Creating Solutions for a
Safer and Healthier World
2021 Annual Report
4
5
6
non gaap eps
OSI Systems, Inc. provides specialized electronic systems and components that meet the
critical needs of the homeland security, healthcare, defense, and aerospace industries.
Fiscal 2021 Financial Highlights
(June 30th fiscal year end)
$1.15B
2021 Sales
Sales by Division
Security
55%
Optoelectronics and
Manufacturing
26%
Healthcare 19%
sales by year
0
200
400
600
800
1000
1200
sales
by
year
Sales by Geography
United States 51%
EMEA 22%
APAC 20%
Other Americas 7%
Operating Cash Flow
Non-GAAP EPS
1200
1000
800
600
400
$3.61
200
$2.99
$4.32
$4.60
$5.32
$133M
$119M
$129M
$139M
0
$63M
7
1
0
2
8
1
0
2
9
1
0
2
non gaap eps
0
2
0
2
1
2
0
2
7
1
0
2
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
6
5
4
3
Reconciliation of GAAP to Non-GAAP EPS
2
DILUTED EPS
GAAP basis
1
0
Impairment, restructuring, and other charges
Amortization of acquired intangible assets
Non-cash interest expense
cash flow
Gain from disposition of business
150
Tax effect of the above adjustments
120
Discrete income tax items
90
Impact of diluted shares
Non-GAAP basis
60
30
0
FY 2017
FY 2018*
FY 2019
FY 2020
FY 2021
$
1 . 0 7
2 . 3 7
0 . 4 3
0 . 1 3
(0.11 )
(0.78 )
(0.12 )
—
$
( 1 . 5 7 )
$
1 . 8 8
0 . 8 5
0 . 4 0
—
(0.84 )
3. 02
(0.13 )
3 . 4 6
0 . 2 0
0 . 8 4
0 . 4 2
—
(0.41 )
(0.19 )
—
$
4 . 0 5
0 . 3 5
0 . 8 8
0 . 4 7
—
(0.47 )
(0.6 8 )
—
$
4 . 0 3
0 . 5 5
0 . 8 5
0 . 4 8
—
(0.50 )
(0.09 )
—
$
2. 9 9
$
3. 61
$
4. 32
$
4. 60
$
5.3 2
* For the fiscal year ended June 30, 2018, the weighted average diluted shares used to calculate EPS on a GAAP basis exclude potential common shares (stock options and restricted stock units) due to their antidilutive effect
resulting from the Company’s reported net loss. For the fiscal year ended June 30, 2018, the weighted average diluted shares used to calculate EPS on a non-GAAP basis were approximately 19,274,000 shares.
OSI Systems, Inc.
2021 Annual Report 1
Deepak Chopra
President, Chief Executive Officer
and Chairman of the Board
checkpoints. With our broad portfolio of screening systems,
expanding presence at large U.S. and international port, border,
and airport facilities, and continued investment in software
innovation, we are excited about our potential in fiscal ’22.
The Optoelectronics and Manufacturing division (“Opto”) fiscal
2021 performance was stellar delivering third party sales
of $301 million or 26% higher than the prior year. The Opto
team did a wonderful job managing the pandemic related
challenges and successfully navigating through its supply
chain that had, in some cases, longer lead times, disruptions
and higher sourcing costs. Opto’s manufacturing footprint is
in several countries, and customers in the critical industries of
aerospace, defense, and healthcare recognize our capabilities
and increased their reliance on us as we exhibited flexibility in
meeting their requirements. Opto had a book-to-bill of 1.2 and
finished the year with a record backlog, which provides plenty
of optimism about the division’s prospects in fiscal ’22.
The Healthcare division had a solid fiscal 2021 delivering
$212 million in revenues or 15% growth as we benefited from
efforts to expand our sales channels as well as increased
spending by certain hospital customers to meet the needs of
the pandemic. The division achieved improved margins, not
only from the higher sales volume, but also from managing its
costs throughout the year and solid execution by a bolstered
management team. We made significant investments in
research and development to enhance our core offerings in
patient monitoring and cardiology and develop new products
that are designed to help caregivers deliver patient care more
effectively and efficiently. During the fiscal year, we introduced
new cardiology products in the areas of event recording,
screening, and data management. These products are
expected to favorably impact revenues going forward.
Overall, I am pleased with our performance in fiscal ‘21 and
grateful for the perseverance that our team has demonstrated
in handling the pandemic related opportunities and challeng-
es. Our ability to manufacture complete systems and sub-as-
semblies in North America, Europe, and Asia is really paying off
as it gives us more flexibility to support our global customers,
work through unforeseen supply constraints and manage the
challenges of higher logistics and freight costs. Going forward,
our focus will be on serving our core markets, capitalizing on
strategic acquisitions and opportunities, and advancing our
technology and product portfolio. I would like to thank our em-
ployees and stockholders for their confidence and support, and
I look forward to fiscal ‘22.
Sincerely,
Dear Fellow Stockholders,
Fiscal 2021 was a memorable year as our Company focused on
serving our customers, while creating a safe workplace for our
employees in the ongoing pandemic environment. We worked
through these challenges and stayed connected virtually and
physically and continued our mission to make the world safer
and healthier. In fiscal ‘21, we achieved approximately $1.1
billion in revenues, delivered record non-GAAP earnings per
share of $5.32, and generated record operating cash flow of
$139 million. In addition, bookings were strong leading to a
record year-end backlog of approximately $1.1 billion, which
bodes well for fiscal 2022 as we have a strong opportunity
pipeline to continue expanding our presence in the marketplace.
Despite pandemic-related challenges, our Security division
performed well capitalizing on significant global opportunities.
During fiscal ‘21, we won key international awards to deploy
various fixed and mobile platforms of vehicle and cargo
inspection systems. In the U.S., we were selected as a vehicle
and cargo screening equipment supplier for a $480 million
IDIQ (indefinite delivery/indefinite quantity) contract from
the U.S. Customs and Border Protection to help prevent illicit
materials crossing U.S. borders. We fully ramped up on a new
turnkey service contract at a Guatemalan port and continued
the turnkey service operations in Albania and Puerto Rico.
Towards the end of the fiscal year, the easing of international
travel restrictions stemming from the COVID-19 pandemic
helped our Cargo team to regain momentum in scheduling site
acceptance testing for new product installations, which often
require personnel from our Company and the customer to meet
in person for approval. Although the aviation market continues
to be hampered, we did see some signs of improvement during
the fiscal year as air passenger traffic began to improve, albeit
slowly, and certain of our airport customers began to shift
their focus back towards long term infrastructure planning.
We capitalized on several new inspection equipment and
upgrade opportunities at airports. Of note, we received a $59
million contract to provide our high-speed Rapiscan® RTT®110
for checked baggage screening along with our Itemizer® 4DX
desktop trace detection systems to the Hamad International
Airport in Qatar. In air cargo, we continued to support customers
that are expanding their infrastructure to handle the expected
growth in e-commerce traffic.
Our team has also focused on recurring revenue streams, and
we are seeing several of our security customers increasingly
utilizing our Certscan® platform, a software platform that
is cybersecure, can manage inspection image data, and
facilitates the automation of inspection activity. We will
continue to focus on bringing versatile software applications,
like Certscan, that build upon our threat detection, image data
management, and artificial intelligence capabilities for security
2
OSI Systems, Inc.
2021 Annual Report
ONE COMPANY,
TOTAL SECURITY
Our Security division is a leading supplier of security
inspection solutions utilizing multiple technologies and
advanced threat identification algorithms based on
X-ray and high-speed computed tomography imaging,
ion mobility spectrometry, and nuclear detection
technologies. Our broad portfolio of products, services,
and solutions helps customers solve complex security
needs, including combatting terrorism, drug and weapon
smuggling, and trade fraud. With our leading detection
technology and vast industry knowledge, we can
meet demanding security requirements while offering
customers outstanding value for their security screening
and inspection operations.
