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OSI SYSTEMS INC - Quarter Report: 2023 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

OR

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

For the transition period from              to             

Commission File Number 000-23125

Graphic

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

33-0238801

(State or other jurisdiction of
incorporation or organization)

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

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, $0.001 par value

OSIS

The Nasdaq Global Select Market

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

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

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

Large accelerated filer 

   

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

As of October 24, 2023, there were 16,987,842 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, 2023 and September 30, 2023

3

Condensed Consolidated Statements of Operations for the three months ended September 30, 2022 and 2023

4

Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2022 and 2023

5

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2022 and 2023

6

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2023

7

Notes to Condensed Consolidated Financial Statements

8

Item 2 —

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3 —

Quantitative and Qualitative Disclosures about Market Risk

26

Item 4 —

Controls and Procedures

26

PART II — OTHER INFORMATION

28

Item 1 —

Legal Proceedings

28

Item 1A —

Risk Factors

28

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3 —

Defaults Upon Senior Securities

28

Item 4 —

Mine Safety Disclosures

28

Item 5 —

Other Information

28

Item 6 —

Exhibits

29

Signatures

30

2

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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, 

September 30, 

    

2023

    

2023

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

76,750

$

82,591

Accounts receivable, net

 

380,845

323,769

Inventories

 

338,008

418,797

Prepaid expenses and other current assets

 

44,300

46,942

Total current assets

 

839,903

872,099

Property and equipment, net

 

108,933

109,174

Goodwill

 

349,505

348,411

Intangible assets, net

 

140,857

140,211

Other assets

 

116,488

118,557

Total assets

$

1,555,686

$

1,588,452

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Bank lines of credit

$

215,000

$

235,000

Current portion of long-term debt

 

8,076

8,134

Accounts payable

 

139,011

164,422

Accrued payroll and related expenses

 

51,243

44,430

Advances from customers

 

21,250

31,949

Other accrued expenses and current liabilities

 

137,114

127,693

Total current liabilities

 

571,694

611,628

Long-term debt

 

136,491

134,746

Deferred income taxes

 

6,571

6,868

Other long-term liabilities

 

114,765

110,753

Total liabilities

 

829,521

863,995

Commitments and contingencies (Note 10)

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, 16,755,772 shares at June 30, 2023 and 16,987,842 shares at September 30, 2023

 

9,835

17

Retained earnings

 

735,957

745,955

Accumulated other comprehensive loss

 

(19,627)

(21,515)

Total stockholders’ equity

 

726,165

724,457

Total liabilities and stockholders’ equity

$

1,555,686

$

1,588,452

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 September 30, 

    

2022

    

2023

Net revenues:

Products

$

196,954

$

199,709

Services

 

71,117

79,501

Total net revenues

 

268,071

279,210

Cost of goods sold:

Products

 

143,369

136,983

Services

 

37,205

43,482

Total cost of goods sold

 

180,574

180,465

Gross profit

 

87,497

98,745

Operating expenses:

Selling, general and administrative

 

53,438

59,798

Research and development

 

14,540

15,922

Impairment, restructuring and other charges, net

 

1,219

466

Total operating expenses

 

69,197

76,186

Income from operations

 

18,300

22,559

Interest and other expense, net

 

(3,432)

(5,748)

Income before income taxes

 

14,868

16,811

Provision for income taxes

 

(3,633)

(3,932)

Net income

$

11,235

$

12,879

Earnings per share:

Basic

$

0.66

$

0.77

Diluted

$

0.65

$

0.75

Shares used in per share calculation:

Basic

 

16,924

16,825

Diluted

 

17,180

17,175

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 September 30, 

    

2022

    

2023

Net income

$

11,235

$

12,879

Other comprehensive loss:

Foreign currency translation adjustment, net of tax

 

(9,792)

(3,172)

Net unrealized gain on derivatives, net of tax

3,540

1,147

Other, net of tax

333

137

Other comprehensive loss

(5,919)

(1,888)

Comprehensive income

$

5,316

$

10,991

See accompanying notes to condensed consolidated financial statements.

5

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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 September 30, 2022

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

    

Shares

    

Amount

    

Earnings

    

Loss

    

Total

Balance—June 30, 2022

 

16,870,050

$

17

$

663,869

$

(25,462)

$

638,424

Exercise of stock options

 

2,919

194

194

Vesting of RSUs

 

286,119

Shares issued under employee stock purchase program

 

28,603

1,969

1,969

Stock-based compensation expense

 

7,177

7,177

Repurchase of common stock

(208,427)

(208)

(17,079)

(17,287)

Taxes paid related to net share settlement of equity awards

 

(125,111)

(9,132)

(2,008)

(11,140)

Net income

 

11,235

11,235

Other comprehensive loss

 

(5,919)

(5,919)

Balance—September 30, 2022

16,854,153

$

17

$

656,017

$

(31,381)

$

624,653

Three Months Ended September 30, 2023

Accumulated

Common Stock

Other

    

Number of

    

    

Retained

    

Comprehensive

    

    

Shares

    

Amount

    

Earnings

    

Loss

    

Total

Balance—June 30, 2023

16,755,772

$

9,835

$

735,957

$

(19,627)

