What changed in this filing

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Item 1. Financial Statements

2022-10-28 compared with 2022-04-29 · 141 added, 245 removed, 411 unchanged (48% of the section changed)

5 unchanged sentences

June 30, 2022

March 31, 2022

September 30, 2022

CURRENT ASSETS:

23 unchanged sentences

Common stock, $ 0.001 par value— 100,000,000 shares authorized;

issued and outstanding , 17,854,110 shares at June 30, 2021 and 17,043,853 shares at March 31, 2022

issued and outstanding, 16,870,050 shares at June 30, 2022 and 16,854,153 shares at September 30, 2022

Retained earnings

7 unchanged sentences

(amounts in thousands, except per share data)

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Net revenues:

5 unchanged sentences

Research and development

Impairment, restructuring and other charges (benefit), net

Impairment, restructuring and other charges, net

Total operating expenses

1 unchanged sentence

Interest and other expense, net

Other income, net

Income before income taxes

7 unchanged sentences

(amounts in thousands)

Three Months Ended March 31,

Nine Months Ended March 31,

Other comprehensive income (loss):

Foreign currency translation adjustment

Other comprehensive income (loss)

Three Months Ended September 30,

Other comprehensive loss:

Foreign currency translation adjustment, net of tax

Net unrealized gain on investments and derivatives, net of tax

Other, net of tax

Other comprehensive loss

Comprehensive income

4 unchanged sentences

(amounts in thousands, except share data)

Three Months Ended March 31, 2021

Comprehensive

Balance—December 31, 2020

Exercise of stock options

Vesting of RSUs

Shares issued under employee stock purchase program

Stock-based compensation expense

Repurchase of common stock

Taxes paid related to net share settlement of equity awards

Other comprehensive loss

Balance—March 31, 2021

Three Months Ended March 31, 2022

Comprehensive

Balance—December 31, 2021

Vesting of RSUs

Shares issued under employee stock purchase program

Stock-based compensation expense

Repurchase of common stock

Taxes paid related to net share settlement of equity awards

Other comprehensive loss

Balance—March 31, 2022

Nine Months Ended March 31, 2021

Three Months Ended September 30, 2021

Comprehensive

6 unchanged sentences

Taxes paid related to net share settlement of equity awards

Other comprehensive income

Balance—March 31, 2021

Nine Months Ended March 31, 2022

Adoption of ASU 2020-06 for convertible notes

Other comprehensive loss

Balance—September 30, 2021

Three Months Ended September 30, 2022

Comprehensive

5 unchanged sentences

Repurchase of common stock

( 1,117,258 )

Taxes paid related to net share settlement of equity awards

Adoption of ASU 2020-06 for convertible notes

Other comprehensive loss

Balance—March 31, 2022

Balance—September 30, 2022

OSI SYSTEMS, INC.

2 unchanged sentences

(amounts in thousands)

Nine Months Ended March 31,

Three Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

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

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

Depreciation and amortization

3 unchanged sentences

Amortization of debt discount and issuance costs

Impairment charges

Gain on sale of property and equipment

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

4 unchanged sentences

Advances from customers

Net cash provided by operating activities

Deferred revenue

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

2 unchanged sentences

Purchases of certificates of deposit

Proceeds from certificates of deposit

Acquisition of businesses, net of cash acquired

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (repayments) on bank lines of credit

Net borrowings on bank lines of credit

Proceeds from long-term debt

24 unchanged sentences

These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 filed with the SEC.

The results of operations for the three and nine months ended March 31, 2022 are not necessarily indicative of the operating results to be expected for the full 2022 fiscal year or any future periods.

The results of operations for the three months ended September 30, 2022 are not necessarily indicative of the operating results to be expected for the full 2023 fiscal year or any future periods.

Use of Estimates

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

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

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.

4 unchanged sentences

Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method.

The underlying equity component of the 1.25 % convertible senior notes due 2022 (the “Notes”) discussed in Note 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 three and nine months ended March 31, 2021 and 2022.

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

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Net income available to common stockholders

7 unchanged sentences

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 $ 83.3 million at March 31, 2022.

Our cash and cash equivalents totaled $ 54.0 million at September 30, 2022.

