OSI SYSTEMS INC - Quarter Report: 2021 December (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the quarterly period ended December 31, 2021

☐

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

For the transition period from to

Commission File Number 000-23125

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

		Emerging growth company ☐

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

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

As of January 25, 2022, there were 17,679,034 shares of the registrant’s common stock outstanding.

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OSI SYSTEMS, INC.

INDEX


		PAGE

PART I — FINANCIAL INFORMATION		3

Item 1 —	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2021	3
	Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2020 and 2021	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2020 and 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended December 31, 2020 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3 —	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4 —	Controls and Procedures	31

PART II — OTHER INFORMATION		33
Item 1 —	Legal Proceedings	33
Item 1A —	Risk Factors	33
Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3 —	Defaults Upon Senior Securities	33
Item 4 —	Mine Safety Disclosures	33
Item 5 —	Other Information	33
Item 6 —	Exhibits	34
Signatures		35

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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


	June 30, 2021		December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	80,613	$	86,332
Accounts receivable, net		290,653		288,037
Inventories		294,208		334,242
Prepaid expenses and other current assets		43,930		61,179
Total current assets		709,404		769,790
Property and equipment, net		118,004		116,115
Goodwill		320,304		320,319
Intangible assets, net		127,608		126,643
Other assets		109,047		110,239
Total assets	$	1,384,367	$	1,443,106
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit	$	—	$	81,622
Current portion of long-term debt		846		287,247
Accounts payable		141,263		128,164
Accrued payroll and related expenses		50,816		37,518
Advances from customers		38,463		39,521
Other accrued expenses and current liabilities		113,379		120,383
Total current liabilities		344,767		694,455
Long-term debt		276,421		602
Deferred income taxes		7,157		4,526
Other long-term liabilities		116,202		123,375
Total liabilities		744,547		822,958
Commitments and contingencies (Note 9)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value— 10,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock, $0.001 par value—100,000,000 shares authorized; issued and outstanding, 17,854,110 shares at June 30, 2021 and 17,643,903 shares at December 31, 2021		105,724		30,909
Retained earnings		548,842		606,647
Accumulated other comprehensive loss		(14,746)		(17,408)
Total stockholders’ equity		639,820		620,148
Total liabilities and stockholders’ equity	$	1,384,367	$	1,443,106

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Net revenues:
Products	$	208,367	$	205,377	$	391,114	$	412,589
Services		67,642		71,304		139,803		143,349
Total net revenues		276,009		276,681		530,917		555,938
Cost of goods sold:
Products		139,893		139,060		264,734		281,966
Services		34,035		37,848		68,351		74,869
Total cost of goods sold		173,928		176,908		333,085		356,835
Gross profit		102,081		99,773		197,832		199,103
Operating expenses:
Selling, general and administrative		56,101		54,879		114,718		112,202
Research and development		13,784		14,977		25,866		29,794
Impairment, restructuring and other charges (benefit), net		(162)		831		8,197		3,341
Total operating expenses		69,723		70,687		148,781		145,337
Income from operations		32,358		29,086		49,051		53,766
Interest and other expense, net		(4,233)		(2,217)		(8,422)		(4,233)
Income before income taxes		28,125		26,869		40,629		49,533
Provision for income taxes		(8,087)		(7,072)		(11,247)		(10,684)
Net income	$	20,038	$	19,797	$	29,382	$	38,849
Earnings per share:
Basic	$	1.12	$	1.11	$	1.63	$	2.17
Diluted	$	1.10	$	1.09	$	1.61	$	2.13
Shares used in per share calculation:
Basic		17,924		17,838		17,988		17,892
Diluted		18,196		18,106		18,266		18,203

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Net income	$	20,038	$	19,797	$	29,382	$	38,849
Other comprehensive income (loss):
Foreign currency translation adjustment		4,267		(624)		7,722		(2,926)
Other		59		131		117		264
Other comprehensive income (loss)		4,326		(493)		7,839		(2,662)
Comprehensive income	$	24,364	$	19,304	$	37,221	$	36,187

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)


	Three Months Ended December 31, 2020
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—September 30, 2020	17,912,541	$	95,084	$	484,137	$	(21,681)	$	557,540
Exercise of stock options	8,337		483		—		—		483
Vesting of RSUs	17,719		—		—		—		—
Stock-based compensation expense	—		5,712		—		—		5,712
Taxes paid related to net share settlement of equity awards	(5,341)		(463)		—		—		(463)
Net income	—		—		20,038		—		20,038
Other comprehensive income	—		—		—		4,326		4,326
Balance—December 31, 2020	17,933,256	$	100,816	$	504,175	$	(17,355)	$	587,636


	Three Months Ended December 31, 2021
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—September 30, 2021	17,941,393	$	53,377	$	586,850	$	(16,915)	$	623,312
Exercise of stock options	2,219		156		—		—		156
Vesting of RSUs	18,995		—		—		—		—
Stock-based compensation expense	—		6,975		—		—		6,975
Repurchase of common stock	(312,790)		(29,049)						(29,049)
Taxes paid related to net share settlement of equity awards	(5,914)		(550)		—		—		(550)
Net income	—				19,797		—		19,797
Other comprehensive loss	—		—		—		(493)		(493)
Balance—December 31, 2021	17,643,903	$	30,909	$	606,647	$	(17,408)	$	620,148

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	Six Months Ended December 31, 2020
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2020	18,011,982	$	122,553	$	474,793	$	(25,194)	$	572,152
Exercise of stock options	77,532		563		—		—		563
Vesting of RSUs	304,420		—		—		—		—
Shares issued under employee stock purchase program	32,641		2,022		—		—		2,022
Stock-based compensation expense	—		11,821		—		—		11,821
Repurchase of common stock	(320,136)		(24,816)						(24,816)
Taxes paid related to net share settlement of equity awards	(173,183)		(11,327)		—		—		(11,327)
Net income	—		—		29,382		—		29,382
Other comprehensive income	—		—		—		7,839		7,839
Balance—December 31, 2020	17,933,256	$	100,816	$	504,175	$	(17,355)	$	587,636


	Six Months Ended December 31, 2021
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2021	17,854,110	$	105,724	$	548,842	$	(14,746)	$	639,820
Exercise of stock options	164,612		311		—		—		311
Vesting of RSUs	329,072		—		—		—		—
Shares issued under employee stock purchase program	27,960		1,990		—		—		1,990
Stock-based compensation expense	—		14,088		—		—		14,088
Repurchase of common stock	(481,296)		(45,280)						(45,280)
Taxes paid related to net share settlement of equity awards	(250,555)		(19,161)		—		—		(19,161)
Adoption of ASU 2020-06 for convertible notes			(26,763)		18,956				(7,807)
Net income	—		—		38,849		—		38,849
Other comprehensive loss	—		—		—		(2,662)		(2,662)
Balance—December 31, 2021	17,643,903	$	30,909	$	606,647	$	(17,408)	$	620,148

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)