Our S2 Global business assists customs, border security,
and tax collection agencies with inspection and manifest
verification of cargo traveling across borders, increasing
the efficiency of trade and infrastructure and supporting
economic growth and transparency. We develop
comprehensive screening solutions that perform high-
speed threat and contraband detection through CONOPS
design, advanced equipment, integration with information
systems, and recurring training of image analysts. Our
expertise has crossed industries to support security
at stadiums and large venues where customers are
benefitting from our comprehensive screening solutions.
Hold Baggage Screening
Cargo and Vehicle Inspection
Baggage and Parcel Inspection
People Screening
Radiation Detection
Trace Detection
T URN KEY SOLUTION S
We also provide turnkey screening
solutions that reduce upfront
capital requirements while
providing innovative screening
technology, ongoing operations,
maintenance, and staffing. Each
turnkey operation uses our
proprietary software to manage
data integration from a wide array
of agencies and platforms, giving
our customers greater insight into
the full spectrum of security-related
information.
OSI Systems, Inc.
2021 Annual Report 5
INNOVATIONS FOR
CONNECTED CARE
Our Healthcare division designs and manufactures patient monitoring solutions,
diagnostic cardiology solutions, supplies and accessories, and connected care
informatics for use in hospitals, medical clinics, and physician offices globally. Our
wired and wireless patient monitoring solutions are used for critical, sub-acute,
and perioperative care areas of the hospital, all aimed at providing caregivers with
timely and actionable patient information. Our diagnostic cardiology solutions
include ambulatory cardiac monitoring analysis software, ambulatory blood pressure
monitors, and electrocardiography (ECG) devices. Our supplies and accessories
product line enables hospitals to standardize accessories across their facilities for
greater efficiency and flexibility, including multi-vendor devices. Our connected care
informatics solutions enable clinicians to access critical information needed to
improve patient outcomes and help healthcare organizations streamline workflows
and improve communications.
Patient Monitoring and Connectivity
Cardiology and Remote Monitoring
Supplies and Accessories
6
OSI Systems, Inc.
2021 Annual Report
LIGHT SENSING
SOLUTIONS
Optoelectronics and Manufacturing
Our Optoelectronics and Manufacturing division designs and manufactures
optoelectronic products and provides electronics manufacturing services for
use in a broad range of applications. Our products and services are widely used
in systems for security inspection, training and simulation, satellite and missile
guidance, range finders, test and measurement, and medical imaging and
diagnostics, among others. This division is a critical supplier to our Security and
Healthcare divisions. Our vertical integration approach to manufacturing and
supply chain management allows us to better serve our global customers.
OSI Systems, Inc.
2021 Annual Report 7
Aerospace and Defense
Healthcare
Optical Communications
Industrial Test and Measurement
X-ray Detection
8
OSI Systems, Inc.
2021 Annual Report
OSI Systems, Inc.
2021 Annual Report 9
2021 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
☐
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
OSI SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
12525 Chadron Avenue, Hawthorne, California
(Address of principal executive offices)
33-0238801
(I.R.S. Employer
Identification No.)
90250
(Zip Code)
Registrant’s telephone number, including area code: (310) 978-0516
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading symbol(s)
OSIS
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ☐ No ☒
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 ☒
Non-accelerated filer ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting Common Stock held by non-affiliates computed by reference to the price at which the
Common Stock was last sold on December 31, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,580,840,328. For
purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to be affiliates of the registrant. The number of shares
outstanding of the registrant’s Common Stock as of August 18, 2021 was 17,891,795.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 2021 annual meeting of stockholders are incorporated by reference into Part III. The proxy statement
will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year.
TABLE OF CONTENTS
Description
Item
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
[RESERVED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . .
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Page
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II-1
Forward-Looking Statements
PART I
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 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 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, including, without limitation, those factors described in
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” as well as factors described elsewhere in this report and other documents
filed by us from time to time with the Securities and Exchange Commission (“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 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; as well as
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 Annual Report on Form 10-K 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.
ITEM 1. BUSINESS
General
OSI Systems, Inc., together with our subsidiaries, is a vertically integrated designer and manufacturer of
specialized electronic systems and components for critical applications. We sell our products and provide related services
in diversified markets, including homeland security, healthcare, defense and aerospace. Our company is incorporated in
the State of Delaware and our principal office is located at 12525 Chadron Avenue, Hawthorne, California 90250.
1
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 and
electronic manufacturing services for the Security and Healthcare divisions, as well as to third parties for applications in
the defense and aerospace markets, among others.
COVID-19
The COVID-19 pandemic has dramatically impacted the global health and economic environment, with millions
of confirmed cases, business slowdowns and shutdowns, and market volatility. COVID-19 has caused, and is likely to
continue to cause, significant economic disruption and is having widespread, rapidly evolving and unpredictable impacts
on global society, financial markets and business practices. Various governments around the world have implemented
measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on
public gatherings, work from home, supply chain logistical changes, and closure of non-essential businesses. The
COVID-19 pandemic has impacted, and is expected to continue to impact, our business operations and the operations of
our suppliers and customers as a result of quarantines, facility closures and travel and logistics restrictions.There is
substantial uncertainty regarding the duration and degree of COVID-19’s continued effects over time. The extent to which
the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably
predict, including the duration and scope of the pandemic or recurrence thereof, deployment and administration of
vaccines, governmental, business and individuals’ actions in response to the pandemic and the impact on economic
activity including the possibility of recession or financial market instability. Refer to Risk Factors (Part I, Item 1A of this
Form 10-K) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II, Item 7
of this Form 10-K) for further discussion regarding potential risks to our business from the COVID-19 pandemic.
Industry Overview
We sell our security and inspection systems and healthcare products primarily to end-users, while we design and
manufacture our optoelectronic devices and value-added subsystems and provide electronics manufacturing services
primarily for OEM customers.
Security. A variety of technologies are currently used globally in security and inspection applications, including
transmission and backscatter X-ray, 3-D and computed tomography, nuclear radiation detection, metal detection, radar
and trace detection. We believe that the market for security and inspection products will continue to be affected by the
threat of terrorist incidents, drug trafficking, gun violence, and by new government mandates and appropriations for
security and inspection products in the United States and internationally.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a wide
range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals, freight forwarding
operations, sporting venues, government and military installations, and nuclear facilities. The U.S. Department of
Homeland Security has undertaken numerous initiatives to prevent terrorists from entering the country, hijacking airliners,
and obtaining and trafficking in weapons of mass destruction and their components, to secure sensitive U.S. technologies
and to identify and screen high-risk cargo before it is loaded onto airlines and ships. These initiatives, such as the
Customs-Trade Partnership Against Terrorism, the U.S. Transportation Security Administration’s Air Cargo Screening
Mandate and the U.S. Customs and Border Protection Container Security Initiative, have resulted in an increased demand
for security and inspection products.
Certain of these government sponsored initiatives in the United States have also stimulated security programs in
other areas of the world in part because the U.S. initiatives call on other nations to bolster their port security strategies,
including acquiring or improving their security and inspection equipment and screening operations. The international
market for non-intrusive inspection equipment and related services, therefore, continues to expand as countries that ship
goods directly to the United States participate in such programs and as they choose to procure and operate equipment in
order to secure their own borders, transportation networks, facilities and other venues.
2
The U.S. Department of Homeland Security and international air transportation security regulators around the
world require the screening of cargo carried on passenger airlines. Several of our screening systems have been approved
by the U.S. Department of Homeland Security’s Transportation Security Administration, as well as various international
regulatory bodies, for this purpose and are being procured and used by freight forwarders, airlines, international airports,
transportation companies and other businesses to fulfill their compliance requirements. These and other regulations
promulgated by international organizations have resulted in a growing global demand for airline, cargo, port and border
security and inspection technologies.