$

726,165

Exercise of stock options

4,752

420

420

Vesting of RSUs

363,820

Shares issued under employee stock purchase program

29,813

2,031

2,031

Stock-based compensation expense

7,089

7,089

Taxes paid related to net share settlement of equity awards

(166,315)

(19,358)

(2,881)

(22,239)

Net income

12,879

12,879

Other comprehensive loss

(1,888)

(1,888)

Balance—September 30, 2023

 

16,987,842

$

17

$

745,955

$

(21,515)

$

724,457

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OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

Three Months Ended September 30, 

    

2022

    

2023

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

$

11,235

$

12,879

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

Depreciation and amortization

 

9,541

9,568

Stock-based compensation expense

 

7,177

7,089

Recovery of losses on accounts receivable

(1,675)

(433)

Deferred income taxes

121

208

Amortization of debt discount and issuance costs

 

196

Other

 

7

42

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

Accounts receivable

 

(5,376)

55,868

Inventories

 

(29,966)

(82,035)

Prepaid expenses and other assets

 

(8,587)

(7,605)

Accounts payable

 

20,000

25,851

Accrued payroll and related expenses

(10,987)

(6,606)

Advances from customers

 

10,133

10,770

Deferred revenue

19,231

(7,142)

Other

 

(3,808)

(1,310)

Net cash provided by operating activities

 

17,242

17,144

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of property and equipment

 

(3,281)

(5,239)

Proceeds from sale of property and equipment

92

44

Purchases of certificates of deposit

(73)

(2,068)

Proceeds from maturities of certificates of deposit

1,839

Acquisition of businesses, net of cash acquired

 

(1,871)

Payments for intangible and other assets

 

(3,944)

(4,154)

Net cash used in investing activities

 

(9,077)

(9,578)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings on bank lines of credit

 

155,000

20,000

Proceeds from long-term debt

 

100,307

394

Payments on long-term debt

 

(242,479)

(2,073)

Proceeds from exercise of stock options and employee stock purchase plan

 

2,163

2,451

Payments of contingent consideration

(415)

(383)

Repurchases of common stock

 

(17,287)

Taxes paid related to net share settlement of equity awards

 

(11,140)

(22,239)

Net cash used in financing activities

 

(13,851)

(1,850)

Effect of exchange rate changes on cash

 

(4,526)

125

Net change in cash and cash equivalents

 

(10,212)

5,841

Cash and cash equivalents—beginning of period

 

64,202

76,750

Cash and cash equivalents—end of period

$

53,990

$

82,591

Supplemental disclosure of cash flow information:

Cash paid, net during the period for:

Interest

$

3,856

$

5,455

Income taxes

$

7,235

$

6,795

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, 2023 filed with the SEC. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the operating results to be expected for the full 2024 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, costs of sales and expenses 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, contingent consideration, allowance for doubtful accounts, 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 following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

    

Three Months Ended September 30, 

2022

    

2023

Net income available to common stockholders

$

11,235

$

12,879

Weighted average shares outstanding—basic

 

16,924

16,825

Dilutive effect of equity awards

 

256

350

Weighted average shares outstanding—diluted

 

17,180

17,175

Basic earnings per share

$

0.66

$

0.77

Diluted earnings per share

$

0.65

$

0.75

Shares excluded from diluted earnings per share due to their anti-dilutive effect

26

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Cash and Cash Equivalents

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

Our cash and cash equivalents totaled $82.6 million at September 30, 2023. Of this amount, approximately 91% 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, Qatar, Singapore, India, Malaysia and Canada, and to a lesser extent in Indonesia, Australia, Germany, Mexico and Egypt 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, an interest rate swap contract and foreign currency forward contracts. The carrying values of financial instruments, other than long-term debt instruments and the interest rate swap contract, are representative of their fair values due to their short-term maturities. The carrying values of our long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current rates for financing available to us. The fair values of our foreign currency forward contracts were not significant as of June 30, 2023 and September 30, 2023.

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 at quoted prices in active markets for identical assets and liabilities. The “Level 2” category includes assets and liabilities from observable inputs other than quoted market prices. The “Level 3” category includes assets and liabilities for which valuation techniques are unobservable and significant to the fair value measurement. Our contingent payment obligations related to acquisitions, which are further discussed in Note 10 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, 2023

    

September 30, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets—Insurance company contracts

$

$

47,181

$

$

47,181

$

$

47,508

$

$

47,508

Assets – Interest rate swap contract

$

$

5,369

$

$

5,369

$

$

6,826

$

$

6,826

Liabilities—Contingent consideration

$

$

$

21,181

$

21,181

$

$

$

19,784

$

19,784

Derivative Instruments and Hedging Activity

Our use of derivatives consists of foreign currency forward contracts and an interest rate swap contract. The foreign currency forward contracts are utilized to partially mitigate certain balance sheet exposures or used as a net investment hedge to protect against potential changes resulting from short-term foreign currency fluctuations. These contracts have original maturities of up to three months. We also manage our risk to changes in interest rates using derivative instruments. We use fixed interest rate swaps to effectively convert a portion of the variable interest rate payments to fixed interest rate payments. We do not use hedging instruments for speculative purposes.

