interest expense recognized subsequent to adoption on July 1, 2021 is 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 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.

Contract Assets and Contract Liabilities from Revenue Contracts with Customers in a Business Combination

In October 2021, the FASB issued Accounting Standards Update 2021-08, an accounting standard update to improve the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination (Topic 805).

This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination.

This authoritative guidance is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted.

We early adopted the new guidance effective January 1, 2022 using the prospective approach and applied the amendments to both business combinations that occurred during the year ended June 30, 2022.

The adoption of ASU 2021-08 did not have a material impact on our consolidated financial statements.

BUSINESS COMBINATIONS

In February 2022, we (through our Security division) acquired a privately held provider of intelligent inspection, sensory, and recognition solutions for approximately $ 14 million, plus up to $ 25 million in potential contingent consideration.

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

The goodwill recognized for this business is not deductible for income tax purposes.

In February 2022, we (through our Security division) acquired a privately held sales and services company for approximately $ 1.1 million, plus an immaterial amount of potential contingent consideration.

The acquisition was financed with cash on hand.

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

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

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.

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.

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.

In fiscal 2021, 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 an aggregate of $ 8.9 million, plus an insignificant amount of future contingent consideration, for four business acquisitions.

In fiscal 2020, we paid an aggregate of $ 8.9 million, plus potential future contingent consideration of an immaterial amount, 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

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

BALANCE SHEET DETAILS

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During fiscal 2020, 2021 and 2022, depreciation expense was approximately $ 21.5 million, $ 22.4 million and $ 21.0 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

GOODWILL AND INTANGIBLE ASSETS

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Balance as of June 30, 2022

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

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

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Developed technology

Customer relationships/backlog

Customer relationships

Total amortizable assets

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At June 30, 2022, the estimated future amortization expense was as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

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

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During fiscal 2020, 2021 and 2022, we capitalized software development costs in the amounts of $ 11.9 million, $ 12.9 million and $ 15.2 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

CONTRACT ASSETS AND LIABILITIES

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

Remaining performance obligations related to ASC 606 represent the portion of the transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period.

As of June 30, 2022, the aggregate portion of the transaction price allocated to remaining performance obligations was approximately $ 400.8 million.

We expect to recognize revenue on approximately 44 % 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, 2022, we recognized revenue of $ 65.7 million from contract liabilities existing as of July 1, 2021.

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.

OSI SYSTEMS, INC.

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The components of operating lease expense for the fiscal years ended June 30, 2021 and 2022 were as follows (in thousands):

Year Ended June 30,

Fiscal Year Ended June 30,

Operating lease cost

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Short-term lease cost

Sale-leaseback Transaction.

In March 2022, we completed a sale-leaseback transaction for our manufacturing facilities and corporate headquarters in Hawthorne, California (the “Hawthorne Property”).

We sold the Hawthorne Property for $ 32 million and recognized a gain on sale of $ 27.4 million which is included in Other income on the statement of operations.

We also entered into a 6-year lease agreement for the Hawthorne Property expiring in March 2028, with two 5-year renewal options.

As of June 30, 2022, we recorded the related ROU asset and lease liability for $ 5.7 million.

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

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Supplemental cash flow information related to operating leases for the year ended June 30, 2022 was as follows (in thousands):

Year Ended June 30,

Fiscal 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):

Maturities of operating lease liabilities under ASC 842 Leases at June 30, 2022 were as follows (in thousands):

June 30, 2022

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Total lease liabilities

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 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.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

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

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 fiscal year ended June 30, 2022, we recognized $ 7.5 million in impairment, restructuring and other charges, which included $ 5.1 million in legal charges primarily related to class action litigation and government investigations, $ 1.2 million for employee terminations, $ 1.0 million for impairment of software assets, $ 0.3 million in acquisition related costs, and a net benefit for facility closures activity of a nominal amount.

During the fiscal 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 transaction costs of $ 2.7 million, and $ 0.6 million for ROU 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.

During fiscal year ended June 30, 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.

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Manufacturing

Impairment charges

Acquisition-related costs

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Employee termination costs

Mexico transaction costs

Facility closures/consolidation

Legal costs (recoveries), net

Legal costs, net

Total expensed

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

Optoelectronics

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Employee termination costs

Mexico transaction costs

Facility closures/consolidation

Legal costs (recoveries), net

Legal costs, net

Total expensed

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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.