Healthcare. Healthcare has been, and we believe will continue to be, a growing economic sector throughout
much of the world. Developing countries in Latin America and the Asia-Pacific region are expected to continue to build
healthcare infrastructure to serve expanding middle class populations. In developed areas, especially the United States,
Europe, and mature Asian countries, aging populations and extended life expectancy are projected to fuel growth in
healthcare for the foreseeable future.
While we believe that the healthcare industry will continue to grow throughout much of the world, many factors
are forcing healthcare providers to do more with less, including stricter government requirements affecting staffing and
accountability and uncertainty around potential U.S. healthcare legislation. The COVID-19 pandemic has significantly
strained healthcare provider resources, placing increased focus on the advantages of remote monitoring and products which
can be deployed flexibly, enabling hospitals to quickly reconfigure and adapt to unexpected change. Our customers expect
clinical value, economic value, and clinical decision support. Positioning our current healthcare products to demonstrate
the competitive value in total cost of ownership is increasingly important in this environment. At the same time, the
widespread introduction of mobile devices into the healthcare environment is creating an emerging demand for patient
data acquisition and distribution. Our Healthcare division designs, manufactures and markets devices and software that
respond to these factors, helping hospitals reduce costs, make better-informed clinical decisions, and more fully utilize
resources.
We are a global manufacturer and distributor of patient monitoring, diagnostic cardiology, and connected care
solutions for use in hospitals, medical clinics and physician offices. We design, manufacture and market patient monitoring
solutions for critical, sub-acute and perioperative care areas of the hospital, wired and wireless networks and ambulatory
blood pressure monitors, all aimed at providing caregivers with timely patient information. Our diagnostic cardiology
systems
include Holter recorders and analyzers, ambulatory blood pressure monitors, resting and stress
electrocardiography (ECG) devices, and ECG management software systems and related software and services.
Optoelectronics and Manufacturing. We believe that continued advances in technology and reductions in the
cost of key components of optoelectronic systems, including computer processing power and memory, have broadened
the market by enabling the use of optoelectronic devices in a greater number of applications. In addition, we see a trend
among OEMs to increasingly outsource the design and manufacture of optoelectronic devices as well as value-added
subsystems to fully-integrated, independent manufacturers, like us, that may have greater specialization, broader expertise
and more flexibility to respond to short cycle times and quicker market expectations.
Our optoelectronic devices are used in a wide variety of applications for diversified markets including aerospace
and defense, avionics, medical imaging and diagnostics, biochemistry analysis, pharmaceutical, nanotechnology,
telecommunications, construction and homeland security. Medical applications for our devices include diagnostic and
imaging products, patient monitoring equipment, and glucose monitors. Aerospace and defense applications for our
devices include satellite navigation sensors, laser guided munitions systems, range finders, weapons simulation systems,
and other applications that require the conversion of optical signals into electrical signals. Homeland security applications
for our devices include X-ray based and other detection systems. Our optoelectronic devices and value-added subsystems
are also used in a wide variety of measurement control, monitoring and industrial applications and are key components in
telecommunications technologies. We also offer electronics manufacturing services to broader markets, as well as to our
optoelectronics customers and to our Security and Healthcare divisions. We offer full turnkey solutions as well as printed
circuit board assembly, cable and harness assembly, liquid crystal displays and box-build manufacturing services, in which
we provide product design and development, supply chain management, and production manufacturing services.
Additionally, our flexible circuit businesses offer design expertise, manufacturing capabilities, and assembly of flexible
and rigid circuit boards for applications in the industrial medical, military, and consumer markets.
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Growth Strategy
We believe that one of our primary competitive strengths is our expertise in the cost-effective design and
manufacture of specialized electronic systems and components for critical applications. As a result, we have leveraged,
and intend to continue to leverage, such expertise and capacity to gain price, performance and agility advantages over our
competitors in the security, healthcare and optoelectronics fields, and to translate such advantages into profitable growth
in those fields. At the same time, we continually seek to identify new markets in which our core expertise and capacity
will provide us with competitive advantages. Key elements of this strategy include:
Capitalizing on Global Reach. We operate from multiple locations throughout the world. We view our
international operations as providing an important strategic advantage over competitors. First, our international
manufacturing facilities allow us to take advantage of competitive labor rates in order to be a low-cost producer. Second,
our international offices strengthen our sales and marketing efforts and our ability to service and repair our systems by
providing direct access to growing markets and to our existing international customer base. Third, our international
manufacturing locations allow us to reduce delivery times to our global customer base. We intend to continue to enhance
our international manufacturing and sales capabilities.
Capitalizing on Vertical Integration. Our vertical integration provides several advantages in each of our
divisions. These advantages include reduced manufacturing and delivery times, lower costs due to our access to
competitive international labor markets and direct sourcing of raw materials. We also believe that we offer significant
added value to our customers by providing a full range of vertically-integrated services, including component design and
customization, subsystem concept design and application engineering, product development and prototyping, efficient
pre-production and short-run manufacturing and competitive mass production capabilities. We believe that our vertical
integration differentiates us from many of our competitors and provides value to our customers who can rely on us to be
an integrated supplier.
Capitalizing on the Market for Security and Inspection Systems. The trend toward increased screening of goods
entering and departing from ports and borders has resulted, and may continue to result in, the growth in the market for
cargo inspection systems and turnkey security screening services that are capable of screening shipping containers for
contraband and assisting customs officials in the verification of shipping manifests. Package and cargo screening by freight
forwarders, airlines and air cargo companies represents a growing sector, as regulations in the United States and Europe
have continued to support increased screening of air cargo shipments. We intend to capitalize on opportunities to replace,
service and upgrade existing security installations, and to offer turnkey security screening solutions in which we may
construct, staff and/or operate on a long-term basis security screening checkpoints for our customers. Finally, we also
intend to continue to develop new security and inspection products and technologies, and to enhance our current product
and service offerings through internal research and development and selective acquisitions.
Improving and Complementing Existing Medical Technologies. We develop and market patient monitoring
systems, diagnostic cardiology products, and connected care systems and associated supplies and accessories. Our efforts
to develop new products and improve our existing medical technologies are focused on the needs of healthcare
organizations, caregivers, and their patients. Our efforts to improve existing medical technologies concentrate on providing
products that are flexible and intuitive to use so that clinicians can deliver accurate, precise, reliable and cost-effective
care.
Selectively Entering New Markets. We intend to continue to selectively enter new markets that complement our
existing capabilities in the design, development and manufacture of specialized electronic systems and components for
critical applications such as security inspection, patient monitoring and diagnostic cardiology. We believe that by
manufacturing products that rely on our existing technological capabilities, we will leverage our integrated design and
manufacturing infrastructure to build a larger presence in new markets that present attractive competitive dynamics. We
intend to achieve this strategy through internal growth and through selective acquisitions.
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Acquiring New Technologies and Companies. Our success depends in part on our ability to continually enhance
and broaden our product offerings in response to changing technologies, customer demands and competitive pressures.
We have developed expertise in our various lines of business and other areas through internal research and development
efforts, as well as through selective acquisitions. We expect to continue to seek acquisition opportunities to broaden our
technological expertise and capabilities, lower our manufacturing costs and facilitate our entry into new markets.
Products and Technology
We design, develop, manufacture and sell products ranging from security and inspection systems to patient
monitoring and diagnostic cardiology systems to discrete optoelectronic devices and value-added subsystems.
Security and Inspection Systems. We design, manufacture and market security and inspection systems globally
to end users under the “Rapiscan Systems” and “AS&E” trade names. Our Security products are used to inspect baggage,
parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear materials and
other contraband. These systems are also used for the safe, accurate and efficient verification of cargo manifests for the
purpose of assessing duties and monitoring the export and import of controlled materials. Our Security products fall into
the following categories: baggage and parcel inspection; cargo and vehicle inspection; hold (checked) baggage screening;
people screening; radiation detection; and explosive and narcotics trace detection. We also offer turnkey security screening
services, as well as related software integration platforms, operator training, and the staffing and operation of security
screening checkpoints under the “S2” trade name. From time to time we form joint ventures to carry out our operations in
certain geographies, including, for example, Albania.