	Six Months Ended December 31,
	2020		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	29,382	$	38,849
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions:
Depreciation and amortization		21,162		19,190
Stock-based compensation expense		11,821		14,088
Provision for (recovery of) losses on accounts receivable		5,240		(3,934)
Deferred income taxes		44		(9)
Amortization of debt discount and issuance costs		4,830		697
Impairment charges		552		—
Other		55		111
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable		3,189		5,547
Inventories		(25,151)		(42,247)
Prepaid expenses and other assets		(9,622)		(8,264)
Accounts payable		4,408		(12,775)
Accrued payroll and related expenses		(4,328)		(12,899)
Advances from customers		45,250		1,155
Deferred revenue		394		5,003
Other		2,253		(1,066)
Net cash provided by operating activities		89,479		3,446
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(8,508)		(7,401)
Proceeds from sale of property and equipment		—		258
Purchases of certificates of deposit		(2,628)		(126)
Proceeds from maturities of certificates of deposit		700		—
Acquisition of business, net of cash acquired		(3,000)		—
Payments for intangible and other assets		(7,047)		(8,122)
Net cash used in investing activities		(20,483)		(15,391)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on bank lines of credit		(41,000)		81,622
Proceeds from long-term debt		315		143
Payments on long-term debt		(539)		(491)
Proceeds from exercise of stock options and employee stock purchase plan		2,585		2,301
Payments of contingent consideration		(628)		(1,500)
Repurchases of common stock		(24,816)		(45,280)
Taxes paid related to net share settlement of equity awards		(11,327)		(19,161)
Net cash provided by (used in) financing activities		(75,410)		17,634
Effect of exchange rate changes on cash		2,887		30
Net change in cash and cash equivalents		(3,527)		5,719
Cash and cash equivalents—beginning of period		76,102		80,613
Cash and cash equivalents—end of period	$	72,575	$	86,332
Supplemental disclosure of cash flow information:
Cash paid, net during the period for:
Interest	$	3,012	$	3,501
Income taxes	$	5,125	$	7,787

See accompanying notes to condensed consolidated financial statements.

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OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 filed with the SEC. The results of operations for the three and six months ended December 31, 2021 are not necessarily indicative of the operating results to be expected for the full 2022 fiscal year or any future periods.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, fair values of assets acquired and liabilities assumed in business combinations, values for inventories reported at lower of cost or net realizable value, stock-based compensation expense, income taxes, accrued warranty costs, legal contingencies and recoveries, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Due to the inherent uncertainty involved in making estimates, our actual amounts reported in future periods could differ materially from these estimates.

Earnings Per Share Computations

We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income available to common stockholders by the sum of the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method. The underlying equity component of the 1.25% convertible senior notes due 2022 (the “Notes”) discussed in Note 7 to the condensed consolidated financial statements will have a net impact on diluted earnings per share when the average price of our common stock exceeds the conversion price of $107.46 because the principal amount of the Notes is intended to be settled in cash upon conversion. There was no dilutive effect of the Notes for the three and six months ended December 31, 2020 and 2021.

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


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Net income available to common stockholders	$	20,038	$	19,797	$	29,382	$	38,849

Weighted average shares outstanding—basic		17,924		17,838		17,988		17,892
Dilutive effect of equity awards		272		268		278		311
Weighted average shares outstanding—diluted		18,196		18,106		18,266		18,203

Basic earnings per share	$	1.12	$	1.11	$	1.63	$	2.17
Diluted earnings per share	$	1.10	$	1.09	$	1.61	$	2.13
Shares excluded from diluted earnings per share due to their anti-dilutive effect		45		62		89		25

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of three months or less as of the acquisition date to be cash equivalents.

Our cash and cash equivalents totaled $86.3 million at December 31, 2021. Of this amount, approximately 72% 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. We have cash holdings in financial institutions that exceed insured limits for such financial institutions; however, we mitigate this risk by utilizing international financial institutions of high credit quality.

Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable, debt instruments and foreign currency forward contracts. The carrying values of financial instruments, other than long term debt instruments, are representative of their fair values due to their short-term maturities. The carrying values of our long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current rates for financing available to us. The fair values of our foreign currency forward contracts were not significant as of December 31, 2021.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Level 1 category includes assets and liabilities measured at quoted prices in active markets for identical assets and liabilities. The Level 2 category includes assets and liabilities measured from observable inputs other than quoted market prices. The Level 3 category includes assets and liabilities for which valuation inputs are unobservable and significant to the fair value measurement. Our contingent payment obligations related to acquisitions, which are further discussed in Note 9 to the condensed consolidated financial statements, are in the Level 3 category for valuation purposes.

The fair values of our financial assets and liabilities are categorized as follows (in thousands):


	June 30, 2021								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets—Insurance company contracts	$	—	$	47,113	$	—	$	47,113	$	—	$	48,553	$	—	$	48,553
Liabilities—Contingent consideration	$	—	$	—	$	19,431	$	19,431	$	—	$	—	$	14,129	$	14,129

Derivative Instruments and Hedging Activity

Our use of derivatives consists of foreign currency forward contracts. These forward contracts are utilized to partially mitigate certain balance sheet exposures or used as a net investment hedge to protect against potential changes resulting from short-term foreign currency fluctuations. These contracts have original maturities of up to three months. We do not use hedging instruments for speculative purposes.

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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 December 31, 2021.

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. We initiated these forward contracts in the first quarter of fiscal 2021. The amounts reported in the consolidated income statement for the three and six months ended December 31, 2021 were not significant. The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term. Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities. As of June 30, 2021 and December 31, 2021, we held foreign currency forward contracts with notional amounts totaling $26.1 million and $28.0 million, respectively. Unrealized gains and losses from the forward currency forward contracts as of December 31, 2021 were not significant.

Business Combinations

Under ASC 805, Business Combinations, the acquisition method of accounting requires us to record assets acquired less liabilities assumed in an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase consideration over the estimated fair value of the assets acquired less liabilities assumed should be recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions 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.

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 will be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.

Income Taxes

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles of ASC 740 and is intended to improve consistency and simplify GAAP in several other areas of ASC 740 by clarifying and amending existing guidance. The ASU applies to all entities that pay income taxes under GAAP. We adopted this accounting pronouncement on July 1, 2021 using the modified prospective approach. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

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2. Balance Sheet Details

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


	June 30,		December 31,
Accounts receivable, net	2021		2021
Accounts receivable	$	315,926	$	309,262
Less allowance for doubtful accounts		(25,273)		(21,225)
Total	$	290,653	$	288,037


	June 30,		December 31,
Inventories	2021		2021
Raw materials	$	160,313	$	187,335
Work-in-process		59,594		68,446
Finished goods		74,301		78,461
Total	$	294,208	$	334,242


	June 30,		December 31,
Property and equipment, net	2021		2021
Land	$	16,357	$	16,287
Buildings, civil works and improvements		57,555		56,410
Leasehold improvements		8,874		9,520
Equipment and tooling		129,735		130,083
Furniture and fixtures		3,275		3,403
Computer equipment		19,349		20,871
Computer software		23,090		23,863
Computer software implementation in process		11,102		10,896
Construction in process		4,011		4,649
Total		273,348		275,982
Less accumulated depreciation and amortization		(155,344)		(159,867)
Property and equipment, net	$	118,004	$	116,115

Depreciation and amortization expense for property and equipment was $5.6 million and $5.3 million for the three months ended December 31, 2020 and 2021, respectively, and $10.8 million and $10.6 million for the six months ended December 31, 2020 and 2021, respectively.

3. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the six-month period ended December 31, 2021 were as follows (in thousands)


					Optoelectronics
					And
	Security		Healthcare		Manufacturing
	Division		Division		Division		Consolidated
Balance as of June 30, 2021	$	206,426	$	43,584	$	70,294	$	320,304
Goodwill acquired or adjusted during the period		1,270		—		—		1,270
Foreign currency translation adjustment		(176)		(92)		(987)		(1,255)
Balance as of December 31, 2021	$	207,520	$	43,492	$	69,307	$	320,319

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Intangible assets consisted of the following (in thousands):


		June 30, 2021						December 31, 2021
	Weighted	Gross						Gross
	Average	Carrying		Accumulated		Intangibles		Carrying		Accumulated		Intangibles
	Lives	Value		Amortization		Net		Value		Amortization		Net
Amortizable assets:
Software development costs	8-9 years	$	49,183	$	(15,679)	$	33,504	$	56,653	$	(17,126)	$	39,527
Patents	19 years		8,753		(2,597)		6,156		8,514		(2,789)		5,725
Developed technology	10 years		60,665		(25,923)		34,742		60,604		(29,066)		31,538
Customer relationships	7 years		50,676		(26,588)		24,088		50,057		(29,321)		20,736
Total amortizable assets			169,277		(70,787)		98,490		175,828		(78,302)		97,526
Non-amortizable assets:
In-process R&D			533		—		533		533		—		533
Trademarks			28,585		—		28,585		28,584		—		28,584
Total intangible assets		$	198,395	$	(70,787)	$	127,608	$	204,945	$	(78,302)	$	126,643

Amortization expense related to intangible assets was $5.6 million and $4.2 million for the three months ended December 31, 2020 and 2021, respectively. For the six months ended December 31, 2020 and 2021, amortization expense related to intangible assets was $10.3 million and $8.6 million, respectively.

At December 31, 2021, the estimated future amortization expense for intangible assets was as follows (in thousands):

Fiscal Year


2022 (remaining 6 months)	$	8,693
2023		19,983
2024		19,463
2025		16,062
2026		12,242
Thereafter		21,083
Total	$	97,526

Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product-by-product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight-line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended December 31, 2020 and 2021, we capitalized software development costs in the amounts of $2.4 million and $3.6 million, respectively. For the six months ended December 31, 2020 and 2021, we capitalized software development costs in the amounts of $6.5 million and $7.7 million, respectively.

4. Contract Assets and Liabilities

We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606. When we recognize revenue in advance of the point in time at which contracts give us the right to invoice a customer, we record this as unbilled revenue, which is included in accounts receivable, net, on the consolidated balance sheets. We may also receive consideration, per the terms of a contract, from customers prior to transferring control of goods to the customer. We record customer deposits as contract liabilities. Additionally, we may receive payments, most typically under service and warranty contracts, at the onset of the contract and before services have been performed. In such instances, we record a deferred revenue liability. We recognize these contract liabilities as sales after all revenue recognition criteria are met.

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The table below shows the balance of contract assets and liabilities as of June 30, 2021 and December 31, 2021, including the change between the periods. There were no substantial non-current contract assets for the periods presented.

Contract Assets (in thousands)


	June 30,		December 31,
	2021		2021		Change		% Change
Unbilled revenue (included in accounts receivable, net)	$	40,853	$	38,706	$	(2,147)	(5)	%

Contract Liabilities (in thousands)


	June 30,		December 31,
	2021		2021		Change		% Change
Advances from customers	$	38,463	$	39,521	$	1,058	3	%
Deferred revenue—current		32,689		32,674		(15)	(0)	%
Deferred revenue—long-term		14,898		19,817		4,919	33	%

Contract assets decreased due to invoicing for performance obligations fulfilled in our Security division. The overall increase in contract liabilities was primarily due to deferred revenue from receipt of payments under service and warranty contracts primarily in our Security division.

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $357.0 million. We expect to recognize revenue on approximately 49% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the six months ended December 31, 2021, we recognized revenue of $41.2 million from contract liabilities existing at the beginning of the period.

Practical Expedients. In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat the shipping activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only give consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year.

5. Leases

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


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Operating lease cost	$	2,370	$	2,375	$	4,904	$	4,650
Variable lease cost		184		202		443		387
Short-term lease cost		180		307		391		586
	$	2,734	$	2,884	$	5,738	$	5,623

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


	Balance Sheet Category	June 30, 2021		December 31, 2021
Operating lease ROU assets, net	Other assets	$	23,439	$	31,503

Operating lease liabilities, current portion	Other accrued expenses and current liabilities	$	7,499	$	7,771
Operating lease liabilities, long-term	Other long-term liabilities		16,317		24,048
Total operating lease liabilities		$	23,816	$	31,819

Weighted average remaining lease term					4.3 years
Weighted average discount rate					3.6 %

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


	Six Months Ended December 31,
	2020		2021
Cash paid for operating lease liabilities	$	5,234	$	4,732
ROU assets obtained in exchange for new lease obligations		725		5,564

Maturities of operating lease liabilities at December 31, 2021 were as follows (in thousands):


	December 31, 2021
Less than one year	$	8,705
1 – 2 years		7,961
2 – 3 years		6,361
3 – 4 years		4,666
4 – 5 years		4,065
Thereafter		2,684
		34,442
Less: imputed interest		(2,623)
Total lease liabilities	$	31,819

6. Impairment, Restructuring and Other Charges

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

During the three months ended December 31, 2021, we recognized $0.8 million in restructuring and other charges, which primarily included $0.5 million in legal charges primarily related to class action litigation and government investigations and $0.3 million for employee terminations.

During the three months ended December 31, 2020, we recognized a net benefit of $0.5 million for reimbursements from our insurance carriers for covered legal charges, partially offset by additional legal fees related to class action litigation and government investigations. This net benefit was partially offset by charges of $0.1 million for employee terminations from operational efficiency activities and $0.2 million for acquisition-related activities.

During the six months ended December 31, 2021, we recognized $3.3 million in restructuring and other charges, which primarily included $0.7 million in employee terminations and $2.7 million in legal charges. During the six months ended December 31, 2020, we incurred $7.2 million for exit activities associated with an expired turnkey contract in Mexico. Such exit costs commenced in the first quarter of the 2021 fiscal year and 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. We also incurred costs of $1.2 million for employee terminations and facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities, partially offset by a net benefit of $0.5 million for reimbursements from our insurance carriers for covered legal charges.