Of this amount, approximately 86 % 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, Singapore, India, Malaysia, and Canada, and to a lesser extent in Australia, Albania, Indonesia and Mexico among other countries.

These foreign funds were held primarily by our subsidiaries in the United Kingdom, Singapore, Malaysia, Canada and India, and to a lesser extent in Australia, Albania, Indonesia and Mexico among other countries.

We have cash holdings in financial institutions that exceed insured limits for such financial institutions;

1 unchanged sentence

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.

Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable, debt instruments, interest rate swap contract and foreign currency forward contracts.

The carrying values of financial instruments, other than long term debt instruments and interest rate swap contract, are representative of their fair values due to their short-term maturities.

The carrying values of our long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current rates for financing available to us.

The fair values of our foreign currency forward contracts were not significant as of June 30, 2021 and March 31, 2022.

The fair values of our foreign currency forward contracts were not significant as of June 30, 2022 and September 30, 2022.

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.

5 unchanged sentences

June 30, 2022

March 31, 2022

September 30, 2022

Assets—Insurance company contracts

Assets – Interest rate swap contract

Liabilities—Convertible debt

Liabilities—Contingent consideration

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.

Our use of derivatives consists of foreign currency forward contracts and an interest rate swap agreement.

The foreign currency forward contracts are utilized to partially mitigate certain balance sheet exposures or used as a net investment hedge to protect against potential changes resulting from short-term foreign currency fluctuations.

These contracts have original maturities of up to three months.

We also manage our risk to changes in interest rates through the use of derivative instruments.

We use fixed interest rate swaps to effectively convert a portion of the variable interest rate payments to fixed interest rate payments.

We do not use hedging instruments for speculative purposes.

The net investment hedge has been designated as a hedge instrument and accounted for under Accounting Standards Codification (“ASC”) 815 Derivatives and Hedging .

Hedge effectiveness is assessed using the spot method, consistent with guidance in ASC 815 whereby the change in fair value of the forward contract is recorded in the same manner as the related currency translation adjustments, within other comprehensive income, as the hedging instrument is expected to be fully effective unless the amount hedged exceeds the net investment in the foreign operation, or the foreign operation is liquidated.

There were no net investment hedges outstanding as of June 30, 2021 and March 31, 2022.

The net gains or losses from our foreign currency forward contracts, which are not designated as hedge instruments, are reported in the consolidated income statement.

The amounts reported in the consolidated income statement for the three and nine months ended March 31, 2021 and 2022 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.

The amounts reported in the consolidated statements of operations for the three months ended September 30, 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 and March 31, 2022, we held foreign currency forward contracts with notional amounts totaling $ 26.1 million and $ 21.0 million, respectively.

Unrealized gains and losses from our forward currency forward contracts as of March 31, 2021 and 2022 were not significant.

As of June 30, 2022 and September 30, 2022, we held foreign currency forward contracts with notional amounts totaling $ 22.9 million and $ 17.6 million, respectively.

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

The interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to our variable, Secured Overnight Financing Rate (“SOFR”) based debt.

The interest rate swap matures in December 2026.

The interest rate swap is considered an effective cash flow hedge, and as a result, the net gains or losses on such instrument are reported as a component of Other comprehensive loss in the consolidated financial statements and are reclassified as net income when the underlying hedged interest impacts earnings.

A qualitative and quantitative assessment over the hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate that the hedge may no longer be highly effective.

As of June 30, 2022 and September 30, 2022, the notional amount of the derivative instruments designated as an interest rate swap hedge was $ 0 and $ 175 million, respectively.

The fair value of the interest rate swap contract as of September 30, 2022 was $ 3.5 million and recorded in Other assets within the condensed consolidated balance sheet.

The effect of the cash flow hedges on other comprehensive loss and earnings for the periods presented was as follows:

September 30,

Total interest and other expense, net presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded

Amount recognized in other comprehensive loss

Amount reclassified from accumulated other comprehensive loss to interest expense, net

Recently Adopted Accounting Pronouncements

Convertible Debt

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

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

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

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

The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.

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

Additionally, we recorded an increase to the convertible notes balance 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

2 unchanged sentences

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 three months ended March 31, 2022.

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 and the business combination that occurred during the quarter ended September 30, 2022.