As a result of terrorist attacks worldwide, security and inspection products have increasingly been used at a wide
range of facilities other than airports, such as border crossings, railways, seaports, cruise line terminals, freight forwarding
operations, government and military installations and nuclear facilities. As a result of the use of security and inspection
products at additional facilities, we have diversified our sales channels for security and inspection products.
Many of our security and inspection systems include dual-energy X-ray technology with computer software
enhanced imaging methods to facilitate the detection of materials such as explosives, weapons, narcotics, bulk currency
or other contraband. In addition, we offer dual-view X-ray screening systems, now available on many of our systems that
allow operators to examine objects from two directions simultaneously, thereby reducing the need for re-scanning of
objects and improving the operator’s ability to detect threats quickly and effectively. Our baggage and parcel inspection,
cargo and vehicle inspection and hold (checked) baggage screening inspection systems range in size from compact mobile
systems to large systems comprising entire buildings in which trucks, shipping containers or pallets are inspected. Many
of our inspection systems are also designed to be upgradeable to respond to new customer requirements as they emerge or
change.
Our cargo and vehicle inspection applications, in which vehicles, cars, trucks, shipping containers, pallets and
other large objects can be inspected, are designed in various configurations, including gantry, portal and mobile systems.
These products are primarily used to verify the contents of cars, trucks or cargo containers and to detect the presence of
contraband, including narcotics, weapons, explosives, radioactive and nuclear materials and other smuggled items. Most
of our cargo and vehicle inspection systems employ X-ray imaging to non-intrusively inspect objects and present images
to an inspector, showing shapes, sizes, locations and relative densities of the contents. These systems utilize transmission
imaging technology, backscatter imaging technology, or both technologies. We also manufacture passive radiation
detection devices for detecting nuclear threat material utilizing their gamma and neutron signatures. Additionally, we have
developed isotope-specific identification algorithms. Many of these systems have been built to meet specific customer
inspection requirements.
We believe that we offer one of the broadest technology platforms in the baggage and parcel and cargo and vehicle
inspection systems industry. Our broad platform permits us to offer customers solutions, which optimize flexibility,
performance and cost to meet the customers’ unique application requirements.
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Our Security division also offers hold (checked) baggage screening systems that are utilized by airports, freight
forwarders and other parties responsible for screening baggage and cargo before it is placed in the cargo hold of airplanes.
Certain of our currently available systems utilize multiple X-ray beams to provide high-quality images able to discriminate
materials and to enable algorithms that assist operators in the detection of explosives and narcotics. Other systems utilize
a very large number of distributed X-ray emitters that rapidly capture hundreds of views of a bag and then utilize
sophisticated software to reconstruct high resolution images. These systems are designed to meet the high-speed screening
and analysis demands of regulators in the United States and European Union (“EU”).
Our Security division also offers trace detection systems that are designed to detect trace amounts of explosives
as well as narcotics. We also offer people screening products, such as walk-through metal detector (WTMD) products for
use at security checkpoints at airports, government buildings, sports arenas and other venues. These systems are designed
to be used in screening people, baggage and other items for illicit materials and weapons.
Patient Monitoring and Diagnostic Cardiology. Our Healthcare division designs, manufactures and markets
products globally to end users primarily under the “Spacelabs” trade name.
Spacelabs products include patient monitors for use in perioperative, critical care and emergency care
environments with neonatal, pediatric and adult patients. Our patient monitoring systems comprise monitors and central
nursing stations connected by wireless or hardwired networks, as well as standalone monitors that enable patient data to
be transported physically from one monitor to another as the patient is moved. These systems enable hospital staff to access
patient data where and when it is required. In addition, these products are designed to interact with hospital information
systems.
For electrocardiograph monitoring or multiparameter monitoring of ambulatory patients, we offer a digital
telemetry system. The system operates in government-protected bands, which are not used for private land mobile radio,
business radio services or broadcast analog or digital television. Spacelabs Intesys® Clinical Suite (ICS) provides a
software suite allowing hospitals to leverage their infrastructure to capture data from the bedside, compact and telemetry
monitors.
Our PathfinderSL® analysis tool provides multiple analysis modes and simple, actionable Holter reports to any
PC, inside or outside the hospital. Our EvoTM Holter recorders provide low cost of ownership through, for example, the
elimination of disposable batteries and other advances. Our Lifecard® CF Holter recorders are worn by patients for up to
seven days in order to capture heart arrhythmias that may occur in a patient only a few times per week. This product is
helpful in identifying the presence of atrial fibrillation.
We are also a supplier of ambulatory blood pressure (ABP) monitors which are routinely used by physicians
around the world and by contract research organizations. Many physicians are using ambulatory blood pressure monitoring
to detect “white coat” hypertension, a condition in which people experience elevated blood pressure in the doctor’s office
but not in their daily lives. Ambulatory blood pressure monitoring helps improve diagnostic accuracy and minimize the
associated costs of treatment. Spacelabs OnTrak™ ambulatory blood pressure system has been validated for both pediatric
and adult patient types and includes the capability to measure activity correlation with non-invasive blood pressure
readings.
Our Sentinel® 11 Cardiology Information Management System is designed to provide an electronic,
enterprise-wide scalable system for diagnostic cardiology. Sentinel integrates data from Spacelabs-branded products and
third-party devices into a central enterprise-wide database system that can be accessed by care providers and medical
facility administrators, thereby providing enhanced workflow and efficiencies. The system’s web-based solution enables
the secure transfer of data from multiple remote sites. Sentinel supports mobile and remote working, taking ECG
management to the point of care for flexible use of devices and capture of data.
In addition, the capital-intensive products that our Healthcare division sells have supplies and accessories
associated with them that can represent annuity revenue opportunities. Additionally, our Healthcare division manufactures
multivendor-compatible accessories for use with third-party devices.
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Optoelectronic Devices and Manufacturing Services. Optoelectronic devices generally consist of both active
and passive components. Active components sense light of varying wavelengths and convert the light detected into
electrical signals, whereas passive components amplify, separate or reflect light. These products are manufactured in
standard and customized configurations for specific applications and are offered either as components or as subsystems.
Our optoelectronic products and services are provided primarily under the “OSI Optoelectronics,” “OSI LaserDiode,”
“OSI Laserscan,” “Semicoa,” and “Advanced Photonix” trade names.
In addition to the manufacture of standard and OEM products, we also specialize in designing and manufacturing
customized value-added subsystems for use in a wide range of products and equipment. An optoelectronic subsystem
typically consists of one or more optoelectronic devices that are combined with other electronic components and packaging
for use in an end product. The composition of a subsystem can range from a simple assembly of various optoelectronic
devices that are incorporated into other subsystems (for example, a printed circuit board containing our optoelectronic
devices) to complete end-products (for example, pulse oximetry equipment).
We also provide electronics design and manufacturing services both in North America, the United Kingdom and
in the Asia Pacific region with enhanced, RoHS-compliant, printed circuit board and cable and harness assemblies and
box-build manufacturing services utilizing state-of-the-art automated surface mount technology lines. We offer electronics
manufacturing services to OEM customers and end users for medical, automotive, defense, aerospace, industrial and
consumer applications that do not utilize optoelectronic devices. We also manufacture LCD displays for medical, industrial
and consumer electronics applications, and flex circuits for OEM customers from the prototype stage to mass production.
Our electronics manufacturing services are provided primarily under the “OSI Electronics,” “APlus Products,” “Altaflex,”
and “PFC Flexible Circuits” trade names.
We develop, manufacture and sell laser-based remote sensing devices that are used to detect and classify vehicles
in toll and traffic management systems under the “OSI Laserscan” and “Autosense” trade names. We offer solid-state laser
products for aerospace, defense, telecommunication and medical applications under the “OSI LaserDiode” trade name.