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


	Three Months Ended December 31, 2020
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Acquisition-related costs	$	139	$	27	$	—	$	—	$	166
Employee termination costs		147		—		—		—		147
Facility closures/consolidation costs (benefit)		(17)		—		—		—		(17)
Legal recoveries, net		—		—		—		(458)		(458)
Total expensed (benefit), net	$	269	$	27	$	—	$	(458)	$	(162)


	Three Months Ended December 31, 2021
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Employee termination costs	$	332	$	—	$	—	$	—	$	332
Facility closures/consolidation		22		—		—		—		22
Legal costs, net		—		—		—		477		477
Total expensed	$	354	$	—	$	—	$	477	$	831


	Six Months Ended December 31, 2020
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Impairment charges	$	552	$	—	$	—	$	—	$	552
Acquisition-related costs		227		27		—		—		254
Employee termination costs		3,797		—		146		—		3,943
Mexico transaction costs		2,691		—				—		2,691
Facility closures/consolidation costs		1,255		—		—		—		1,255
Legal recoveries, net		—		—		—		(498)		(498)
Total expensed (benefit), net	$	8,522	$	27	$	146	$	(498)	$	8,197


	Six Months Ended December 31, 2021
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Employee termination costs	$	668	$	—	$	—	$	—	$	668
Facility closures/consolidation		(40)		—		—		—		(40)
Legal costs, net		—		—		—		2,713		2,713
Total expensed	$	628	$	—	$	—	$	2,713	$	3,341

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 six-month period ended December 31, 2021 were as follows (in thousands):


			Facility
	Employee		Closure/		Legal
	Termination		Consolidation		Costs and
	Costs		Cost		Settlements		Total
Balance as of June 30, 2021	$	250	$	386	$	2,772	$	3,408
Restructuring and other charges (benefits), net		668		(40)		2,713		3,341
Payments, adjustments and reimbursements, net		(837)		(346)		(2,913)		(4,096)
Balance as of December 31, 2021	$	81	$	—	$	2,572	$	2,653

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7. Borrowings

Revolving Credit Facility

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 December 31, 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 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 bore a commitment fee of 0.10% as of December 31, 2021 (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 December 31, 2021, there were $81.6 million of borrowings outstanding under the revolving credit facility, $84.2 million outstanding under the letters of credit sub-facility, and no borrowings outstanding under the term loan. As of December 31, 2021, the amount available to borrow under the revolving credit facility was $434.2 million and the amount available to borrow under the term loan was $150 million. Loan amounts under the revolving credit facility may be borrowed, repaid and re-borrowed during the term. 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, borrowings under the revolving credit facility are included in current liabilities. As of December 31, 2021, we were in compliance with all financial covenants under this credit facility.

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

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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. 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 three and six months ended December 31, 2020 related to the Notes was $3.3 million and $6.6 million, respectively, which consisted of $0.9 million and $1.8 million of contractual interest expense, $2.1 million and $4.2 million of debt discount amortization and $0.3 million and $0.6 million of amortization of debt issuance costs For the three and six months ended December 31, 2021, the total interest expense was $1.2 million and $2.5 million, respectively, which consisted of $0.9 million and $1.8 million of contractual interest expense and $0.3 million and $0.7 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 $0.9 million as of June 30, 2021 and December 31, 2021, 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 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. We early adopted the new guidance on July 1, 2021 using the modified retrospective approach and recorded a $19 million increase to retained earnings and a reduction of $27 million in common stock as if there had been no equity component. Additionally, we recorded an increase to the convertible notes balance by $10 million.

Other Borrowings

Several of our foreign subsidiaries maintain bank lines of credit, denominated in local currencies and U.S. dollars, primarily for the issuance of letters of credit. As of December 31, 2021, $59.6 million was outstanding under these letter-of-credit facilities. As of December 31, 2021, the total amount available under these credit facilities was $15.5 million.

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


	June 30, 2021		December 31, 2021
1.25% convertible notes due September 1, 2022:
Principal amount	$	287,500	$	287,500
Unamortized discount		(10,494)		—
Unamortized debt issuance costs		(1,372)		(930)
		275,634		286,570
Other long-term debt		1,633		1,279
		277,267		287,849
Less current portion of long-term debt		(846)		(287,247)
Long-term portion of debt	$	276,421	$	602

8. Stockholders’ Equity

Stock-based Compensation

As of December 31, 2021, we maintained the Amended and Restated 2012 Incentive Award Plan (the “OSI Plan”) as a stock-based employee compensation plan.

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


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Cost of goods sold	$	194	$	205	$	373	$	411
Selling, general and administrative		5,384		6,642		11,168		13,410
Research and development		135		127		280		267
Stock-based compensation expense	$	5,713	$	6,974	$	11,821	$	14,088

As of December 31, 2021, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $0.8 million for stock options and $27.1 million for restricted stock units (“RSUs”). We expect to recognize these costs over a weighted average period of 2.4 years with respect to the stock options and 1.8 years with respect to the RSUs.

The following summarizes stock option activity during the six months ended December 31, 2021:


		Weighted
		Average		Weighted-Average	Aggregate
	Number of	Exercise		Remaining Contractual	Intrinsic Value
	Options	Price		Term	(in thousands)
Outstanding at June 30, 2021	255,220	$	50.24
Granted	22,954		96.38
Exercised	(164,612)		34.61
Expired or forfeited	(834)		71.83
Outstanding at December 31, 2021	112,728		82.30	6.7 years	$	1,408
Exercisable at December 31, 2021	68,063		75.13	5.0 years		1,265

The following summarizes RSU award activity during the six months ended December 31, 2021:


		Weighted-
		Average
	Shares	Fair Value
Nonvested at June 30, 2021	435,925	$	84.16
Granted	333,897		90.44
Vested	(329,072)		82.49
Forfeited	(3,233)		82.53
Nonvested at December 31, 2021	437,517	$	90.22

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 December 31, 2021, 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.

We granted 136,242 and 96,620 performance-based RSUs during the six months ended December 31, 2020 and 2021, respectively. These performance based RSU awards are contingent on the achievement of certain performance metrics. 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.

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 in our consolidated financial statements as a reduction in the number of shares of common stock issued and outstanding.

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During the six months ended December 31, 2021, we repurchased 481,296 shares of our common stock.

Dividends

We have not paid any cash dividends since the consummation of our initial public offering in 1997 and we do not currently intend to pay any cash dividends in the foreseeable future. Our Board of Directors will determine the payment of future cash dividends, if any. Certain of our current bank credit facilities restrict the payment of cash dividends and future borrowings may contain similar restrictions.

9. 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 $28.7 million as of December 31, 2021.

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 $0.5 million and $0.6 million, respectively, during the three and six months ended December 31, 2020 and $1.0 million and $1.3 million, respectively, during the three and six months ended December 31,2021.

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 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. The following table provides a roll-forward from June 30, 2021 to December 31, 2021 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, 2021	$	19,431
Addition of contingent earnout obligations		—
Foreign currency translation adjustment		(133)
Changes in fair value for contingent earnout obligations		(5,001)
Payments on contingent earnout obligations		(168)
Ending fair value, December 31, 2021	$	14,129

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. 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 investigate the site and develop appropriate remedial actions.

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We have not accrued for loss contingencies relating to the Hawthorne facility or any other 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.

Indemnifications and Certain Employment-Related Contingencies

In the normal course of business, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from breaches of representations, warranties or covenants, or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our directors and certain of our officers. 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 December 31, 2021.

On December 31, 2017, we and Deepak Chopra, our Chief Executive Officer, entered into an amendment to Mr. Chopra’s employment agreement that, among other things, provides for a $13.5 million bonus payment to Mr. Chopra on or within 45 days of January 1, 2024 contingent upon Mr. Chopra’s continued employment with us through that date, subject to accelerated payout terms in the event of Mr. Chopra’s 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.