The adoption of ASU 2021-08 did not have a material impact 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.

Under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805"), the acquisition method of accounting requires us to record assets acquired less liabilities assumed from an acquisition at their estimated fair values at the date of acquisition.

Any excess of the total estimated purchase price over the estimated fair value of the net assets acquired should be recorded as goodwill.

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

1 unchanged sentence

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

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.

Any adjustments subsequent to the conclusion of such one-year measurement period are reflected in reported earnings.

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

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

Fiscal Year 2023 Business Acquisition

In August 2022, we (through our Security division) acquired a privately held provider of training software and solutions for approximately $ 1.9 million, plus up to $ 0.5 million in potential contingent consideration.

The acquisition was financed with cash on hand.

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

Fiscal Year 2022 Business Acquisitions

8 unchanged sentences

Balance Sheet Details

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

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

September 30,

Accounts receivable, net

1 unchanged sentence

Less allowance for doubtful accounts

September 30,

Raw materials

1 unchanged sentence

Finished goods

September 30,

Property and equipment, net

9 unchanged sentences

Property and equipment, net

Depreciation and amortization expense for property and equipment was $ 5.5 million and $ 5.4 million for the three months ended March 31, 2021 and 2022, respectively, and $ 16.3 million and $ 16.0 million for the nine months ended March 31, 2021 and 2022, respectively.

Depreciation and amortization expense for property and equipment was $ 5.3 million and $ 4.9 million for the three months ended September 30, 2021 and 2022, respectively.

Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the nine-month period ended March 31, 2022 were as follows (in thousands)

The changes in the carrying value of goodwill by segment for the three-month period ended September 30, 2022 were as follows (in thousands)

Optoelectronics

3 unchanged sentences

Foreign currency translation adjustment

Balance as of March 31, 2022

Balance as of September 30, 2022

Intangible assets consisted of the following (in thousands):

June 30, 2022

March 31, 2022

September 30, 2022

Amortizable assets:

6 unchanged sentences

Total intangible assets

Amortization expense related to intangible assets was $ 4.8 million and $ 4.4 million for the three months ended March 31, 2021 and 2022, respectively.

For the nine months ended March 31, 2021 and 2022, amortization expense related to intangible assets was $ 15.1 million and $ 13.0 million, respectively.

At March 31, 2022, the estimated future amortization expense for intangible assets was as follows (in thousands):

Amortization expense related to intangible assets was $ 4.4 million and $ 4.7 million for the three months ended September 30, 2021 and 2022, respectively.

At September 30, 2022, the estimated future amortization expense for intangible assets was as follows (in thousands):

2023 (remaining 9 months)

4 unchanged sentences

Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above.

For the three months ended March 31, 2021 and 2022, we capitalized software development costs in the amounts of $ 2.6 million and $ 4.0 million, respectively.

For the nine months ended March 31, 2021 and 2022, we capitalized software development costs in the amounts of $ 9.1 million and $ 11.7 million, respectively.

For the three months ended September 30, 2021 and 2022, we capitalized software development costs in the amounts of $ 4.1 million and $ 3.9 million, respectively.

Contract Assets and Liabilities

We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions.

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

We recognize revenue and corresponding accounts receivable according to ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).

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

2 unchanged sentences

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

In such instances, we record a deferred revenue liability.

In such instances, we record a deferred revenue liability in either Other accrued expenses and current liabilities or Other long-term liabilities.

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

The table below shows the balance of contract assets and liabilities as of June 30, 2021 and March 31, 2022, including the change between the periods.

The table below shows the balance of contract assets and liabilities as of June 30, 2022 and September 30, 2022, including the change between the periods.

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

Contract Assets (in thousands)

September 30,

Unbilled revenue (included in accounts receivable, net)

Contract Liabilities (in thousands)

September 30,

Advances from customers

1 unchanged sentence

Deferred revenue—long-term

Contract assets increased during the nine months ended March 31, 2022 primarily due to satisfaction of performance obligations for aviation, cargo and vehicle inspection customers in our Security division which have not yet been billed.

Contract assets increased during the three months ended September 30, 2022 primarily due to satisfaction of performance obligations for aviation, cargo and vehicle inspection customers in our Security division which have not yet been billed.