The net gains or losses from our foreign currency forward contracts, which are not designated as hedge instruments, are reported in the consolidated statements of operations, and the amounts reported for the three months ended September 30, 2022 and 2023 were not significant.  The fair value of our foreign currency forward contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term. Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.  As of June 30, 2023 and September 30, 2023, we held foreign currency forward contracts with notional amounts totaling $21.6 million and $25.6 million, respectively. Unrealized gains and losses from our foreign currency forward contracts as of June 30, 2023 and September 30, 2023 were not significant.

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The interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to our variable, Secured Overnight Financing Rate (“SOFR”) based debt. The interest rate swap matures in December 2026. The interest rate swap is considered an effective cash flow hedge, and as a result, the net gains or losses on such instrument are reported as a component of other comprehensive income in the consolidated financial statements and are reclassified as net income when the underlying hedged interest expense impacts earnings. A qualitative and quantitative assessment over the hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate that the hedge may no longer be highly effective.

As of June 30, 2023 and September 30, 2023, the notional amount of the derivative instruments designated as an interest rate swap hedge was $175 million. The fair value of the interest rate swap contract as of as of June 30, 2023 and September 30, 2023 is recorded in Other assets within the consolidated balance sheet.

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

    

Three Months Ended September 30, 

2022

    

2023

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

$

(3,432)

$

(5,748)

Gain recognized in other comprehensive income, net of tax

 

3,540

 

1,147

Benefit (expense) reclassified from accumulated other comprehensive income to interest expense, net

 

(120)

 

872

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption. There were no new pronouncements adopted in the first quarter of fiscal year 2024.

2. Business Combinations

Under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805"), the acquisition method of accounting requires us to record assets acquired less liabilities assumed from an acquisition at their estimated fair values at the date of acquisition. Any excess of the total estimated purchase price over the estimated fair value of the net assets acquired should be recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. 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. During the measurement period, which is up to one year from the acquisition date, as additional information that existed at the acquisition date becomes available for preliminary estimates, we may record adjustments to the preliminary assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are included in earnings.

Fiscal Year 2024 Business Acquisition

In October 2023, we (through our Security Division) acquired a privately held provider of radiation detection technology for approximately $2.8 million, plus up to $3.6 million in potential contingent consideration.  The acquisition was financed with cash on hand.

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

Fiscal Year 2023 Business Acquisitions

In April 2023, we (through our Optoelectronics and Manufacturing division) acquired a privately held provider of engineering and contract manufacturing solutions for approximately $2.5 million, plus up to $2.5 million in potential contingent consideration. The acquisition was financed with cash on hand.

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In February 2023, we (through our Healthcare division) acquired a privately held provider of software and solutions for approximately $2.1 million plus up to $5.0 million in potential contingent consideration. The acquisition was financed with cash on hand.

Through our Security division, we acquired (i) in December 2022 certain assets of a provider of baggage and parcel inspection systems for approximately $1.6 million and (ii) in August 2022 a privately held provider of training software and solutions for approximately $1.9 million plus an immaterial amount of potential contingent consideration. These acquisitions were financed with cash on hand.

The goodwill recognized for each of the fiscal year 2023 business acquisitions is not deductible for income tax purposes. These business acquisitions in fiscal 2023 and 2024, individually and in the aggregate, were not material to our consolidated financial statements. Accordingly, pro-forma historical results of operations and other disclosures related to these businesses have not been presented.

3. Balance Sheet Details

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

June 30, 

September 30, 

Accounts receivable, net

    

2023

    

2023

Accounts receivable

$

395,218

$

337,365

Less allowance for doubtful accounts

 

(14,373)

 

(13,596)

Total

$

380,845

$

323,769

June 30, 

September 30, 

Inventories

    

2023

    

2023

Raw materials

$

233,217

$

271,449

Work-in-process

 

56,329

 

82,969

Finished goods

 

48,462

 

64,379

Total

$

338,008

$

418,797

June 30, 

September 30, 

Property and equipment, net

    

2023

    

2023

Land

$

15,691

$

15,663

Buildings, civil works and improvements

 

49,166

 

48,564

Leasehold improvements

 

13,553

 

13,533

Equipment and tooling

 

135,703

 

136,399

Furniture and fixtures

 

3,632

 

3,241

Computer equipment

 

24,119

 

21,229

Computer software

 

26,981

 

27,487

Computer software implementation in process

9,705

9,544

Construction in process

 

4,108

 

5,806

Total

 

282,658

 

281,466

Less accumulated depreciation and amortization

 

(173,725)

 

(172,292)

Property and equipment, net

$

108,933

$

109,174

Depreciation and amortization expense for property and equipment was $4.9 million in each of the three months ended September 30, 2022 and 2023.