Markets, Customers and Applications
Security and Inspection Products. Many security and inspection products were developed in response to civilian
airline hijackings. Consequently, certain of our security and inspection products have been and continue to be sold for use
at airports. Our security and inspection products are also used for security and customs purposes at locations in addition
to airports, such as border crossings, shipping ports, military and other government installations, freight forwarding
facilities, high-profile locations such as U.K. House of Parliament, Buckingham Palace, and the Vatican and for
high-profile events such as the Olympic Games, and other sporting events. We also provide turnkey security screening
solutions, which can include the construction, staffing and long-term operation of security screening locations for our
customers.
Our customers include, among many others, the U.S. Department of Homeland Security, U.S. Department of
Defense, U.S. Department of State, U.S. Department of Commerce, and Federal Bureau of Prisons in the United States, as
well as many premier international government agencies, including airports and other critical infrastructure agencies, DHL,
and United Parcel Service.
Our contracts with the U.S. Government are generally subject to renegotiation of profits and termination for
convenience at the election of the Government. For the fiscal year ended June 30, 2021, our Security division direct sales
to the U.S. Government were approximately $165 million. Additionally, certain of our contracts with foreign governments
contain provisions allowing the government to terminate a contract for convenience. For further discussion, please refer
to Item 1A. “Risk Factors.”
Patient Monitoring, Diagnostic Cardiology, and Connected Care Systems. Our patient monitoring, diagnostic
cardiology, and connected care systems are manufactured and distributed globally for use in critical care, emergency and
perioperative areas within hospitals as well as physicians’ offices, medical clinics and ambulatory surgery centers. We
also provide wired and wireless networks, clinical information access solutions and ambulatory blood pressure monitors.
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We sell products directly to end customers as well as through integrated delivery networks and group purchasing
organizations in the U.S., the NHS Supplies Organisation in the United Kingdom, UGAP in France, and to various
government funded hospitals in the Middle East and several parts of Asia.
Optoelectronic Devices and Electronics Manufacturing Services. Our optoelectronic devices and the electronics
we manufacture are used in a broad range of products by a variety of customers in the following market segments: defense,
aerospace and avionics; analytical and medical imaging; healthcare; telecommunications; homeland security; toll and
traffic management; and automotive.
Marketing, Sales and Service
We market and sell our security and inspection products and turnkey security screening solutions globally through
a direct sales and marketing staff located in North America, South America, Europe, Middle East, Australia, and Asia, in
addition to an expansive global network of independent distributors. This sales staff is supported by a service organization
located in the same regions, as well as a global network of independent, authorized service providers.
We market and sell our healthcare products globally through a direct sales and marketing staff located in North
America, South America, Europe and Asia, in addition to a global network of independent distributors. We also support
these sales and customer service efforts by providing operator in-service training, comprehensive interactive eLearning
for all monitoring products, software updates and upgrades and service training for customer biomedical staff and
distributors. We also provide IT specialists and clinical specialists to provide support both before and after product sale.
We market and sell our optoelectronic devices and value-added manufacturing services, through both our direct
sales and marketing staff located in North America, Europe and Asia, and indirectly through a global network of
independent sales representatives and distributors. Our sales staff is supported by an applications engineering group whose
members are available to provide technical support, which includes designing applications, providing custom tooling and
process integration and developing products that meet customer defined specifications.
We consider our maintenance service operations to be an important element of our business. After the expiration
of our standard product warranty periods, we are often engaged by customers, either directly or through our network of
authorized service providers, to provide maintenance services for our security and inspection products. In addition, we
provide a variety of service and support options for our healthcare customers, including hospital on-site repair and
maintenance service and telephone support, parts exchange programs for customers with the internal expertise to perform
a portion of their own service needs and a depot repair center at our division headquarters. We believe that our international
maintenance service capabilities allow us to be competitive in selling our security and inspection systems as well as our
patient monitoring, diagnostic cardiology, and connected care systems.
Research and Development
Our security and inspection systems are primarily designed at our facilities in the United States and in the United
Kingdom, Australia, Singapore, India, and Malaysia. These products include mechanical, electrical, analog and digital
electronics, software subsystems and algorithms, which are designed by us. In addition to product design, we provide
system integration services to integrate our products into turnkey systems at the customer site. We support cooperative
research projects with government agencies and provide contract research for government agencies.
Our healthcare products are primarily designed at our facilities in the United States and in the United Kingdom
with sustaining engineering efforts in India. These products include enterprise and embedded software, networking,
connectivity, mechanical, electronic and software subsystems, most of which are designed by us. We are also currently
involved, both in the United States and internationally, in research projects aimed at improving our medical systems and
at expanding our current product lines.
We design and manufacture optoelectronic devices and we provide electronics manufacturing services primarily
in our facilities in the United States and internationally in the United Kingdom, Canada, Mexico, India, Indonesia,
Malaysia and Singapore. We engineer and manufacture subsystems to solve the specific application needs of our OEM
customers. In addition, we offer entire subsystem design and manufacturing solutions. We consider our engineering
personnel to be an important extension of our core sales and marketing efforts.
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In addition to close collaboration with our customers in the design and development of our current products, we
maintain an active program for the development and introduction of new products, enhancements and improvements to
our existing products, including the implementation of new applications of our technology. We seek to further enhance
our research and development program and consider such program to be an important element of our business and
operations.
Manufacturing and Materials
We currently manufacture our security and inspection systems domestically in California, Kentucky,
Massachusetts, and Tennessee, and internationally in Malaysia and the United Kingdom. We currently manufacture our
patient monitoring and diagnostic cardiology systems in Washington state. Our connected care system is developed in
Oklahoma, Washington state, and Edinburgh, United Kingdom. We outsource manufacturing of certain of our supplies
and accessories. We currently manufacture our optoelectronic devices and provide electronics manufacturing services
domestically in California and New Jersey, and internationally in Canada, Mexico, India, Indonesia, Malaysia, the United
Kingdom and Singapore. Most of our high-volume, labor-intensive manufacturing and assembly activities are performed
at our facilities in India, Mexico, Indonesia and Malaysia. Our ability to manufacture products and provide follow-on
service from offices located in these regions allows us to remain in close proximity to our customers, which is an important
component of our global strategy.
Our global manufacturing organization has expertise in optoelectronic, microelectronic and integrated electronics
for industrial and automation, medical, aerospace and defense industry applications. Our manufacturing includes silicon
wafer processing and fabrication, optoelectronic device assembly and screening, thin and thick film microelectronic hybrid
assemblies, surface mounted and thru-hole printed circuit board electronic assemblies, cable and harness assemblies,
box-build manufacturing, and flex circuitry on a complete turnkey basis. To support our manufacturing operations, we
outsource certain requirements, including sheet metal fabrication and plastic molding of components.
The principal raw materials and subcomponents used in producing our security and inspection systems consist of
X-ray generators, linear accelerators, radioactive isotopes, detectors, data acquisition and computer systems, conveyance
systems and miscellaneous mechanical and electrical components. A large portion of the optoelectronic devices,
subsystems and circuit card assemblies used in our inspection and detection systems are manufactured in-house. The
majority of our X-ray generators, linear accelerators, radioactive isotopes and conveyance systems used in our cargo and
vehicle inspection systems are purchased from unaffiliated third-party providers.
The principal raw materials and subcomponents used in producing our healthcare products consist of printed
circuit boards, housings, mechanical assemblies, pneumatic devices, touch screens, medical grade displays, cables, filters,
textiles, fabric, gauges, fittings, tubing and packaging materials. We purchase finished medical devices, computers,
peripheral accessories, and remote displays from unaffiliated third-party providers.
The principal raw materials and subcomponents used in producing our optoelectronic devices and electronic
subsystems consist of silicon wafers, electronic components, light emitting diodes, scintillation crystals, passive optical
components, printed circuit boards and packaging materials. The silicon-based optoelectronic devices manufactured by us
are critical components in most of our products and subsystems. We purchase silicon wafers and other electronic
components from unaffiliated third-party providers.