The overall increase in contract liabilities was primarily due to receipt of upfront deposits from customers and deferred revenue from receipt of payments under service and warranty contracts primarily in our Security division.

Remaining Performance Obligations .

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

As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 372.8 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 September 30, 2022, the portion of the transaction price allocated to remaining performance obligations was approximately $ 404.0 million.

We expect to recognize revenue on approximately 55 % of the remaining performance obligations over the next 12 months , and the remainder is expected to be recognized thereafter.

During the nine months ended March 31, 2022, we recognized revenue of $ 53.3 million from contract liabilities existing at the beginning of the period.

During the three months ended September 30, 2022, we recognized revenue of $ 16.5 million from contract liabilities existing at the beginning of the period.

Practical Expedients.

3 unchanged sentences

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

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Operating lease cost

1 unchanged sentence

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 of $ 27.4 million.

We also entered into a 6-year lease agreement for the Hawthorne Property commencing March 10, 2022 and expiring on March 31, 2028, with two 5-year renewal options.

As of March 31, 2022 , we recorded a right-of-use asset and lease liability for $ 5.7 million.

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

1 unchanged sentence

June 30, 2022

March 31, 2022

September 30, 2022

Operating lease ROU assets, net

7 unchanged sentences

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

Nine Months Ended March 31,

Three Months Ended September 30,

Cash paid for operating lease liabilities

ROU assets obtained in exchange for new lease obligations

Maturities of operating lease liabilities at March 31, 2022 were as follows (in thousands):

March 31, 2022

Maturities of operating lease liabilities at September 30, 2022 were as follows (in thousands):

September 30, 2022

Less than one year

3 unchanged sentences

We endeavor to align our global capacity and infrastructure with demand by our customers as well as fully integrate acquisitions and thereby improve operational efficiency.

During the three months ended March 31, 2022, we recognized $ 1.5 million in restructuring and other charges, which included $ 0.8 million in legal charges primarily related to class action litigation and government investigations, $ 0.4 million for employee terminations, and $ 0.3 million in acquisition related costs.

During the three months ended March 31, 2021, we recognized a total net benefit of ($ 0.3 ) million which included a net benefit of ($ 0.7 ) million for reimbursements from our insurance carriers for covered legal charges.

We also incurred charges of $ 0.2 million for employee terminations and $ 0.2 million for facility closure and operational efficiency activities.

During the nine months ended March 31, 2022, we recognized $ 4.8 million in restructuring and other charges, which included $ 1.0 million in employee terminations, $ 0.3 million in acquisition related costs, and $ 3.5 million in legal charges primarily related to class action litigation and government investigations.

During the nine months ended March 31, 2021, we incurred a total net expense of $ 7.9 million which included $ 7.2 million for exit activities associated with an expired turnkey contract in Mexico.

Such exit costs included $ 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 right-of-use asset impairment for a leased facility.

We also incurred costs of $ 1.6 million for other employee terminations and facility closure costs for operational efficiency activities and $ 0.3 million for acquisition-related activities.We also recognized a net benefit of ($ 1.2 ) million for reimbursements from our insurance carriers for covered legal charges.

During the three months ended September 30, 2022, we recognized $ 1.2 million in restructuring and other charges, which included $ 0.9 million in legal charges and $ 0.3 million for employee terminations.

During the three months ended September 30, 2021, we recognized $ 2.5 million in restructuring and other charges which included $ 2.2 million in legal charges net of insurance recoveries, $ 0.3 million for employee terminations, and an insignificant net benefit for facility closure and operational efficiency activities.

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

Three Months Ended March 31, 2021

Optoelectronics and

Manufacturing

Security Division

Acquisition-related costs

Employee termination costs

Facility closures/consolidation costs

Legal costs (recoveries), net

Total expensed (benefit), net

Three Months Ended March 31, 2022

Three Months Ended September 30, 2021

Optoelectronics and

1 unchanged sentence

Security Division

Acquisition-related costs

Employee termination costs

1 unchanged sentence

Legal costs, net

Total expensed

Nine Months Ended March 31, 2021

Optoelectronics and

Manufacturing

Security Division

Impairment charges

Acquisition-related costs

Employee termination costs

Mexico transaction costs

Facility closures/consolidation costs

Legal costs (recoveries), net

Total expensed (benefit), net

Nine Months Ended March 31, 2022

Three Months Ended September 30, 2022

Optoelectronics and

3 unchanged sentences

Employee termination costs

Facility closures/consolidation

Legal costs, net

Total expensed

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

The changes in the accrued liability for restructuring and other charges for the nine-month period ended March 31, 2022 were as follows (in thousands):