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4. Goodwill and Intangible Assets

The changes in the carrying value of goodwill by segment for the three-month period ended September 30, 2023 were as follows (in thousands):

Optoelectronics

And

Security

Healthcare

Manufacturing

    

Division

    

Division

    

Division

    

Consolidated

Balance as of June 30, 2023

$

230,662

$

48,455

$

70,388

$

349,505

Foreign currency translation adjustment

 

(132)

(103)

(859)

(1,094)

Balance as of September 30, 2023

$

230,530

48,352

69,529

348,411

Intangible assets consisted of the following (in thousands):

June 30, 2023

September 30, 2023

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

$

77,844

$

(20,285)

$

57,559

81,845

(21,145)

60,700

Patents

 

19 years

 

8,636

 

(3,404)

 

5,232

8,742

(3,515)

5,227

Developed technology

 

10 years

 

68,274

 

(38,353)

 

29,921

68,246

(40,186)

28,060

Customer relationships

 

7 years

 

55,780

 

(39,101)

 

16,679

55,570

(40,833)

14,737

Total amortizable assets

 

210,534

(101,143)

109,391

214,403

(105,679)

108,724

Non-amortizable assets:

In-process R&D

533

533

533

533

Trademarks

 

30,933

30,933

30,954

30,954

Total intangible assets

$

242,000

$

(101,143)

$

140,857

245,890

(105,679)

140,211

Amortization expense related to intangible assets was $4.7 million in each of the three months ended September 30, 2022 and 2023.

At September 30, 2023, the estimated future amortization expense for amortizable intangible assets was as follows (in thousands):

Fiscal Year

2024 (remaining 9 months)

    

$

14,187

2025

 

15,879

2026

 

12,705

2027

8,741

2028

5,953

Thereafter

 

51,259

Total

$

108,724

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 September 30, 2022 and 2023, we capitalized software development costs in the amounts of $3.9 million and $4.0 million, respectively.

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5. 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 Topic 606, Revenue from Contracts with Customers (“ASC 606”). When we recognize revenue in advance of the point in time at which contracts give us the right to invoice a customer, we record this as unbilled revenue, which is included in accounts receivable, net, on the consolidated balance sheets. 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 in either Other accrued expenses and current liabilities or Other long-term liabilities. We recognize these contract liabilities as sales after all revenue recognition criteria are met.

The table below shows the balance of contract assets and liabilities as of June 30, 2023 and September 30, 2023, including the change between the periods. There were no substantial non-current contract assets for the periods presented.

Contract Assets (in thousands)

    

June 30, 

    

September 30, 

    

    

 

    

2023

    

2023

    

Change

    

% Change

 

Unbilled revenue (included in accounts receivable, net)

$

86,818

$

103,663

$

16,845

19

%

Contract Liabilities (in thousands)

    

June 30, 

    

September 30, 

    

    

 

    

2023

    

2023

    

Change

    

% Change

Advances from customers

$

21,250

$

31,949

$

10,699

50

%

Deferred revenue—current

 

43,861

39,000

(4,861)

(11)

%

Deferred revenue—long-term

 

22,200

19,733

(2,467)

(11)

%

Contract assets increased during the three months ended September 30, 2023 primarily from the timing and nature of milestones met in contracts for a number of customers in our Security Division where we met the revenue recognition criteria under ASC 606 in advance of the time when contracts give us the right to invoice customers.

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the portion of the transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of September 30, 2023, the portion of the transaction price allocated to remaining performance obligations was approximately $906.2 million. We expect to recognize revenue on approximately 67% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the three months ended September 30, 2023, we recognized revenue of $29.7 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.

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6. Leases

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

Three Months Ended September 30, 

    

2022

    

2023

Operating lease cost

$

2,826

$

2,805

Variable lease cost

406

265

Short-term lease cost

223

325

$

3,455

$

3,395

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

    

Balance Sheet Category

    

June 30, 2023

    

September 30, 2023

Operating lease right of use (“ROU”) assets, net

 

Other assets

$

32,618

$

32,534

Operating lease liabilities, current portion

 

Other accrued expenses and current liabilities

$

9,787

$

9,929

Operating lease liabilities, long-term

 

Other long-term liabilities

 

23,733

 

23,472

Total operating lease liabilities

$

33,520

$

33,401

Weighted average remaining lease term

 

 

4.0 years

Weighted average discount rate

 

 

3.9

%

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

    

Three Months Ended September 30, 

    

2022

    

2023

Cash paid for operating lease liabilities

$

2,685

$

2,994

ROU assets obtained in exchange for new lease obligations

 

413

1,791

Maturities of operating lease liabilities at September 30, 2023 were as follows (in thousands):

    

September 30, 2023

Less than one year

$

11,008

1 – 2 years

 

8,845

2 – 3 years

 

7,664

3 – 4 years

 

5,357

4 – 5 years

 

1,282

Thereafter

 

1,969

 

36,125

Less: imputed interest

 

(2,724)

Total lease liabilities

$

33,401

7. Impairment, Restructuring and Other Charges

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

During the three months ended September 30, 2023, we recognized $0.5 million in impairment, restructuring and other charges, which included $0.1 million in legal charges, $0.1 million for employee terminations, $0.1 million for other facility closure costs for operational efficiency activities, and $0.2 million in acquisition related costs.