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For cost, quality control, technological, and efficiency reasons, we purchase certain materials, parts, and
components only from single vendors with whom we have ongoing relationships. We do, however, qualify alternative
sources for many of our materials, parts, and components. We purchase most materials, parts, and components pursuant
to purchase orders placed from time to time in the ordinary course of business. Although to date none of our divisions has
experienced any significant shortages or material delays in obtaining any of its materials, parts, or components, it is
possible that we may face longer lead times, shortages, or price increases in one or more items in the future.
Information Technology and Cybersecurity Risk Management
We rely on digital technology to conduct our business operations and engage with our business partners. The
technology used by us and our business partners grows more complex over time and there are growing threats to our
business operations from cyber intrusions, denial of service attacks, manipulation and other cyber misconduct. Through
a risk management approach that continually assesses and improves our information technology (IT) and cybersecurity
risk deterrence capabilities, our information security and risk management teams provide oversight when managing IT and
cybersecurity risks.
Through a combination of governance, risk and compliance (GRC) resources, we (i) proactively monitor IT
controls to better ensure compliance with legal and regulatory requirements, (ii) assess adherence by third parties with
which we partner to appropriate risk management standards, (iii) ensure essential business functions remain available
during a business disruption and (iv) develop and update response plans to address potential weaknesses and IT or cyber
incidents should they occur. Our GRC resources are designed to prioritize IT and cybersecurity risk areas, identify
solutions that minimize such risks, pursue optimal outcomes and maintain compliance with contractual obligations. We
also maintain an operational security function that has a real-time response capability that triages incident management
and triggers impact mitigation protocols. These capabilities allow us to reduce exposure in the case of a security incident.
For more information regarding the risks associated with these matters, see Item 1A. “Risk Factors.”
Trademarks and Tradenames and Patents
Trademarks and Tradenames. We have used, registered and applied to register certain trademarks and service
marks to distinguish our products, technologies and services from those of our competitors in the United States and in
foreign countries. We monitor and, when necessary, enforce our trademark, service mark and trade name rights in the
United States and abroad.
Patents. We possess rights to a number of U.S. and foreign patents relating to various aspects of our security and
inspection products, healthcare products and optoelectronic devices and subsystems. Our current patents will expire at
various times between 2021 and 2039. While we continue to file new applications and pursue new patents, it remains
possible that pending patent applications or other applications that may be filed may not result in issued patents. In addition,
issued patents may not survive challenges to their validity or enforceability, or may be found to not be infringed by any
third parties. Although we believe that our patents have value, our patents, or any additional patents that may be issued in
the future, may not be able to provide meaningful protection from competition.
We believe that our trademarks and tradenames and patents are important to our business. The loss of some of
our trademarks or patents might have a negative impact on our financial results and operations. Nevertheless, with the
exception of the loss of the Spacelabs®, Rapiscan®, or AS&E® trademarks, the impact of the loss of any single trademark
or patent would not likely have a material adverse effect on our business.
Government Regulation of Medical Devices
The patient monitoring, diagnostic cardiology, and connected care systems we manufacture and market are
subject to regulation by numerous government agencies, principally the U.S. Food and Drug Administration (FDA), and
by other federal, state, local and foreign authorities. These systems are also subject to various U.S. and foreign electrical
safety standards. Our medical device product candidates must undergo an extensive government regulatory clearance or
approval process prior to sale in the United States and other countries, and the lengthy process of clinical development and
submissions for approvals, as well as the continuing need for compliance with applicable laws and regulations, require the
expenditure of substantial resources.
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United States FDA. In the United States, the FDA has broad regulatory powers with respect to pre-clinical and
clinical testing of new medical devices and the designing, manufacturing, labeling, storage, record keeping, marketing,
advertising, promotion, distribution, post-approval monitoring and reporting and import and export of medical devices.
Unless an exemption applies, federal law and FDA regulations require that all new or significantly modified medical
devices introduced into the market be preceded either by a pre-market notification clearance order under section 510(k) of
the Federal Food, Drug and Cosmetic Act (FDCA), or an approved pre-market approval (PMA) application. Under the
FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of
risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to
safety and effectiveness. Class I devices are those for which safety and effectiveness can be reasonably assured by
adherence to a set of regulations, referred to as General Controls, which require compliance with the applicable portions
of the FDA’s Quality System Regulation (QSR) facility registration and product listing, reporting of adverse events and
malfunctions and appropriate, truthful and non-misleading labeling, advertising and promotional materials. Some Class I
devices, also called Class I reserved devices, also require premarket clearance by the FDA through the 510(k) premarket
notification process described below. Most Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls as deemed necessary
by the FDA, which can include performance standards, guidelines and post-market surveillance. Most Class II devices are
subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices
is accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must
submit to the FDA a premarket notification, demonstrating that the product for which clearance has been sought is
substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before
May 28, 1976 for which the FDA had not yet called for the submission of pre-market approval applications. To be
substantially equivalent, the proposed device must have the same intended use as the predicate device, and either have the
same technological characteristics as the predicate device or have different technological characteristics and not raise
different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support
substantial equivalence.
After a 510(k) notice is submitted, the FDA determines whether to accept it for substantive review. If it lacks
necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted for
filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of, and clear or deny,
a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer
and sometimes is not granted at all. Although many 510(k) premarket notifications are cleared without clinical data, the
FDA may require further information, including clinical data, to make a determination regarding substantial equivalence,
which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will
grant clearance to commercially market the device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or,
depending on the modification, could require a PMA application. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination.
If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for
the modification of an existing device, the FDA can require the manufacturer to cease marketing and/or recall the modified
device until 510(k) clearance or approval of a PMA application is obtained. If the FDA requires us to seek 510(k) clearance
or approval of a PMA application for any modifications to a previously cleared product, we may be required to cease
marketing or recall the modified device until we obtain this clearance or approval. In addition, in these circumstances, we
may be subject to significant regulatory fines or penalties for failure to submit the requisite PMA application(s). In addition,
the FDA is currently evaluating the 510(k) process and may make substantial changes to industry requirements.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or
life-sustaining devices, or implantable devices, in addition to those deemed not substantially equivalent following the
510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General
Controls and Special Controls described above. Therefore, these devices are subject to the PMA application process, which
is generally more costly and time consuming than the 510(k) process. To date, all of the patient monitoring and diagnostic
cardiology systems we manufacture and sell in the United States have required only 510(k) pre-market notification
clearance.
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FDA clearance or approval, when granted, may entail limitations on the indicated uses for which a product may
be marketed, and such product approvals, once granted, may be withdrawn if problems occur after initial marketing.
Manufacturers of FDA-regulated products are subject to pervasive and continuing post-approval governmental regulation,
including, but not limited to, the registration and listing regulation, which requires manufacturers to register all
manufacturing facilities and list all medical devices placed into commercial distribution; the QSR, which requires
manufacturers, including third party manufacturers, to follow stringent design, validation, testing, production, control,
supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during the
manufacturing process; labeling regulations and unique device identification requirements; advertising and promotion
requirements; restrictions on sale, distribution or use of a device; PMA annual reporting requirements; the FDA’s general
prohibition against promoting products for unapproved or “off-label” uses; the Medical Device Reporting (MDR)
regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death
or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to
reoccur; medical device correction and removal reporting regulations, which require that manufacturers report to the FDA
field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy
a violation of the FDCA that may present a risk to health; recall requirements, including a mandatory recall if there is a
reasonable probability that the device would cause serious adverse health consequences or death; an order of repair,
replacement or refund; device tracking requirements; and post-approval study and post-market surveillance requirements.
The FDA has also established a Unique Device Identification (“UDI”) system that was phased in over a period of years.
The UDI system requires manufacturers to mark certain medical devices distributed in the United States with unique device
identifiers.
The FDA recently finalized its guidance for managing post-market cybersecurity for connected medical devices.