The changes in the accrued liability for restructuring and other charges for the three-month period ended September 30, 2022 were as follows (in thousands):

Consolidation

Balance as of June 30, 2022

Restructuring and other charges (benefits), net

Restructuring and other charges, net

Payments, adjustments and reimbursements, net

Balance as of March 31, 2022

Balance as of September 30, 2022

Revolving Credit Facility

1 unchanged sentence

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 March 31, 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.

Borrowings under the amended facility bore interest at SOFR plus a margin of 1.0 % as of September 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).

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

The unused portion of the facility bore a commitment fee of 0.10 % as of March 31, 2022 (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 September 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 credit facility contains various representations and warranties, affirmative, negative and financial covenants and events of default.

As of March 31, 2022, there were $ 73.0 million of borrowings outstanding under the revolving credit facility, $ 85.2 million outstanding under the letters of credit sub-facility, and $ 50 million outstanding under the term loan.

As of March 31, 2022, the amount available to borrow under the revolving credit facility was $ 441.8 million and the amount available to borrow under the term loan was $ 100 million.

As of September 30, 2022, there were $ 215 million of borrowings outstanding under the revolving credit facility, $ 67.2 million outstanding under the letters of credit sub-facility, and $ 150 million outstanding under the term loan.

As of September 30, 2022, the amount available to borrow under the revolving credit facility was $ 317.8 million.

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

2 unchanged sentences

It is our practice to routinely borrow and repay several times per year under the revolving facility and therefore, borrowings under the revolving credit facility are included in current liabilities.

As of March 31, 2022, we were in compliance with all financial covenants under this credit facility.

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

In September 2022, we entered into an interest rate swap in order to mitigate the interest rate risk on a portion of the interest payments expected to be made on the borrowings outstanding under the revolving credit facility and term loan.

Refer to Note 1 for details.

1.25% Convertible Senior Notes (“Notes”) Due 2022

In February 2017, we issued $ 287.5 million of the Notes in a private offering.

The Notes are governed by an indenture dated February 22, 2017.

The maturity for the payment of principal is September 1, 2022.

The Notes bear interest at the rate of 1.25 % and are payable in cash semiannually in arrears on each March 1 and September 1.

The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes;

equal in right of payment to any of our unsecured indebtedness that is not so subordinated;

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 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 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.

If we undergo a fundamental change, as defined in the indenture for the Notes, subject to certain conditions, holders of the Notes may require us to repurchase all or part of the Notes for cash at a price equal to 100 % of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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, 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 represented the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the Notes.

The Notes were governed by an indenture dated February 22, 2017.

The maturity for the payment of principal was September 1, 2022.

The Notes bore interest at the rate of 1.25 % and were payable in cash semiannually in arrears on each March 1 and September 1.

On September 1, 2022, we repurchased and cancelled the remaining $ 242.3 million balance 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 three and nine months ended March 31, 2021 related to the Notes was $ 3.3 million and $ 10.0 million, respectively, which consisted of $ 0.9 million and $ 2.7 million of contractual interest expense, $ 2.2 million and $ 6.4 million of debt discount amortization and $ 0.3 million and $ 0.9 million of amortization of debt issuance costs.

For the three and nine months ended March 31, 2022, the total interest expense was $ 1.2 million and $ 3.7 million, respectively, which consisted of $ 0.9 million and $ 2.7 million of contractual interest expense and $ 0.3 million and $ 1.0 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 $ 0.6 million as of June 30, 2021 and March 31, 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.

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 the three months ended March 31, 2022, we repurchased and cancelled approximately $ 40.2 million of principal value of the Notes.

We recognized a loss on debt extinguishment of $ 0.1 million during the quarter ended March 31, 2022, representing the write-off of unamortized debt issuance costs related to the portion of the Notes repurchased.