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

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

Three Months Ended September 30, 2022

    

    

    

Optoelectronics and

    

    

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Employee termination costs

$

23

$

$

$

$

23

Facility closures/consolidation

241

15

256

Legal costs, net

 

524

294

122

940

Total

$

788

$

294

$

15

$

122

$

1,219

Three Months Ended September 30, 2023

Optoelectronics and

Healthcare

Manufacturing

    

Security Division

    

Division

    

Division

    

Corporate

    

Total

Employee termination costs

$

13

$

$

$

110

$

123

Facility closures/consolidation

51

51

Acquisition-related costs

208

208

Legal costs, net

 

52

32

84

Total

$

273

$

$

51

$

142

$

466

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 three-month period ended September 30, 2023 were as follows (in thousands):

Facility

Acquisition-

Employee

Closure/

Legal

Related 

Termination

Consolidation

Costs and

    

Costs

    

Costs

    

Cost

    

Settlements

    

Total

Balance as of June 30, 2023

$

7

$

107

$

1,609

$

656

$

2,379

Restructuring and other charges, net

 

208

 

123

 

51

 

84

 

466

Payments, adjustments and reimbursements, net

 

(208)

 

72

 

(716)

 

(228)

 

(1,080)

Balance as of September 30, 2023

$

7

$

302

$

944

$

512

$

1,765

8. 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 term loan. 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 SOFR plus a margin of 1.0% as of September 30, 2023 (which margin can range from 1.0% to 1.75% based on our consolidated net leverage ratio as defined in the credit facility). Letters of credit reduce the amount available to borrow under the credit facility by their face value amount. The unused portion of the facility bore a commitment fee of 0.10% as of September 30, 2023 (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 September 30, 2023, there were $235 million of borrowings outstanding under the revolving credit facility, $37.7 million outstanding under the letters of credit sub-facility, and $141.3 million outstanding under the term loan. As of September 30, 2023, the amount available to borrow under the revolving credit facility was $327.3 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

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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 September 30, 2023, we were in compliance with all financial covenants under this credit facility. In September 2022, we entered into an interest rate swap in order to mitigate the interest rate risk on a portion of the interest payments expected to be made on the borrowings outstanding under the revolving credit facility and term loan. Refer to Note 1 for details. Interest expense related to the credit facility and term loan was $2.1 million and $6.3 million for the three months ended September 30, 2022 and 2023, respectively.

1.25% Convertible Senior Notes (“Notes”)

In February 2017, we issued $287.5 million of the Notes in a private offering. On September 1, 2022, we repurchased and cancelled the remaining $242.3 million balance of the Notes. Total interest expense recognized for the three months ended September 30, 2022 related to the Notes was $0.7 million, which consisted of $0.5 million of contractual interest expense and $0.2 million of amortization of debt issuance costs.

Other Borrowings

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 September 30, 2023, $56.8 million was outstanding under these letter-of-credit facilities. As of September 30, 2023, the total amount available under these credit facilities was $17.6 million.

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

    

June 30, 

September 30, 

    

2023

    

2023

Term loan

$

143,125

$

141,250

Other long-term debt

 

1,442

1,630

 

144,567

142,880

Less current portion of long-term debt

 

(8,076)

(8,134)

Long-term portion of debt

$

136,491

$

134,746

9. Stockholders’ Equity

Stock-based Compensation

As of September 30, 2023, we maintained the Amended and Restated 2012 Incentive Award Plan (the “OSI Plan”) as a stock-based employee compensation plan.

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

Three Months Ended September 30, 

    

2022

    

2023

Cost of goods sold

$

216

$

232

Selling, general and administrative

6,840

6,731

Research and development

121

126

Stock-based compensation expense

$

7,177

$

7,089

As of September 30, 2023, total unrecognized compensation cost related to share-based compensation grants under the OSI Plan were estimated at $0.6 million for stock options and $19.6 million for restricted stock units (“RSUs”). We expect to recognize these costs over a weighted average period of 1.8 years with respect to the stock options and 2.3 years with respect to the RSUs.

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The following summarizes stock option activity during the three months ended September 30, 2023:

Weighted

Average

Weighted-Average

Aggregate

Number of

Exercise

Remaining Contractual

Intrinsic Value

    

Options

    

Price

    

Term

    

(in thousands)

Outstanding at June 30, 2023

 

83,677

 

$

87.09

 

Granted

 

Exercised

 

(4,752)

88.39

Expired or forfeited

 

Outstanding at September 30, 2023

 

78,925

$

87.01

6.9 years

$

2,449

Exercisable at September 30, 2023

34,225

$

83.15

 

4.8 years

$

1,194

The following summarizes RSU award activity during the nine months ended September 30, 2023:

Weighted-

Average

    

Shares

    

Fair Value

Nonvested at June 30, 2023

 

455,515

$

85.15

Granted

 

307,506

93.35

Vested

 

(363,820)

79.00

Forfeited

 

(1,890)

74.15

Nonvested at September 30, 2023

 

397,311

$

97.19

As of September 30, 2023, there were approximately 0.2 million shares available for grant under the OSI Plan. Under the terms of the OSI Plan, RSUs granted from the pool of shares available for grant reduce the pool by 1.87 shares for each award granted. RSUs forfeited and returned to the pool of shares available for grant increase the pool by 1.87 shares for each award forfeited.

We granted 109,594 and 75,988 performance-based RSUs during the three months ended September 30, 2022 and 2023, 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

In September 2022, our Board of Directors increased the stock repurchase authorization to a total of 2 million shares. This program does not expire unless our Board of Directors acts to terminate the program. 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, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings.

During the three months ended September 30, 2023, we did not repurchase shares of our common stock. As of September 30, 2023, there were 1,721,870 shares remaining available for repurchase under the authorized repurchase program.