This guidance places additional expectations on our Healthcare division to build in cybersecurity controls when it designs
and develops its devices to assure safe performance in the face of cyber threats. It is also incumbent on us to monitor third
party software for new vulnerabilities and verify and validate any software updates or patches meant to address
vulnerabilities.
Our facilities, records and manufacturing processes are subject to periodic unscheduled inspections by the FDA.
Failure to comply with the applicable United States medical device regulatory requirements could result in, among other
things, warning letters, untitled letters, fines, injunctions, consent decrees, civil penalties, unanticipated expenditures,
repairs, replacements, refunds, recalls or seizures of products, operating restrictions, total or partial suspension of
production, the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other
countries, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current
product clearances or approvals and criminal prosecution.
Coverage and Reimbursement. Government and private sector initiatives to limit the growth of healthcare costs,
including price regulation and competitive pricing, coverage and payment policies, comparative effectiveness therapies,
technology assessments and managed care arrangements, are continuing in many countries where we do business,
including the United States, Europe and Asia. As a result of these changes, the marketplace has placed increased emphasis
on the delivery of more cost-effective medical therapies. In addition, because there is generally no separate reimbursement
from third-party payers to our customers for many of our products, the additional costs associated with the use of our
products can impact the profit margin of our customers. Accordingly, these various initiatives have created increased price
sensitivity over healthcare products generally and may impact demand for our products and technologies.
Healthcare cost containment efforts have also prompted domestic hospitals and other customers of medical
devices to consolidate into larger purchasing groups to enhance purchasing power, and this trend is expected to continue.
The medical device industry has also experienced some consolidation, partly in order to offer a broader range of products
to large purchasers. As a result, transactions with customers are larger, more complex and tend to involve more long-term
contracts than in the past. These larger customers, due to their enhanced purchasing power, may attempt to increase the
pressure on product pricing.
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Significant healthcare reforms have had an impact on medical device manufacturer and hospital revenues. The
Patient Protection and Affordable Care Act as amended by the Health Care and Education and Reconciliation Act of 2010,
collectively referred to as the Affordable Care Act, is a sweeping measure designed to expand access to affordable health
insurance, control healthcare spending and improve healthcare quality. Many states have also adopted or are considering
changes in healthcare policies, in part due to state budgetary pressures. Ongoing uncertainty regarding implementation of
certain aspects of the Affordable Care Act makes it difficult to predict the impact the Affordable Care Act or state law
proposals may have on our business. This has created uncertainty in the market, which could result in reduced demand for
our products, additional pricing pressure, and increased demand for new and more flexible payment structures.
Other Healthcare Laws. In addition to FDA restrictions on marketing and promotion of drugs and devices, other
federal and state laws restrict our business practices. These laws include, without limitation, data privacy and security
laws, anti-kickback and false claims laws, and transparency laws regarding payments or other items of value provided to
healthcare providers.
As a participant in the healthcare industry, we are subject to extensive regulations protecting the privacy and
security of patient health information that we receive, including the Health Insurance Portability and Accountability Act
of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009
(HITECH), which was enacted as part of the American Recovery and Reinvestment Act of 2009. Among other things,
these regulations impose extensive requirements for maintaining the privacy and security of individually identifiable health
information, known as “protected health information.” The HIPAA privacy regulations do not preempt state laws and
regulations relating to personal information that may also apply to us. Our failure to comply with these regulations could
expose us to civil and criminal sanctions.
The HIPAA provisions also created federal criminal statutes that prohibit among other actions, knowingly and
willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private
third-party payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing
a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a
material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. A person or entity does not need to have actual knowledge of the statutes or
specific intent to violate them in order to have committed a violation. Also, many states have similar fraud and abuse
statutes or regulations that may be broader in scope and may apply regardless of payer, in addition to items and services
reimbursed under Medicaid and other state programs.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, to induce or in return for the purchasing, leasing, ordering, or arranging for or recommending the purchase, lease
or order of items or services for which payment may be made, in whole or in part, under Medicare, Medicaid or other
federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. Although
there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from
prosecution, the exceptions and safe harbors are drawn narrowly. Further, a claim including items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal
civil False Claims Act.
The federal False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or
causing to be presented, a false or fraudulent claim for payment or approval to the federal government, or knowingly
making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. A claim includes “any request or demand” for money or property presented to the U.S. Government. Medical
device manufacturers have been held liable under these laws if they are deemed to cause the submission of false or
fraudulent claims by, for example, providing customers with inaccurate billing or coding information.
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These laws impact the kinds of financial arrangements we may have with hospitals or other potential purchasers
of our products. They particularly impact how we structure our sales offerings, including discount practices, customer
support, education and training programs, physician consulting, research grants and other service arrangements. If our
operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to
us, we may be subject to material penalties, including potentially significant criminal and civil and administrative penalties,
damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual
damages, reputational harm, and the curtailment or restructuring of our operations, any of which could adversely affect
our ability to operate our business and our results of operations.
Additionally, there has been a trend towards increased federal and state regulation of payments and other transfers
of value provided to healthcare professionals or entities. The federal Physician Payment Sunshine Act requires that certain
device manufacturers track and report to the government information regarding payments and other transfers of value to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family
members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments,
transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of
$150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.” Certain states also mandate
implementation of compliance programs, impose restrictions on device manufacturer marketing practices and/or require
the tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities.
We are subject to similar laws in foreign countries where we conduct business. For example, within the EU, the
control of unlawful marketing activities is a matter of national law in each of the member states. The member states of the
EU closely monitor perceived unlawful marketing activity by companies. We could face civil, criminal, and administrative
sanctions if any member state determines that we have breached our obligations under its national laws. Industry
associations also closely monitor the activities of member companies. If these organizations or authorities name us as
having breached our obligations under their regulations, rules or standards, our reputation would suffer, and our business
and financial condition could be adversely affected.
Other Foreign Healthcare Regulations
We are also subject to regulation in the foreign countries in which we manufacture and market our products. For
example, the commercialization of certain products, including medical devices, in the EU is regulated under a system that
presently requires all such products sold in the EU to bear the CE mark—an international symbol of adherence to quality
assurance standards. Our manufacturing facilities in Hawthorne, California; Snoqualmie, Washington; Johor Bahru,
Malaysia; Batam, Indonesia; and Hyderabad, India are all certified to the International Organization for Standardization’s
ISO 13485 standard for quality management. Our Hawthorne, California and Snoqualmie, Washington facilities are also
certified to the requirements of Annex II, section 3 of the Directive 93/42/EEC on Medical Devices, which allows them to
self-certify that manufactured products can bear the CE mark. Further, the implementation of the Restriction of Hazardous
Substance Directive (“ROHS”) requires that certain products, including medical devices, shipped into the EU eliminate
targeted ROHS substances.
The International Medical Device Regulators Forum has implemented a global approach to auditing
manufacturers of medical devices. This audit system, called the Medical Device Single Audit Program (“MDSAP”),
provides for an annual audit of a medical device manufacturer by a certified body on behalf of various regulatory
authorities. Current authorities participating in MDSAP include the Therapeutic Goods Administration of Australia,
Brazil’s Agencia Nacional de Vigilancia Sanitaria, Health Canada, Japan’s Ministry of Health, Labour and Welfare, and
the Japanese Pharmaceuticals and Medical Devices Agency and the FDA. It is expected that more regulatory authorities
will participate in MDSAP in the future.
We and other medical device manufacturers will soon be confronted with major changes in the EU’s decades-old
regulatory framework which governs market access to the EU. The Medical Devices Regulation (“MDR”) will replace the
EU’s current Medical Device Directive (93/42/EEC) and the EU’s Directive on active implantable medical devices
(90/385/EEC).
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Manufacturers of currently approved medical devices will have a transition time to meet the requirements of the
MDR. The MDR differs in several important ways from the EU’s current directives for medical devices and active
implantable medical devices. The most significant changes in the regulation include:
• The definition of medical devices covered under the MDR will be significantly expanded to include devices
that may not have a medical intended purpose, such as colored contact lenses. Also included in the scope of
the regulation are devices designed for the purpose of “prediction and prognosis” of a disease or other health
condition.