Product Warranties

We offer our customers warranties on many of the products that we sell. These warranties typically provide for repairs and maintenance of the products if problems arise during a specified time period after original shipment. Concurrent with the sale of products, we record a provision for estimated warranty expenses with a corresponding increase in cost of goods sold. We periodically adjust this provision based on historical experience and anticipated expenses. We charge actual expenses of repairs under warranty, including parts and labor, to this provision when incurred. The current obligation for warranty provision is included in other accrued expenses and current liabilities and the noncurrent portion is included in other long-term liabilities in the consolidated balance sheets.

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


	Six Months Ended December 31,
	2020		2021
Balance at beginning of period	$	20,825	$	19,736
Additions and adjustments		3,103		1,455
Reductions for warranty repair costs		(4,088)		(4,242)
Balance at end of period	$	19,840	$	16,949

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. v. OSI Systems, Inc. balet al., No. 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. We have accrued the $12.5 million in Other accrued expenses and current liabilities as of December 31, 2021. The settlement amount is probable and anticipated to be recovered by insurance and, therefore, we also recorded an asset for $12.5 million within Prepaid expenses and other current assets as of December 31, 2021. If the insurance recovery is less than the agreed-upon settlement, we would recognize an expense for the difference between the settlement and the amount recovered.

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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. No. 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 are involved in various other 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. We have not accrued for loss contingencies relating to any such matters because we believe that, although unfavorable outcomes in the proceedings are possible, they are not considered by management to be probable and reasonably estimable. If one or more of these matters are resolved in a manner adverse to our company, the impact on our business, financial condition, results of operations and cash flows could be material.

10. Income Taxes

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which we operate and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, our tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The effective tax rates for the three months ended December 31, 2021 and 2020 were 26.3% and 28.6%, respectively. During each of the three month periods ended December 31, 2021 and 2020, we recognized a net discrete tax expense of $0.3 million related to equity-based compensation under ASU 2016-09 and changes in prior year tax estimates.

The effective tax rate for the six months ended December 31, 2021 and 2020 was 21.6% and 27.7%, respectively. During the six months ended December 31, 2021, we recognized a net discrete tax benefit of $1.8 million related to equity-based compensation under ASU 2016-09 partially offset by a discrete tax expense for changes in prior year tax estimates of $0.2 million. During the six months ended December 31, 2020, we recognized discrete tax expense of $0.1 million related to equity-based compensation under ASU 2016-09 and changes in prior year estimates.

11. 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). 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. Both the Security and Healthcare divisions comprise primarily end-product businesses, whereas the Optoelectronics and Manufacturing division primarily supplies components and subsystems to external OEM customers, as well as to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values. All other accounting policies of the segments are the same as described in Note 1, Basis of Presentation.

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


	Three Months Ended December 31,				Six Months Ended December 31,
	2020		2021		2020		2021
Revenues (1) —by Segment:
Security division	$	145,236	$	145,918	$	280,011	$	295,435
Healthcare division		54,895		52,425		106,398		103,013
Optoelectronics and Manufacturing division, including intersegment revenues		87,521		91,490		167,435		183,795
Intersegment revenues elimination		(11,643)		(13,152)		(22,927)		(26,305)
Total	$	276,009	$	276,681	$	530,917	$	555,938

Income (loss) from operations —by Segment:
Security division	$	19,776	$	18,171	$	28,682	$	39,764
Healthcare division		9,323		7,030		18,307		12,950
Optoelectronics and Manufacturing division		10,414		13,382		19,154		23,165
Corporate		(7,361)		(9,663)		(16,817)		(22,126)
Intersegment eliminations		206		166		(275)		13
Total	$	32,358	$	29,086	$	49,051	$	53,766


	June 30,		December 31,
	2021		2021
Assets (2) —by Segment:
Security division	$	798,192	$	813,139
Healthcare division		220,411		228,449
Optoelectronics and Manufacturing division		282,039		295,281
Corporate		121,293		142,321
Eliminations (3)		(37,568)		(36,084)
Total	$	1,384,367	$	1,443,106

(1)For each of the three and six month periods ended December 31, 2020 and December 31, 2021, no customer accounted for greater than 10% of total net revenues.

(2)As of June 30, 2021 and December 31, 2021, 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. Such inter-segment profit will be realized when inventory is shipped to the external customers of the Security and Healthcare divisions.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, “OSI”, the “Company”, “we”, “us”, “our” and similar terms refer to OSI Systems, Inc. together with our wholly-owned subsidiaries.

This management’s discussion and analysis of financial condition as of December 31, 2021 and results of operations for the three and six months ended December 31, 2021 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 filed with the SEC.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to our current expectations, beliefs, and projections concerning matters that are not historical facts. Words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” “should,” “will,” “would,” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, information provided regarding impact of the COVID-19 pandemic. Forward-looking statements are not guarantees of future performance and involve uncertainties, risks, assumptions and contingencies, many of which are outside our control. Assumptions upon which our forward-looking statements are based could prove to be inaccurate, and actual results may differ materially from those expressed in or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (including Part I, Item 1, “Business,” Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and other documents filed by us from time to time with the SEC. Such factors, of course, do not include all factors that might affect our business and financial condition. We could be exposed to a variety of negative consequences as a result of delays related to the award of domestic and international contracts; failure to secure the renewal of key customer contracts; delays in customer programs; delays in revenue recognition related to the timing of customer acceptance; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; global economic uncertainty; impacts on our business related to or resulting from the COVID-19 pandemic such as material delays and cancellations of orders or deliveries thereon, supply chain disruptions, plant closures, or other adverse impacts on our ability to execute business plans; unfavorable currency exchange rate fluctuations; effect of changes in tax legislation; market acceptance of our new and existing technologies, products and services; our ability to win new business and convert any orders received to sales within the same fiscal year; enforcement actions in respect of any noncompliance with laws and regulations including export control and environmental regulations and the matters that are the subject of some or all of our investigations and compliance reviews, contract and regulatory compliance matters, and actions, which if brought, could result in judgments, settlements, fines, injunctions, debarment or penalties; and other risks and uncertainties, including but not limited to those detailed herein and from time to time in our other SEC filings, which could have a material and adverse impact on our business, financial condition and results of operation. Many of the referenced risks could be amplified by the magnitude and duration of the COVID-19 pandemic. All forward-looking statements contained in this report are qualified in their entirety by this statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation other than as may be required under securities laws to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We are a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. We sell our products and provide related services in diversified markets, including homeland security, healthcare, defense and aerospace. We have three operating divisions: (a) Security, providing security and inspection systems and turnkey security screening solutions; (b) Healthcare, providing patient monitoring, diagnostic cardiology and connected care systems and associated accessories; and (c) Optoelectronics and Manufacturing, providing specialized electronic components for our Security and Healthcare divisions, as well as to third parties for applications in the defense and aerospace markets, among others.

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Security Division. Through our Security division, we provide security screening products and services globally, as well as turnkey security screening solutions. These products and services are used to inspect baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear materials and other contraband. Revenues from our Security division accounted for 53% of our total consolidated revenues for each of the six months ended December 31, 2020 and 2021.

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and connected care systems globally for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the hospital and provide information, through wired and wireless networks, to physicians and nurses who may be at the patient’s bedside, in another area of the hospital or even outside the hospital. Revenues from our Healthcare division accounted for 20% and 19% of our total consolidated revenues for the six months ended December 31, 2020 and 2021, respectively.