Dividends

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

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10. 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 obligations that are capped, the remaining maximum amount of such potential future payments is $45.0 million as of September 30, 2023.

Projections and estimated 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, 2023 to September 30, 2023 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, 2023

    

$

21,181

Foreign currency translation adjustment

(150)

Changes in fair value for contingent earnout obligations

 

(864)

Payments on contingent earnout obligations

 

(383)

Ending fair value, September 30, 2023

$

19,784

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 have not accrued for loss contingencies relating to environmental matters because we believe that, although unfavorable outcomes are possible, they are not considered by our management to be probable and reasonably estimable. If one or more of these environmental matters are resolved in a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be material.

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 September 30, 2023.

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 accrued payroll and related expenses.

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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):

Three Months Ended September 30, 

    

2022

    

2023

Balance at beginning of period

$

13,347

$

11,149

Additions

884

312

Reductions for warranty repair costs and adjustments

 

(1,972)

(902)

Balance at end of period

$

12,259

$

10,559

Legal Proceedings

In February 2023, one of our subsidiaries received a subpoena from the U.S. Department of Justice (“DoJ”) relating to a federal investigation involving a former employee of an OSI Systems subsidiary. The DoJ is currently prosecuting the former employee for embezzlement and other conduct occurring before he was hired by our subsidiary and while he was employed by another company in the United States and Mexico. The subpoena requests documents and records relating to, among other things, the former employee and the Company's business dealings in Mexico since 2020. We have produced documents in response to this subpoena and intend to cooperate with any further subpoenas or other requests in connection with this or any ensuing investigation.

In September 2023, an employee demanded a $4 million payment claiming that he was retaliated against for internally reporting that a Mexican government official solicited a payment in connection with a $35 million opportunity. The opportunity has not been awarded, no payment was actually made, and we have reported the employee’s allegations to the U.S. Department of Justice. We have denied the employee’s claim of retaliation and intend to vigorously contest any potential lawsuit that may be filed as lacking in credibility and merit.

We are involved in various other potential or actual 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 non-ordinary course 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.

11. 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 September 30, 2022 and 2023 were 24.4% and 23.4%, respectively. During the three months ended September 30, 2022 and 2023, we recognized a net discrete tax benefit of $0.1 million and $0.4 million, respectively, related to equity-based compensation under ASU 2016-09.

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12. Segment Information

We have determined that we operate in three identifiable industry segments: (a) security and inspection systems (Security division), (b) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division) and (c) medical monitoring systems (Healthcare 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.

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

Three Months Ended

September 30, 

    

2022

    

2023

Revenues (1) —by Segment:

Security division

$

144,992

$

164,629

Optoelectronics and Manufacturing division, including intersegment revenues

93,915

96,128

Healthcare division

43,563

37,787

Intersegment revenues elimination

(14,399)

(19,334)

Total

$

268,071

$

279,210

Income (loss) from operations —by Segment:

Security division

$

14,924

$

20,609

Optoelectronics and Manufacturing division

11,258

11,437

Healthcare division

1,628

164

Corporate

(10,178)

(9,916)

Intersegment Eliminations

668

265

Total

$

18,300

$

22,559

June 30, 

September 30, 

    

2023

    

2023

Assets (2) —by Segment:

Security division

$

948,126

$

987,134

Optoelectronics and Manufacturing division

 

310,930

296,328

Healthcare division

245,856

238,897

Corporate

 

94,678

113,252

Eliminations (3)

 

(43,904)

(47,159)

Total

$

1,555,686

$

1,588,452

(1)For the three-month period ended September 30, 2022 and 2023, no customer accounted for greater than 10% of total net revenues.
(2)As of June 30, 2023 and September 30, 2023, 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 September 30, 2023 and results of operations for the three months ended September 30, 2023 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, 2023 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 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 our expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (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; the impact of potential information technology, cybersecurity or data security breaches; changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our businesses; the impact of the Russia-Ukraine conflict, including the potential for broad economic disruption; global economic uncertainty; 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 fiscal year; contract and regulatory compliance matters, and actions, which if brought, could result in judgments, settlements, fines, injunctions, debarment or penalties; as well as other risks and uncertainties, including but not limited to those factors described in our other SEC filings, which could have a material and adverse impact on our business, financial condition and results of operation. All forward-looking statements contained in this report are qualified in their entirety by this Section. Moreover, we operate in a very competitive and rapidly changing environment and 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, cardiology and remote monitoring, 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.

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

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for weapons, explosives, drugs, radioactive and nuclear materials and other contraband. Revenues from our Security division accounted for 54% and 59% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, 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 also 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 30% and 28% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, respectively.

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, cardiology and remote monitoring, 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 16% and 13% of our total consolidated revenues for the three months ended September 30, 2022 and 2023, 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.

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. There is uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, and labor shortages. These global macroeconomic factors, coupled with the volatile U.S. political climate and political unrest internationally, have created uncertainty and impacted demand for certain of our products and services. In October 2023, the war between Israel and Hamas in Gaza has created political and potential economic uncertainty in the Middle East. Also, the continued conflict between Russia and Ukraine and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition or results of operations. 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. 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 below, 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. Certain hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, higher interest rates make access to credit more expensive, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. To the extent macroeconomic conditions remain challenging, it is likely that hospitals’ spend on capital equipment will be adversely impacted.