Total interest expense recognized for the three months ended September 30, 2021 related to the Notes was $ 1.2 million, which consisted of $ 0.9 million of contractual interest expense and $ 0.3 million of amortization of debt issuance costs.

Total interest expense recognized for the three months ended September 30, 2022 related to the Notes was $ 0.7 million, which consisted of $ 0.5 million of contractual interest expense, and $ 0.2 million of amortization of debt issuance costs.

Other Borrowings

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dollars, primarily for the issuance of letters of credit.

As of March 31, 2022, $ 61.9 million was outstanding under these letter-of-credit facilities.

As of March 31, 2022, the total amount available under these credit facilities was $ 11.5 million.

As of September 30, 2022, $ 58.8 million was outstanding under these letter-of-credit facilities.

As of September 30, 2022, the total amount available under these credit facilities was $ 5.9 million.

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

June 30, 2021

March 31, 2022

September 30,

1.25% convertible notes due September 1, 2022:

Principal amount

Unamortized discount

Unamortized debt issuance costs

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Stock-based Compensation

As of March 31, 2022, we maintained the Amended and Restated 2012 Incentive Award Plan (the “OSI Plan”) as a stock-based employee compensation plan.

As of September 30, 2022, we maintained the Amended and Restated 2012 Incentive Award Plan (the “OSI Plan”) as a stock-based employee compensation plan.

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

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Cost of goods sold

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Stock-based compensation expense

As of March 31, 2022, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $ 0.7 million for stock options and $ 20.3 million for restricted stock units (“RSUs”).

As of September 30, 2022, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $ 0.5 million for stock options and $ 31.9 million for restricted stock units (“RSUs”).

We expect to recognize these costs over a weighted average period of 1.8 years with respect to the stock options and 1.6 years with respect to the RSUs.

The following summarizes stock option activity during the nine months ended March 31, 2022:

The following summarizes stock option activity during the three months ended September 30, 2022:

Weighted-Average

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Expired or forfeited

Outstanding at March 31, 2022

Exercisable at March 31, 2022

The following summarizes RSU award activity during the nine months ended March 31, 2022:

Outstanding at September 30, 2022

Exercisable at September 30, 2022

The following summarizes RSU award activity during the nine months ended September 30, 2022:

Nonvested at June 30, 2022

Nonvested at March 31, 2022

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 March 31, 2022, there were approximately 1.4 million shares available for grant under the OSI Plan.

Nonvested at September 30, 2022

As of September 30, 2022, there were approximately 0.8 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.

We granted 136,242 and 96,620 performance-based RSUs during the nine months ended March 31, 2021 and 2022, respectively.

We granted 96,620 and 109,594 performance-based RSUs during the three months ended September 30, 2021 and 2022, respectively.

These performance-based RSU awards are contingent on the achievement of certain performance metrics.

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Stock Repurchase Program

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

In September 2022, our Board of Directors increased the stock repurchase authorization to a total of 2 million shares.

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

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

During the nine months ended March 31, 2022, we repurchased 1,117,258 shares of our common stock.

As of March 31, 2022, there were 1,430,737 shares remaining available for repurchase under the authorized repurchase 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, with the excess purchase price over par value recorded as a reduction of additional paid-in capital.

If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings.

During the three months ended September 30, 2022, we repurchased 208,427 shares of our common stock.

As of September 30, 2022, there were 1,913,673 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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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 $ 52.4 million as of March 31, 2022.

For agreements that contain contingent consideration obligations that are capped, the remaining maximum amount of such potential future payments is $ 51.2 million as of September 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.

We made contingent payments relating to such acquisitions of $ 0.2 million and $ 0.9 million, respectively, during the three and nine months ended March 31, 2021 and $ 0.3 million and $ 1.7 million, respectively, during the three and nine months ended March 31,2022.

We made contingent payments relating to such acquisitions of $ 0.3 million and $ 0.4 million, during the three months ended September 30, 2021 and 2022.

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.