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Balance as of June 30, 2020

Restructuring and other charges (benefit), net

Restructuring and other charges, net

Payments, adjustments and reimbursements, net

Balance as of June 30, 2021

Restructuring and other charges, net

Restructuring and other charges (benefit), net

Payments, adjustments and reimbursements, net

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Revolving Credit Facility

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

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

Under certain circumstances, we have the ability to increase the facility by the greater of $ 250 million or such amount as would not cause our secured leverage ratio to exceed a specified level.

Borrowings under this facility bear interest at LIBOR plus a margin of 1.0 % as of 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 is expected to be discontinued by the end of calendar year 2021.

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

In December 2021, we entered into an amendment to the senior secured credit facility that increased the aggregate amount available to borrow from $ 535 million to $ 750 million.

The amended facility matures in December 2026 and is comprised of a $ 600 million revolving credit facility and a $ 150 million delayed draw term loan.

The term loan is available to us to draw through September 1, 2022.

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

Under certain circumstances and subject to certain conditions, we have the ability to increase the revolving credit facility by the greater of $ 250 million or such amount as would not cause our secured leverage ratio to exceed a specified level.

Borrowings under the amended facility bore interest at LIBOR plus a margin of 1.0 % as of June 30, 2022 (which margin can range from 1.0 % to 1.75 % based on our consolidated net leverage ratio as defined in the credit facility).

The LIBOR index is expected to be phased out over time.

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

Letters of credit reduce the amount available to borrow under the credit facility by their face value amount.

The unused portion of the facility bears a commitment fee of 0.10 % as of June 30, 2021 (which fee can range from 0.10 % to 0.25 % based on our consolidated net leverage ratio as defined in the credit facility).

The unused portion of the facility bore a commitment fee of 0.10 % as of June 30, 2022 (which fee can range from 0.10 % to 0.25 % based on our consolidated net leverage ratio as defined in the credit facility).

Our borrowings under the credit agreement are guaranteed by certain of our U.S.-based subsidiaries and are secured by substantially all of our assets and substantially all the assets of certain of our subsidiaries.

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

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.

The credit facility contains various representations and warranties, affirmative, negative and financial covenants and events of default.

As of June 30, 2022, there were $ 60.0 million of borrowings outstanding under the revolving credit facility, $ 78.5 million outstanding under the letters of credit sub-facility, and $ 50 million outstanding under the term loan.

As of June 30, 2022, the amount available to borrow under the revolving credit facility was $ 461.5 million and the amount available to borrow under the term loan was $ 100 million.

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

The principal amount of each revolving loan is due and payable in full on the maturity date.

We have the right to repay each revolving loan in whole or in part from time to time without penalty.

It is our practice to routinely borrow and repay several times per year under this revolving facility.

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

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

The principal amount of each loan is due and payable in full on the maturity date.

We have the right to repay each loan in whole or in part from time to time without penalty.

It is our practice to routinely borrow and repay several times per year under the revolving facility and therefore,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

borrowings under the revolving credit facility are included in current liabilities.

As of June 30, 2022, we were in compliance with all financial covenants under this credit facility.

1.25% Convertible Senior Notes Due 2022

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effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness;

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).

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

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.

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 credit facility).

The Notes are convertible at any time 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 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.

Upon conversion, the original indenture provided that the Notes may be settled, at our election, in cash or shares of our Common Stock or a combination of cash and shares of our 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 and 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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The occurrence of a fundamental change will also result in the Notes becoming immediately convertible.

Since the last reported sales price of our Common Stock did not exceed 130% of the conversion price for at least 20 trading days within any applicable period of 30 consecutive trading days during fiscal year 2021, the Notes are not yet convertible.

Pursuant to ASC 470-20, we allocated the $ 287.5 million gross proceeds of the Notes between liability and equity components.

Since the last reported sales price of our Common Stock did not exceed 130 % of the conversion price for at least 20 trading days within any applicable period of 30 consecutive trading days, the Notes are not yet convertible.

Pursuant to ASC 470-20, we originally allocated the $ 287.5 million gross proceeds of the Notes between liability and equity components.

The initial $ 242.4 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature for similar terms and priced on the same day the Notes were issued.

The initial $ 45.1 million equity component represents the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes.

Issuance costs of $ 7.7 million were allocated between debt ($ 6.5 million) and equity ($ 1.2 million) components with the portion allocated to the debt presented as an offset against long term debt in the consolidated balance sheet and being amortized as interest expense over the life of the Notes using the effective interest method.