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.

U.S. Budget Environment. U.S. government spending levels and timely funding thereof can affect our financial performance. The House and Senate continue the legislative process on the FY 2024 budget.  The President signed a continuing resolution to fund the U.S government at FY 2023 levels through the earlier of November 17, 2023 or until FY 2024 appropriations bills are enacted. During periods covered by continuing resolutions, we may experience delays in new awards of our products and services, and those delays may adversely affect our results of operations. If Congress fails to enact FY 2024 appropriations bills or extend the continuing resolution on

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a timely basis, the U.S. government will undergo a complete or partial shutdown. The impact of any government shutdown is uncertain. If a government shutdown were to occur and were to continue for an extended period, we could be at risk of program cancellations, schedule delays, and other disruptions and nonpayment regarding products and services, which could adversely affect our results of operations.

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 challenges. 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. 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.

Russia’s Invasion of Ukraine. The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. This has the potential to indirectly disrupt our supply chain and access to certain resources. While we have not experienced significant adverse impacts to date and will continue to monitor for any impacts and seek to mitigate disruption that may arise, we have certain research and development activities within Ukraine for our Healthcare division which have been somewhat impacted. The conflict also has increased the threat of malicious cyber activity from nation states and other actors.

Currency Exchange Rates. On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 1.9% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to the strengthening of the U.S. dollar against other foreign currencies in 2023. Any further strengthening of the U.S. dollar against foreign currencies would adversely impact our sales for the remainder of the year, and any weakening of the U.S. dollar against foreign currencies would positively impact our sales for the remainder of the year.

Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic dramatically impacted the global health and economic environment, with millions of confirmed cases, business slowdowns and shutdowns, and market volatility. The COVID-19 pandemic caused, and may continue to cause, significant economic disruptions and impacted, and may continue to impact, our operations and the operations of our suppliers, logistics providers and customers as a result of supply chain disruptions and delays, as well as labor challenges. During the early stages 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 was delayed, most notably with respect to our aviation and cargo products, and our revenues were adversely impacted as a result of the pandemic.

Significant International Security Contracts. During fiscal year 2023, our Security division was awarded two significant international contracts valued in aggregate greater than $700 million with expected revenues to be recognized over multiple years.

Results of Operations for the Three Months Ended September 30, 2022 (Q1 Fiscal 2023) Compared to the Three Months Ended September 30, 2023 (Q1 Fiscal 2024) (amounts in millions)

Net Revenues

The table below and the discussion that follows are based upon the way in which we analyze our business. See Note 12 to the condensed consolidated financial statements for additional information about our business segments.

    

Q1

    

% of

    

Q1

    

% of

    

    

 

    

Fiscal 2023

    

Net Revenues

    

Fiscal 2024

    

Net Revenues

    

$ Change

    

% Change

 

Security

 

$

145.0

54

%

$

164.6

59

%

$

19.6

14

%

Optoelectronics and Manufacturing

79.5

30

76.8

28

(2.7)

(3)

Healthcare

43.6

16

37.8

13

(5.8)

(13)

Total net revenues

 

$

268.1

100

%

$

279.2

100

%

$

11.1

4

%

Revenues for the Security division during Q1 fiscal 2024 increased year-over-year due to increases in product and service revenues of approximately $12.3 million and $7.3 million, respectively. The increase in product revenue was primarily driven by delivery of systems for our new contracts in Mexico. The increase in service revenue was due primarily to the increase in the installed base of products.

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Revenues for the Optoelectronics and Manufacturing division during Q1 fiscal 2024 decreased year-over year as a result of a decrease in revenue in our optoelectronics business of approximately $4.5 million, offset by an increase in revenue of approximately $1.8 million in our contract manufacturing business.

Revenues for the Healthcare division during Q1 fiscal 2024 decreased year-over-year due to a reduction in patient monitoring sales of $6.2 million offset by an increase in cardiology sales of $0.6 million.

Gross Profit

Q1

% of

Q1

% of

    

Fiscal 2023

    

Net Revenues

    

Fiscal 2024

    

Net Revenues

    

Gross profit

$

87.5

32.6

%

$

98.7

35.4

%

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 increase in net revenues described above which was driven by our Security division. Gross profit as a percentage of net revenues during the quarter ended September 30, 2023 increased on a year-over-year basis due to an increase in the Security division gross margins due to a more favorable sales mix partially offset by a reduction in the sales in the Healthcare division, which carries the highest gross margin of our three divisions.

Operating Expenses

Q1

    

% of

    

Q1

% of

    

Fiscal 2023

    

Net Revenues

    

Fiscal 2024

    

Net Revenues

    

$ Change

    

% Change

Selling, general and administrative

    

$

53.4

    

19.6

%  

$

59.8

21.4

%  

$

6.4

12.0

%

Research and development

 

14.5

 

5.4

15.9

5.7

 

1.4

9.7

Impairment, restructuring and other charges, net

 

1.2

 

0.5

0.5

0.2

 

(0.7)

(58.3)

Total operating expenses

$

69.1

 

25.8

%  

$

76.2

27.3

%  

$

7.1

10.3

%

Selling, general and administrative. Our significant selling, general and administrative (“SG&A”) expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, foreign currency translation, changes in fair value of contingent earnout liabilities and depreciation and amortization expense. SG&A expense for Q1 fiscal 2024 was $6.4 million higher than in the same prior-year period primarily due to a benefit recognized in the prior year attributable to favorable foreign exchange rates and lower recovery of losses on accounts receivable in Q1 fiscal 2024 compared to the same prior-year period.