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and flex circuits and provide electronics manufacturing services globally for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, telecommunications, office automation, computer peripherals, industrial automation and consumer products. We provide our optoelectronic devices and electronics manufacturing services to OEM customers and to our own Security and Healthcare divisions. Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 27% and 28% of our total consolidated revenues for the six months ended December 31, 2020 and 2021, respectively.

Trends and Uncertainties

The following is a discussion of certain trends and uncertainties that we believe have influenced, and may continue to influence, our results of operations.

Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic, including the emergence of new variants, has dramatically impacted the global health and economic environment, with millions of confirmed cases, business slowdowns and shutdowns, and market volatility. The COVID-19 pandemic has caused, and is likely to continue to cause, significant economic disruptions and has impacted, and is expected to continue to impact, our operations and the operations of our suppliers, logistics providers and customers as a result of quarantines, facility closures and travel and logistics restrictions. Our ability to continue to operate without significant negative impacts will in part depend on our ability to protect our employees and our supply chain and to keep our manufacturing facilities open and operating effectively. We have endeavored to implement government and health authority recommendations to protect our employees worldwide including with respect to vaccine administration. While we do not expect these pandemic-related impacts to be long-term, there is substantial uncertainty regarding the duration, scope, and ultimate impact of the COVID-19 pandemic. During the early stages of the pandemic and continuing to a lesser extent throughout the duration of the pandemic, our Healthcare division experienced increased demand for certain products as a result of COVID-19. In our Security division, throughout the pandemic, receipt of certain orders has been delayed, most notably with respect to our aviation and cargo products, and our revenues have been adversely impacted as a result of the pandemic. As many customers of our Security division continue to be impacted by the pandemic, we have received and could receive further requests to delay deliveries of equipment and modify service arrangements or the scheduling of factory or site acceptance tests, which has impacted, and could further impact, timing of revenue recognition. In addition, as a result of COVID-19 related government regulations, certain of our global manufacturing facilities have had to limit operations and might have to limit operations in the future. While we have been able to broadly maintain our operations, we experienced some disruption in our supply chain in certain markets due primarily to materials shortages, longer lead times on deliveries and transportation constraints. If these business interruptions resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be materially and adversely impacted. We intend to continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in our best interests and the best interests of our employees, suppliers and customers.

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Global Economic Considerations. Our products and services are sold in numerous countries worldwide, with a large percentage of our sales generated outside the United States. Therefore, we are exposed to and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. Global economic conditions continue to be highly volatile due to the COVID-19 pandemic, resulting in market size contractions in certain countries due to economic slowdowns and government restrictions on movement. In addition to the COVID-19 pandemic, these other global macroeconomic factors, coupled with the U.S. political climate and political unrest internationally, have created uncertainty and impacted demand for certain of our products and services. We do not know how long this uncertainty will continue. These factors could have a material negative effect on our business, results of operations and financial condition.

Global Trade. In addition to the COVID-19 pandemic, the current domestic and international political environment, including in relation to recent and further potential changes by the U.S. and other countries in policies on global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy and global trade. This uncertainty is exacerbated by sanctions imposed by the U.S. government against certain businesses and individuals in select countries. Continued or increased uncertainty regarding global trade due to these or other factors may require us to modify our current business practices and could have a material adverse effect on our business, results of operations and financial condition.

Healthcare Considerations. As described above, our Healthcare division experienced some increased demand for its patient monitoring products as a result of the COVID-19 pandemic during the earlier stages of the pandemic that has continued to a lesser extent throughout the duration of the pandemic. Increased healthcare capital purchases made in prior periods may result in fewer capital purchases in subsequent periods. The pandemic may also impact our ability to manufacture product needed to timely fill orders if we experience supply chain disruptions or need to close any manufacturing facility due to employee COVID-19 cases or local government regulations.

European Union Threat Detection Standards. The EU has implemented regulations for all airports within the EU that use explosive detection systems to have hold baggage screening systems that are compliant with the European Civil Aviation Conference (ECAC) Standard 3. The deadline for compliance with this mandate was initially set for September 2020. Given the uncertainty surrounding the COVID-19 pandemic, the EU revised the regulations, and the date by which airports using explosive detection systems for hold baggage screening must meet Standard 3 has been changed to March 2024, with certain larger airports required to meet earlier installation dates. Our Security division’s real time tomography (RTT) product has passed the ECAC explosive detection system Standard 3 threat detection requirement.

Government Policies. Our results of operations and cash flows could be materially affected by changes in U.S. or foreign government legislative, regulatory or enforcement policies, including U.S. and foreign government policies to manage the COVID-19 pandemic, such as travel restrictions or site closures.

Changes in Costs and Supply Chain Disruptions. Our costs are subject to fluctuations, particularly due to changes in raw material, component, and logistics costs. Our manufacturing and supply chain operations, including freight and shipping activities, have been and may continue to be impacted by increased vendor costs as well as the current global supply chain bottleneck. Specifically, we are impacted by the global shortage of electronic components and other materials needed for production and freight availability. We expect continued disruptions in obtaining material and freight availability as the world economies react to and recover from supply chain shortages. This increased cost environment has been exacerbated by the COVID-19 pandemic. Although we strive to implement, achieve, and sustain cost containment measures, including supply chain optimization and general overhead and workforce optimization, if we are unable to mitigate the impact of increased costs through pricing or other actions, there could be a negative impact on our business, results of operations, and financial condition.

Results of Operations for the Three Months Ended December 31, 2020 (Q2 Fiscal 2021) Compared to the Three Months Ended December 31, 2021 (Q2 Fiscal 2022) (amounts in millions)

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Net Revenues

The table below and the discussion that follows are based upon the way in which we analyze our business. See Note 11 to the condensed consolidated financial statements for additional information about our business segments.


	Q2		% of		Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues		$ Change		% Change
Security	$	145.2	53	%	$	145.9	53	%	$	0.7	0.5	%
Healthcare		54.9	20			52.4	19			(2.5)	(4.5)
Optoelectronics and Manufacturing		75.9	27			78.4	28			2.5	3.3
Total net revenues	$	276.0	100	%	$	276.7	100	%	$	0.7	0.3	%

Revenues for the Security division during the three months ended December 31, 2021 were relatively comparable year over year. Our service revenues increased by approximately $3.1 million whereas our product revenues decreased by approximately $2.4 million as compared to the prior year comparable period.

Revenues for the Healthcare division during the three months ended December 31, 2021 decreased 4.5% year-over-year. While cardiology sales increased by approximately $1.0 million and service, supplies and accessories sales increased by approximately $0.4 million, patient monitoring sales decreased by approximately $3.9 million.

Revenues for the Optoelectronics and Manufacturing division during the three months ended December 31, 2021 increased year-over year as a result of an increase in revenue in our optoelectronics business of approximately $3.2 million, offset by a reduction in revenue of approximately $0.7 million in our contract manufacturing business.