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

The following table provides a roll-forward from June 30, 2021 to March 31, 2022 of the contingent consideration liability, which is included in other accrued expenses and current liabilities and other long-term liabilities in our consolidated balance sheets (in thousands):

The following table provides a roll-forward from June 30, 2022 to September 30, 2022 of the contingent consideration liability, which is included in other accrued expenses and current liabilities and other long-term liabilities in our consolidated balance sheets (in thousands):

Beginning fair value, June 30, 2022

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Payments on contingent earnout obligations

Ending fair value, March 31, 2022

Ending fair value, September 30, 2022

Environmental Contingencies

We are subject to various environmental laws.

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

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

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

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It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

We have not recorded any liability for costs related to contingent indemnification obligations as of March 31, 2022.

We have not recorded any liability for costs related to contingent indemnification obligations as of September 30, 2022.

On December 31, 2017, we and Deepak Chopra, our Chief Executive Officer, entered into an amendment to Mr.

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The following table presents changes in warranty provisions (in thousands):

Nine Months Ended March 31,

Three Months Ended September 30,

Balance at beginning of period

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Legal Proceedings

In December 2017, a short seller released a report regarding our compliance with the Foreign Corrupt Practices Act.

Following that report, we and certain of our executive officers have been named as defendants in several lawsuits in the United States District Court for the Central District of California (“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.

Although we believe that the actions are without merit, because of the costs and inherent uncertainty in litigation, we reached an agreement to settle the Arkansas Teacher Retirement Systems matter for $ 12.5 million, which was preliminarily approved by the court on December 30, 2021 and paid during the quarter ended March 31, 2022.

We were reimbursed by insurance $ 4.5 million of the settlement amount during the quarter ended March 31, 2022 and were reimbursed the remaining $ 8.0 million in April 2022.

As of March 31, 2022, the $ 8.0 million was included as a receivable in Prepaid expenses and other current assets.

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 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 the dismissal was affirmed by the 9 th Circuit Court of Appeal.

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

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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As such, there can be significant volatility in interim tax provisions.

The effective tax rates for the three months ended March 31, 2022 and 2021 were 20.1 % and 33.7 %, respectively.

During the three month period ended March 31, 2022, we recognized a net discrete tax benefit of $ 0.2 million related to equity-based compensation under ASU 2016-09 and changes in prior year tax estimates.

During the three months ended March 31, 2021, we recognized a net discrete tax expense of $ 2.2 million for changes in prior year tax estimates of $ 2.4 million, offset by a discrete tax benefit of ($ 0.2 ) million for equity-based compensation under ASU 2016-09.

The effective tax rate for the nine months ended March 31, 2022 and 2021 was 20.8 % and 30.1 %, respectively.

During the nine months ended March 31, 2022, we recognized a net discrete tax benefit of $ 2.0 million related to equity-based compensation under ASU 2016-09 .

During the nine months ended March 31, 2021, we recognized a net discrete tax expense of $ 2.3 million for changes in prior year tax estimates of $ 2.8 million, offset by a ($ 0.5 ) million tax benefit from equity-based compensation under ASU 2016-09.

The effective tax rates for the three months ended September 30, 2021 and 2022 were 15.9 % and 24.4 %, respectively.

During the three month period ended September 30, 2021 and 2022, we recognized a net discrete tax benefit of $ 2.1 million and $ 0.1 million, respectively, related to equity-based compensation under ASU 2016-09.

Segment Information

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, expenses related to stock issuances and legal, audit and other professional service fees not allocated to industry segments.

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

Three Months Ended March 31,

Nine Months Ended March 31,

Three Months Ended September 30,

Revenues (1) —by Segment:

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Intersegment Eliminations

September 30,

Assets (2) —by Segment:

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Eliminations (3)

(1) For each of the three and nine month periods ended March 31, 2021 and March 31, 2022, no customer accounted for greater than 10 % of total net revenues.

(2) As of June 30, 2021 and March 31, 2022, no customer accounted for greater than 10 % of accounts receivable.

(1) For each of the three month periods ended September 30, 2021 and 2022, no customer accounted for greater than 10 % of total net revenues.

(2) As of June 30, 2022 and September 30, 2022, no customer accounted for greater than 10 % of accounts receivable.

(3) Eliminations in assets reflect the amount of inter-segment profits in inventory and inter-segment ROU assets under ASC 842 as of the balance sheet date.

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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-Q

Item 1. Financial Statements