The total interest expense recognized for the fiscal year ended June 30, 2021 related to the Notes was $ 13.4 million, which consisted of $ 3.6 million of contractual interest expense, $ 8.6 million of debt discount amortization and $ 1.2 million of amortization of debt issuance costs.

For fiscal year ended June 30, 2020, the total interest expense was $ 13.0 million, which consisted of $ 3.6 million of contractual interest expense, $ 8.2 million of debt discount amortization and $ 1.2 million of amortization of debt issuance costs.

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, 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.

The initial $ 45.1 million equity component represented the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes.

Issuance costs of $ 7.7 million were allocated between debt ($ 6.5 million) and equity ($ 1.2 million) components with the portion allocated to the debt presented as an offset against long-term debt in the consolidated balance sheet and was being amortized as interest expense over the life of the Notes using the effective interest method.

Total interest expense recognized for the year ended June 30, 2020 related to the Notes was $ 13.0 million, which consisted of $ 3.6 million of contractual interest expense for each year, $ 8.2 million of debt discount amortization, and $ 1.2 million of amortization of debt issuance costs.

Total interest expense recognized for the year ended June 30, 2021 related to the Notes was $ 13.4 million, which consisted of $ 3.6 million of contractual interest expense, $ 8.6 million of debt discount amortization, and $ 1.2 million of amortization of debt issuance costs.

For the year ended June 30, 2022, the total interest expense on the Notes was $ 4.7 million, which consisted of $ 3.5 million of contractual interest expense and $ 1.2 million of amortization of debt issuance costs.

As of July 1, 2021, the remaining unamortized debt discount of $ 10.5 million was eliminated upon the adoption of ASU 2020-06.

The unamortized debt issuance cost of $ 1.4 million and $ 0.2 million as of June 30, 2021 and June 30, 2022, respectively, is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

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.

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

Additionally, we recorded an increase to the convertible notes balance by $ 10 million.

During fiscal 2022, we repurchased and cancelled approximately $ 45.2 million of principal value of the Notes.

We recognized a loss on debt extinguishment of $ 0.1 million during the year ended June 30, 2022, representing the write-off of unamortized debt issuance costs related to the portion of the Notes repurchased.

Other Borrowings

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As of June 30, 2022, the total amount available under these credit facilities was $ 9.6 million.

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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):

1.25% convertible notes due 2022:

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

1.25% convertible notes due September 1, 2022:

Principal amount

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Fiscal year principal payments of long-term debt as of June 30, 2022 are as follows (in thousands):

2026 and thereafter

STOCKHOLDERS’ EQUITY

Stock-based Compensation

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.

The 2012 Plan and the 2006 Plan are collectively referred to as the “OSI Plans.”

As of June 30, 2022, we maintained the OSI Plan as a stock-based employee compensation plan.

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AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2022

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

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Stock-based compensation expense

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”).

As of June 30, 2022, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $ 0.6 million for stock options and $ 13.8 million for restricted stock units (“RSUs”).

We expect to recognize these costs over a weighted-average period of 2.0 years with respect to the stock options and 2.1 years for grants of RSUs.

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.

Under the OSI Plans, the exercise price of nonqualified options and incentive stock options may not be less than the fair market value of our Common Stock on the date of grant.

Under the OSI Plan, the exercise price of nonqualified options and incentive stock options may not be less than the fair market value of our Common Stock on the date of grant.

The exercise price of nonqualified options and incentive stock options granted to individuals who own more than 10 % of our voting stock may not be less than 110 % of the fair market value of our Common Stock on the date of grant.

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

Restricted stock

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

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

Stock options granted under the OSI Plan 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.

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Expected Volatility.

Expected volatility is based on our historical share price volatility matching the expected holding period.

Expected volatility is based on implied volatility and/or our historical share price volatility matching the expected holding period.

No single method of estimating volatility is proper under all circumstances and to the extent that a company can derive implied volatility based on the trading of its financial instruments on a public market, it may be appropriate to use both implied and historical volatility in its assumptions.

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Exercisable at June 30, 2022

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 per-share weighted-average grant-date fair value of stock options granted under the OSI Plan was $ 24.88 , $ 18.37 and $ 26.72 for fiscal 2020, 2021 and 2022, respectively.

The total intrinsic value of options exercised during fiscal 2022 was $ 10.4 million.

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Nonvested at June 30, 2022

The per-share weighted average grant-date fair value of RSUs granted under the OSI Plans was $ 74.40 , $ 87.88 , and $ 80.40 for fiscal 2019, 2020 and 2021, respectively.