Gross Profit


	Q2		% of		Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues
Gross profit	$	102.1	37.0	%	$	99.8	36.1	%

Gross profit is impacted by sales volume, productivity, and changes in overall manufacturing-related costs, such as raw materials and component costs, warranty expense, provision for inventory, freight, and logistics. Our cost of goods sold increased year-over-year primarily as a result of the mix of revenues and higher raw material and freight costs. Gross profit as a percentage of net revenues during the quarter ended December 31, 2021 decreased on a year-over-year basis due to (i) a reduction in the Security division gross margins due to a less favorable sales mix and increased component, freight and travel costs and (ii) reduced revenues in our Healthcare division, which carries the highest gross margin of our three divisions. Our gross margin increased within the Optoelectronics and Manufacturing division due to a more favorable sales mix.

Operating Expenses


	Q2		% of		Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues		$ Change		% Change
Selling, general and administrative	$	56.1	20.3	%	$	54.9	19.8	%	$	(1.2)	(2.1)	%
Research and development		13.8	5.0			15.0	5.4			1.2	8.7
Impairment, restructuring and other charges (benefit), net		(0.2)	—			0.8	0.3			1.0	500.0
Total operating expenses	$	69.7	25.3	%	$	70.7	25.5	%	$	1.0	1.4	%

Selling, general and administrative. Our significant selling, general and administrative (SG&A) expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, and depreciation and amortization expense. SG&A expense for the three months ended December 31, 2021 was lower than such expense in the same prior-year period due to a reduced provision for losses on accounts receivable coupled with certain bad debt recoveries totaling $4.9 million and other miscellaneous reductions of $1.5 million. This decrease was offset by an increase in compensation expense of $5.2 million.

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Research and development. Research and development (R&D) expenses include research related to new product development and product enhancements. The increase in R&D expense during the three months ended December 31, 2021 from the same prior-year period reflected an increase in compensation expense and outside services of approximately $1.8 million to support new product development initiatives primarily in our Security and Healthcare divisions. This increase was partially offset by other reductions in R&D expense of approximately $0.6 million.

Impairment, restructuring and other charges. Impairment, restructuring and other charges generally consist of charges relating to reductions in our workforce, facilities consolidation, impairment of assets, costs related to acquisition activity, legal charges and other non-recurring charges. During the three months ended December 31, 2021, impairment, restructuring and other charges primarily consisted of $0.5 million for legal charges and $0.3 million in charges for employee terminations. During the three months ended December 31, 2020, we recognized a net benefit of $0.5 million for reimbursements from our insurance carriers for covered legal charges, partially offset by additional legal fees related to class action litigation and government investigations. This was partially offset by charges of $0.1 million for employee terminations from operational efficiency activities and $0.2 million for acquisition-related activities.

Interest and other expense, net. For the three months ended December 31, 2021, interest and other expense, net was $2.2 million as compared to $4.2 million in the same prior-year period. This decrease was driven by our adoption of ASU 2020-06 (see Note 1 to the condensed consolidated financial statements for further discussion) and was partially offset by higher average levels of borrowing under our revolving credit facility during the three months ended December 31, 2021 in comparison with the levels of borrowing during the same period in the prior year. Interest expense during the three months ended December 31, 2021 and 2020 included $0.1 and $2.3 million of non-cash interest expense, respectively, primarily related to the Notes

Income taxes. The effective tax rate for a particular period varies depending on a number of factors, including (i) the mix of income earned in various tax jurisdictions, each of which applies a unique range of income tax rates and income tax credits, (ii) changes in previously established valuation allowances for deferred tax assets (changes are based upon our current analysis of the likelihood that these deferred tax assets will be realized), (iii) the level of non-deductible expenses, (iv) certain tax elections (v) tax holidays granted to certain of our international subsidiaries and (vi) discrete tax items. For the three months ended December 31, 2021, we recognized a provision for income taxes of $7.1 million compared to $8.1 million for the comparable prior-year period. The effective tax rates for the three months ended December 31, 2021 and 2020 were 26.3% and 28.8%, respectively. During each of the three month periods ended December 31, 2021 and 2020, we recognized a net discrete tax provision of $0.3 million for changes in prior year tax estimates and equity-based compensation under ASU 2016-09.

Results of Operations for the Six Months Ended December 31, 2020 (YTD Q2 Fiscal 2021) Compared to the Six Months Ended December 31, 2021 (YTD Q2 Fiscal 2022) (amounts in millions)

Net Revenues


	YTD Q2		% of		YTD Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues		$Change		% Change
Security	$	280.0	53	%	$	295.4	53	%	$	15.4	6	%
Healthcare		106.4	20			103.0	19			(3.4)	(3)
Optoelectronics and Manufacturing		144.5	27			157.5	28			13.0	9
Total net revenues	$	530.9	100	%	$	555.9	100	%	$	25.0	5	%

Revenues for the Security division during the six months ended December 31, 2021 increased on a year-over-year basis. Our product revenues increased by approximately $13.1 million, and our service revenues increased by approximately $2.3 million as compared to the prior year comparable period.

Revenues for the Healthcare division during the six months ended December 31, 2021 decreased 3% year-over-year. While cardiology sales increased by approximately $2.4 million and service, supplies and accessories sales increased by approximately $1.6 million, patient monitoring sales decreased by approximately $7.4 million.

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Revenues for the Optoelectronics and Manufacturing division during the six months ended December 31, 2021 increased year-over year as a result of an increase in revenue in our contract manufacturing business of approximately $7.9 million coupled with an increase in sales of approximately $5.1 million in our optoelectronics business.

Gross Profit


	YTD Q2		% of		YTD Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues
Gross profit	$	197.8	37.3	%	$	199.1	35.8	%

The overall increase in gross profit was driven by the increase in revenues for the Security and Optoelectronics and Manufacturing divisions which was somewhat mitigated by lower sales in our Healthcare division. Our cost of goods sold increased year-over-year primarily as a result of the increase in revenues and higher raw material and freight costs. Gross profit as a percentage of net revenues during the six months ended December 31, 2021 decreased on a year-over-year basis due to (i) strong sales growth within our Optoelectronics and Manufacturing division (which has the lowest gross margin among our divisions), (ii) a reduction in revenues in our Healthcare division (which has the highest gross margin among our divisions), and (iii) a reduction in the Security division gross margins due to a less favorable sales mix, reduced service gross margin, and increased component, freight and travel costs.

Operating Expenses


	YTD Q2		% of		YTD Q2		% of
	Fiscal 2021		Net Revenues		Fiscal 2022		Net Revenues			$Change	% Change
Selling, general and administrative	$	114.7	21.6	%	$	112.2	20.2	%	$	(2.5)	(2.2)	%
Research and development		25.9	4.9			29.8	5.4			3.9	15.1
Impairment, restructuring and other charges (benefit), net		8.2	1.5			3.3	0.6			(4.9)	(59.8)
Total operating expenses	$	148.8	28.0	%	$	145.3	26.2	%	$	(3.5)	(2.4)	%

Selling, general and administrative. SG&A expense for the six months ended December 31, 2021 was lower than such expense in the same prior-year period due to reduced provision for losses on accounts receivable coupled with certain bad debt recoveries totaling $9.2 million as well as a net benefit of $2.9 million for the change in contingent consideration. These decreases were partially offset by an increase in employee compensation expense of $7.7 million and increased travel, entertainment, and marketing expense of $1.9 million.