Research and development. Research and development (“R&D”) expenses include research related to new product development and product enhancements. R&D expense during Q1 fiscal 2024 was $1.4 million higher than the same prior-year period with investments to support new product development initiatives primarily in our Security and Healthcare divisions.

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, and other non-recurring charges. During Q1 fiscal 2024, impairment, restructuring and other charges consisted of $0.2 million for acquisition activity and $0.3 million in charges for employee terminations, legal charges and other costs. During Q1 fiscal 2023, impairment, restructuring and other charges consisted of $0.9 million for legal charges and $0.3 million in charges for employee terminations from operational efficiency activities.

Interest and Other Expense, Net

Q1

% of

Q1

% of

 

    

Fiscal 2023

    

Net Revenues

    

Fiscal 2024

    

Net Revenues

 

Interest and other expense, net

$

3.4

 

1.3

%  

$

5.7

 

2.0

%

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Interest and other expense, net. For Q1 fiscal 2024, interest and other expense, net was $5.7 million as compared to $3.4 million in the same prior-year period. This increase was driven by higher average interest rates and higher average levels of borrowing under our credit facility during Q1 fiscal 2024 in comparison with the levels of borrowing during the same period in the prior year.  The 1.25% convertible notes were outstanding for the first two months of the quarter ended September 30, 2022 and were retired on September 1, 2022 using borrowings from our credit facility. Interest expense for Q1 fiscal 2024 and 2023 included a benefit of $0.9 million and an expense of $0.1 million, respectively, from the interest rate swap.

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 Q1 fiscal 2024 and 2023, we recognized a provision for income taxes of $3.9 million and $3.6 million, respectively. The effective tax rates for Q1 fiscal 2024 and 2023 were 23.4% and 24.4%, respectively. During the Q1 fiscal 2024 and 2023, we recognized a net discrete tax benefit of $0.4 million and $0.1 million, respectively, related to 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 $82.6 million at September 30, 2023, an increase of $5.8 million, or 7.6%, from $76.8 million at June 30, 2023. 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 beyond that. 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 sub-facility for letters of credit, and a $150 million term loan. The term loan was available to us to draw through December 2026. As of September 30, 2023, there was $235.0 million outstanding under our revolving credit facility, $37.7 million of outstanding letters of credit, and $141.3 million outstanding under the term loan.

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 Q1 fiscal 2024, we generated cash from operations of $17.1 million which was consistent with the prior period. The increase in net income in Q1 fiscal 2024 compared to the same period last year was offset by changes in net working capital.

Cash Used in Investing Activities. Net cash used in investing activities was $9.6 million for Q1 fiscal 2024 as compared to $9.1 million in the same prior-year period. Cash used to acquire businesses was nil during the three-month period ended September 30, 2023 compared to $1.9 in the prior year. Capital expenditures in the three-month period ended September 30, 2023 were $5.2 million compared to $3.3 million in the same prior-year period. Expenditures for intangible and other assets in the three-month period ended September 30, 2023 were $4.2 million compared to $3.9 million in the same prior-year period.

Cash Used in Financing Activities. Net cash used in financing activities was $1.9 million during Q1 fiscal 2024, compared to $13.9 million during the same prior-year period. The decrease in cash used in financing activities was due to (1) no repurchases of common stock during Q1 fiscal 2024 compared to $17.3 million in the same prior-year period and (2) higher net borrowings in Q1 fiscal 2024 compared to the same prior-year period, which were partially offset by higher taxes paid related to settlement of equity awards of $22.2 million during Q1 fiscal 2024 compared to $11.1 million in the same prior-year period.

Borrowings

See Note 8 to the condensed consolidated financial statements for a detailed discussion regarding our revolving credit facility and other borrowings.

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Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $82.6 million at September 30, 2023. Of this amount, approximately 91% 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, Qatar, Singapore, India, Malaysia and Canada, and to a lesser extent in Indonesia, Australia, Germany, Mexico and Egypt among other countries. 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.

Issuer Purchases of Equity Securities

We did not repurchase any shares of Common Stock during the first quarter of fiscal year 2024.

Contractual Obligations

During the first quarter of fiscal year 2024, 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, 2023. See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption. There were no new pronouncements adopted in the first quarter of fiscal year 2024.

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, 2023. There have been no material changes in our exposure to market risk during the three months ended September 30, 2023 from that described in the Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023, 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 first quarter of fiscal 2024 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 10, “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 September 30, 2023 should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on August 29, 2023, 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, 2023.

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

On September 13, 2023, Victor Sze, Executive Vice President and General Counsel, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 30,000 shares of our common stock until March 15, 2024. None of our other directors or officers informed us during the quarter ended September 30, 2023 of the adoption, modification or termination of a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as those terms are defined in Regulation S-K, Item 408.

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ITEM 6. EXHIBITS

Exhibit
Number

    

Description

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)

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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 27th day of October 2023.

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)

30