The per-share weighted average grant-date fair value of RSUs granted under the OSI Plan was $ 87.88 , $ 80.40 , and $ 90.31 for fiscal 2020, 2021 and 2022, respectively.

The total fair value of shares vested during fiscal 2020, 2021 and 2022 was $ 26.8 million, $ 27.0 million, and $ 27.9 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.

Under the terms of the 2012 Plan, RSUs and restricted stock granted from the pool of shares available for grant reduce the pool by 1.87 shares for each award granted.

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

As of June 30, 2022, there were approximately 1.4 million shares available for grant under the OSI Plan.

Under the terms of the OSI Plan, RSUs and restricted stock granted from the pool of shares available for grant reduce the pool by 1.87 shares for each award granted.

RSUs and restricted stock forfeited and returned to the pool of shares available for grant increase the pool by 1.87 shares for each award forfeited.

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The payout related to these awards can range from zero to 376 % of the original number of shares or units awarded.

Compensation cost associated with these performance based RSUs are recognized based on the estimated number of shares that we ultimately expect will vest.

If the estimated number of shares to vest is revised in the future, then stock-based compensation expense will be adjusted accordingly.

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.

During the years ended June 30, 2020, 2021 and 2022, employees purchased 69,399 , 63,499 , and 60,708 shares, respectively.

As of June 30, 2022, there were 477,227 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.

Our Board of Directors has authorized a share repurchase program of up to 3,000,000 shares of Common Stock.

This program does not expire unless our Board of Directors acts to terminate the program.

The timing and actual numbers of shares purchased depends on a variety of factors, including stock price, general business and market conditions and other investment opportunities.

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

Upon repurchase, the shares are restored to the status of authorized but unissued shares, and we record them 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.

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

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

During fiscal 2020, 2021 and 2022, we repurchased 562,707 shares, 452,005 shares and 1,294,594 shares, respectively, of common stock under our then current programs.

As of June 30, 2022, there were 1,253,401 shares remaining available for repurchase under the authorized 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.

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

As of June 30, 2021, we had accrued $ 1.4 million for interest and penalties.

As of June 30, 2022, we have accrued $ 0.5 million for interest and penalties.

Our uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities.

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Convertible debt

Prepaid expenses

Other liabilities

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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.

As of June 30, 2022, we had federal, state and foreign net operating losses carryforwards of approximately $ 3.6 million, $ 26.8 million and $ 16.1 million, respectively.

As of June 30, 2022, we had federal and state tax credit carryforwards of approximately $ 11.9 million and $ 9.1 million, respectively.

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Change in valuation allowance

Unrecognized tax expense

Unrecognized tax expense (benefit)

Tax on foreign currency gains and losses

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COMMITMENTS AND CONTINGENCIES

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

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

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

milestones through the acquired operations.

For agreements that contain contingent consideration caps, the remaining maximum amount of such potential future payments is $ 52.2 million as of June 30, 2022.

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.

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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.

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

These projections and probabilities are used to estimate future contingent earnout payments, which are discounted back to present value to compute contingent earnout liabilities.

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Beginning fair value, June 30, 2021

Change in fair value

Payments on contingent earn-out obligations

Addition of contingent earnout obligations

Foreign currency translation adjustment

Changes in fair value for contingent earnout obligations

Payments on contingent earnout obligations

Ending fair value, June 30, 2022

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Environmental Contingencies —We are subject to various environmental laws.

Our practice is to conduct appropriate environmental investigations at our manufacturing facilities in North America, Asia-Pacific, and Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation, potential areas of environmental concern related to past and present activities or from nearby operations.

In certain cases, we have conducted further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate by independent environmental consultants.

We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California facility that resulted from unspecified on- and off-site releases occurring prior to our occupancy.

We believe the releases are of a historical nature and not uncommon to the region in general.

We continue to take voluntary actions, in cooperation with the local governing agency, to fully investigate the site in order to develop appropriate remedial actions.

We have not accrued for loss contingencies relating to the Hawthorne facility or any other environmental matters because we believe that, although unfavorable outcomes may be possible, they are not considered by our management to be probable and reasonably estimable.

We often conduct environmental investigations at our manufacturing facilities in North America, Asia-Pacific, and Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation, potential areas of environmental concern related to past and present activities or from nearby operations.

We have not accrued for loss contingencies relating to environmental matters because we believe that, although unfavorable outcomes are possible, they are not considered by our management to be probable and reasonably estimable.

If one or more of these environmental matters are resolved in a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be material.

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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

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

Chopra’s death or disability.