Research and development. The increase in R&D expense during the six months ended December 31, 2021 from the same prior-year period reflected higher employee compensation expenses of $4.2 million and $1.3 million in supplies and research expenses to support new product development initiatives primarily in our Security and Healthcare divisions. This increase was partially offset by other reductions in R&D expense of approximately $1.6 million.

Impairment, restructuring and other charges (benefit). During the six months ended December 31, 2021, impairment, restructuring and other charges of $3.3 million consisted of $2.7 million for legal charges and $0.7 million in charges for employee terminations.

During the six months ended December 31, 2020, we incurred $7.2 million for exit activities associated with an expired turnkey contract in Mexico. Such exit costs commenced in the first quarter of the 2021 fiscal year and 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 right-of-use asset impairment. We also incurred costs of $1.2 million for employee terminations and facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities, partially offset by a net benefit of $0.5 million for reimbursements from our insurance carriers for covered legal charges.

Interest and other expense, net. For the six months ended December 31, 2021, interest and other expense, net was $4.2 million as compared to $8.4 million in the comparable prior-year period. This decrease was driven by our adoption of ASU 2020-06 (see Note 1 to the condensed consolidated financial statements for further discussion) and was partially offset by higher average levels of borrowing under our revolving credit facility during the six months ended December 31, 2021 compared to the same period in the prior year. Interest expense during the six months ended December 31, 2021 and 2020 included $0.1 million and $4.5 million of non-cash interest expense, which was primarily related to the Notes.

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Income taxes. For the six months ended December, 2021 and 2020, we recognized a provision for income taxes of $10.7 million and $11.2 million, respectively. The effective tax rate for the six months ended December 31, 2021 and 2020 was 21.6% and 27.7%, respectively. During the six months ended December 31, 2021, we recognized a net discrete tax benefit of $1.8 million, which was comprised of $2.0 million related to equity-based compensation under ASU 2016-09 partially offset by a discrete tax expense for prior year tax estimates of $0.2 million. During the six months ended December 31, 2020, we recognized a net discrete tax expense of $0.1 million related to change in prior year tax estimates of $0.4 million offset by a tax benefit of $0.3 for equity-based compensation under ASU 2016-09.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit facilities. Cash and cash equivalents totaled $86.3 million at December 31, 2021, a increase of $5.7 million, or 7.1%, from $80.6 million at June 30, 2021. We currently anticipate that our available funds, credit facilities and cash flow from operations will be sufficient to meet our operational cash needs for the next 12 months and the foreseeable future. In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S. subsidiaries, and our credit facilities will be sufficient to satisfy our obligations in the U.S.

We have a $750 million credit facility that is comprised of a $600 million revolving credit facility, which includes a $300 million subfacility for letters of credit, and a $150 million delayed draw term loan. The term loan, which was undrawn as of December 31, 2021, is available to us to draw through September 1, 2022. As of December 31, 2021, there were $81.6 million of borrowings outstanding under our revolving credit facility,and $84.2 million of outstanding letters of credit.

Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows. During the six months ended December 31, 2021, we generated cash from operations of $3.4 million compared to $89.5 million in the same prior-year period. This decrease was driven by increases in inventory, a decrease in the amount of advance deposits received from customers and other changes in net working capital.

Cash Used in Investing Activities. Net cash used in investing activities was $15.4 million for the six months ended December 31, 2021 as compared to $20.5 million in the same prior-year period. Capital expenditures in the six-month period ended December 31, 2021 were $7.1 million compared to $8.5 million in the same prior-year period. Expenditures for intangible and other assets in the six-month period ended December 31, 2021 were $8.1 million compared to $7.0 million in the same prior-year period. In addition, during the six months ended December 31, 2020, we used cash of $3.0 million for the acquisition of a business.

Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $17.6 million during the six months ended December 31, 2021, compared to $75.4 million used in financing activities during the same prior-year period. The changes in cash provided by (used in) financing activities primarily relate to (i) net proceeds from borrowings on bank lines of credit totaling $81.6 million in the six month period ended December 31, 2021 compared to net repayments of borrowings of $41.0 million in the same prior-year period and (ii) $64.4 million used for share repurchases and taxes paid related to the net share settlement of equity awards in the six month period ended December 31, 2021 compared to $36.1 million for the same prior-year period.

Borrowings

See Note 7 to the condensed consolidated financial statements for a detailed discussion regarding our revolving credit facility and our Notes.

Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $86.3 million at December 31, 2021. Of this amount, approximately 72% 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 others. We intend to permanently reinvest certain earnings from foreign operations, and we currently do not anticipate that we will need this cash in foreign countries to fund our U.S. operations. In the event we repatriate cash from certain foreign operations and if taxes have not previously been withheld on the related earnings, we would provide for withholding taxes at the time we change our intention with regard to the reinvestment of those earnings.

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Issuer Purchases of Equity Securities

The following table contains information about the shares of common stock we purchased during the quarter ended December 31, 2021:


					Maximum number (or
					approximate dollar
					value) of
				Total number of	shares (or
				shares (or units)	units)
				purchased as	that may
	Total number of	Average price		part of publicly	yet be purchased
	shares (or units)	paid per share (or		announced plans or	under the plans or
	purchased	unit)		programs	programs (1)
October 1 to October 31, 2021	—	$	—	—	2,379,489
November 1 to November 30, 2021	174,770		93.84	174,770	2,204,719
December 1 to December 31, 2021	138,020		91.64	138,020	2,066,699
	312,790			312,790

(1)

In April 2020, the Board of Directors authorized a 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. 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.

Contractual Obligations

During the six months ended December 31, 2021, there were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. See Notes 1, 5, 7 and 9 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

Off-Balance Sheet Arrangements

As of December 31, 2021, we did not have any significant off-balance sheet arrangements, other than those previously disclosed.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the potential impact of those pronouncements on our condensed consolidated financial statements, see Note 1 to the condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no material changes in our exposure to market risk during the six months ended December 31, 2021 from that described in the Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2021, the end of the period covered by this report, our management, including our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon management’s review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud within the Company have been detected.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings, claims, and litigation arising in the ordinary course of our business or otherwise. More information regarding legal proceedings in which we are involved can be found under Note 9, “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Report, which is incorporated by reference into this Item 1.

ITEM 1A. RISK FACTORS

The discussion of our business, financial condition and results of operations in this Quarterly Report on Form 10-Q for the period ended December 31, 2021 should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on August 23, 2021, which describe various risks and uncertainties that could materially affect our business, financial condition and results of operations in the future. There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. Further, COVID-19 and its impact on the global health and economic environment, as well as reactions to resurgences of COVID-19 or other future pandemics, could also amplify the other risk factors described in our Annual Report on Form 10-K and thus materially affect our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

See Issuer Purchases of Equity Securities discussion under Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference into this Item 2.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS


Exhibit Number		Description
10.1		Seventh Amendment to Credit Agreement dated December 22, 2021 between Wells Fargo Bank, N.A. and OSI Systems, Inc. (1)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase

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

(1)Previously filed with our Current Report on Form 8-K filed on December 27, 2021

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Signatures

Pursuant to the requirements 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, in the City of Hawthorne, State of California on the 28^th day of January 2022.


	OSI SYSTEMS, INC.

	By:	/s/ Deepak Chopra
		Deepak Chopra
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Alan Edrick
		Alan Edrick
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)