The bonus is accrued in the financial statements over the remaining term of the employment agreement and is included in other long-term liabilities.

OSI SYSTEMS, INC.

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FOR THE THREE YEARS ENDED JUNE 30, 2022

the event of Mr.

Chopra’s death or disability.

The bonus is recorded in the financial statements over the remaining term of the employment agreement and is included in other long-term liabilities.

Legal Proceedings —In December 2017, a short seller released a report regarding our compliance with the FCPA.

Following that report, we and certain of our executive officers have been named as defendants in several lawsuits in the District Court that were filed in December 2017 and February 2018.

Each of the complaints closely tracks the allegations set forth in the short seller's report.

All of the actions, which were consolidated by the District Court in March 2018 in an action captioned Arkansas Teacher Retirement System et al.

OSI Systems, Inc.

17 cv 08841, allege violations of Sections 10(b) and 20(a) of the Exchange Act, relating to certain of our public statements and filings with the SEC, and seek damages and other relief based upon the allegations in the complaints.

In April 2018 and March 2019, two shareholder derivative complaints were filed purportedly on behalf of the Company against certain members of our Board of Directors (as individual defendants), a former member of our Board of Directors, and a member of management.

The derivative actions, which were consolidated by the District Court in November 2019 in an action captioned Kocen and Riley v.

Chopra, et al.

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.

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.

With respect to these trading related matters, in fiscal year 2018, we took action with respect to a senior level employee.

At this time, we are unable to predict what, if any, action may be taken by the DOJ or SEC as a result of these trading related investigations, or any penalties or remedial measures these agencies may seek.

We place a high priority on compliance with our anticorruption and securities trading policies and are cooperating with each of the government investigations.

We are involved in various other claims and legal proceedings arising in the ordinary course of business.

Legal Proceedings —We are involved in various claims and legal proceedings arising in the ordinary course of business.

In our opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on our business, financial condition, results of operations or cash flows.

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Receivables from the joint venture were $ 0.5 million and $ 0.6 million as of June 30, 2021 and 2022, respectively.

OSI SYSTEMS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE THREE YEARS ENDED JUNE 30, 2021

EMPLOYEE BENEFIT PLANS

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We have determined that we operate in three identifiable industry segments:

(a) security and inspection systems (Security division), (b) medical monitoring and diagnostic cardiology systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division).

(a) security and inspection systems (Security division), (b) medical monitoring systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division).

We also have a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses;

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Other Europe, Middle East and Africa

Pursuant to Accounting Standards Codification 280 “Segment Reporting,” external revenues are attributed to individual countries based upon the location of our selling entity.

Pursuant to ASC 280 Segment Reporting, external revenues are attributed to individual countries based upon the location of our selling entity.

SUPPLEMENTARY DATA

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Research and development

Impairment, restructuring and other charges (benefit), net

Impairment, restructuring and other charges, net

Total operating expenses

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Form of Indemnification Agreement for Directors and Executive Officers of OSI Systems, Inc.

Sixth Amendment to Credit Agreement dated April 23, 2019 between Wells Fargo Bank, N.A.

Eighth Amendment to Credit Agreement dated August 11, 2022 between Wells Fargo Bank, N.A.

and OSI Systems, Inc.

Amended and Restated 2006 Equity Participation Plan of OSI Systems, Inc.

Employment Agreement effective as of January 1, 2012 between Deepak Chopra and OSI Systems, Inc.

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Second Amendment to Amended and Restated Retirement Benefit Award Agreement effective as of August 19, 2020 by and between Deepak Chopra and OSI Systems, Inc.

Third Amendment to Amended and Restated Retirement Benefit Award Agreement effective as of October 27, 2021 by and between Deepak Chopra and OSI Systems, Inc.

Amended and Restated OSI Systems, Inc.

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

EXHIBIT DESCRIPTION

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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(5) Previously filed with our Annual Report on Form 10-K filed on August 27, 2010.

(6) Previously filed with our Current Report on Form 8-K filed on December 1, 2010.

(6) Previously filed with our Current Report on Form 8-K filed on April 6, 2012.

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(13) Previously filed with our Current Report on Form 8-K filed on February 22, 2017.

(15) Previously filed with our Current Report on Form 8-K filed on April 23, 2019.

(14) Previously filed with our Quarterly Report on Form 10-Q filed on October 26, 2018.

2 unchanged sentences

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

(18) Previously filed with our Quarterly Report on Form 10-Q filed on October 29, 2021.

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