• Device manufacturers will be required to identify at least one person within their organization who is
ultimately responsible for all aspects of compliance with the requirements of the new MDR. The organization
must document the specific qualifications of this individual relative to the required tasks.
• The MDR requires rigorous post-market oversight of medical devices.
• The MDR will allow the EU Commission or expert panels to publish “Common Specifications”, such as
requirements for technical documentation, risk management, or clinical evaluation, which devices shall be
required to meet.
• Devices will be reclassified according to risk, contact, duration, and invasiveness.
• Systematic clinical evaluation will be required for Class IIa and Class IIb medical devices.
• All currently approved devices must be recertified in accordance with the new MDR requirements.
We have a dedicated team updating and revising key systems and processes to meet the new MDR requirements
and timeline.
Environmental Regulations
We are subject to various environmental laws, directives, and regulations pertaining to the use, storage, handling
and disposal of hazardous substances used, and hazardous wastes generated, in the manufacture of our products. Such laws
mandate the use of controls and practices designed to mitigate the impact of our operations on the environment, and under
such laws we may be held liable for the costs associated with the remediation and removal of any unintended or previously
unknown releases of hazardous substances on, beneath or from our property and associated operations, including the
remediation of hazardous waste disposed off-site. Such laws may impose liability without regard to whether we knew of,
or caused, the release of such hazardous substances. Any failure by us to comply with present or future regulations could
subject us to the imposition of substantial fines, suspension of production, alteration of manufacturing processes or
cessation of operations, any of which could have a material adverse effect on our business, financial condition and results
of operations.
We believe that, except to an extent that would not have a material adverse effect on our business, financial
condition or results of operations, we are currently in compliance with all environmental regulations in connection with
our manufacturing operations, and that we have obtained all environmental permits necessary to conduct our business. The
amount of hazardous substances used, and hazardous wastes generated, by us may increase in the future depending on
changes in our operations. To ensure compliance and practice proper due diligence, we conduct appropriate environmental
audits and investigations at our manufacturing facilities in North America, Asia Pacific, and Europe, and, to the extent
practicable, on all new properties. Our manufacturing facilities conduct regular internal audits to ensure proper
environmental permits and controls are in place to meet changes in operations. Third-party investigations address matters
related to current and former occupants and operations, historical land use, and regulatory oversight and status of associated
properties and/or operations (including surrounding properties). The purpose of these studies is to identify, as of the date
of such report, potential areas of environmental concern related to past and present activities or from nearby operations.
The scope and extent of each investigation is dependent upon the size and complexity of the property and/or operation and
on recommendations by independent environmental consultants.
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We have been investigating contamination of the soil and groundwater beneath our Hawthorne, California facility
that we believe resulted from unspecified on- and off-site releases occurring prior to our occupancy. The groundwater
contamination is a known regional issue, not limited to our premises or our immediate surroundings. We continue to take
voluntary actions, in cooperation with the local governing agency, to fully investigate the site in order to develop
appropriate remedial actions.
Competition
The markets in which we operate are highly competitive and characterized by evolving customer needs and rapid
technological change. We compete with a number of other manufacturers, some of which have significantly greater
financial, technical and marketing resources than we have. In addition, these competitors may have the ability to respond
more quickly to new or emerging technologies, adapt more quickly to changes in customer requirements, have stronger
customer relationships, have greater name recognition and devote greater resources to the development, promotion and
sale of their products than we do. As a result, we may not be able to compete successfully against designers and
manufacturers of specialized electronic systems and components or within the markets for security and inspection systems,
patient monitoring, diagnostic cardiology, or optoelectronic devices. Future competitive pressures may materially and
adversely affect our business, financial condition and results of operations.
In the security and inspection market, competition is based primarily on factors such as product performance,
functionality and quality, government regulatory approvals and qualifications, the overall cost effectiveness of the system,
prior customer relationships, technological capabilities of the products, price, local market presence, program execution
capability, and breadth of sales and service organization. Competition could result in price reductions, reduced margins
and loss of market share. Although our competitors offer products in competition with one or more of our products, we
can supply a variety of system types and offer among the widest array of solutions available from a single supplier. This
variety of technologies also permits us to offer unique hybrid systems to our customers that utilize two or more of these
technologies, thereby optimizing flexibility, performance and cost to meet the customer’s unique application requirements.
In the patient monitoring, diagnostic cardiology, and connected care markets, competition is also based on a
variety of factors including product performance, functionality, value and breadth of sales and service organization.
Competition could result in price reductions, reduced margins and loss of our market share. We believe that our patient
monitoring products are easier to use than the products of many of our competitors because we offer a consistent user
interface throughout many of our product lines. We also believe that the capability of our monitoring systems to connect
together, and to the hospital IT infrastructure, is a key competitive advantage. Further, while some of our competitors are
also beginning to introduce portal technology, which allows remote access to data from the bedside monitor, central station
or other point of care, we believe that our competing technologies bring valuable, instant access to labs, radiology and
charting at the point of care.
In the markets in which we compete to provide optoelectronic devices and electronics manufacturing services,
competition is based primarily on factors such as expertise in the design and development of optoelectronic devices,
product quality, timeliness of delivery, price, technical support and the ability to provide fully integrated services from
application development and design through production. Because we specialize in custom subsystems requiring a high
degree of engineering expertise, we believe that we generally do not compete to any significant degree with any other
large United States, European or Asian manufacturers of standard optoelectronic components. Competition in the extensive
electronic manufacturing services market ranges from multinational corporations with sales in excess of several billion
dollars, to large regional competitors and to small local assembly companies. In our experience, the OEM customers to
whom we provide such services prefer to engage companies that offer both local and lower-cost off-shore facilities. Along
with a number of domestic competitors for these services, our high-volume, low-cost contract manufacturing locations in
Southeast Asia compete with other manufacturers in the same region.
Backlog
We currently measure our backlog as quantifiable purchase orders or contracts that have been signed, for which
revenues are expected to be recognized within the next five years. In instances where we are not able to estimate the value
of a purchase order or contract, they are not included in backlog.
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We ship most of our baggage and parcel inspection, people screening, patient monitoring and diagnostic
cardiology systems and optoelectronic devices and value-added subsystems within one to several months after receiving
an order. However, such shipments may be delayed for a variety of reasons, including any special design or requirements
of the customer. In addition, large orders of security and inspection products typically require greater lead-times.
Fulfillment of orders of our Rapiscan RTT hold (checked) baggage screening equipment generally requires longer lead
times. Further, we provide turnkey screening services to certain customers for which we may recognize revenue over
multi-year periods.
Certain of our cargo and vehicle inspection systems may require more than a year of lead-time. We have
experienced some significant shipping delays associated with our cargo and vehicle inspection systems. Such delays can
occur for many reasons, including: (i) additional time necessary to coordinate and conduct factory inspections with the
customer before shipment; (ii) a customer’s need to engage in time-consuming special site preparation to accommodate
the system, over which we have no control or responsibility; (iii) additional fine tuning of such systems once they are
installed; (iv) design or specification changes by the customer; (v) time needed to obtain export licenses and/or letters of
credit; and (vi) delays originating from other contractors on the project. The COVID-19 pandemic exacerbated these
challenges and may continue to do so until associated international travel restrictions and other protective measures
subside.
As of June 30, 2021, our consolidated backlog totaled $1,076 million, compared to $861 million as of June 30,
2020. Approximately $377 million of our backlog as of June 30, 2021 is not reasonably expected to be fulfilled in
fiscal year 2022. Sales orders underlying our backlog are firm orders; although, from time to time we may agree to permit
a customer to cancel an order, or an order may be cancelled for other reasons. Variations in the size of orders, product mix,
or delivery requirements, among other factors, may result in substantial fluctuations in backlog from period to period.
Backlog as of any particular date should not be relied upon as indicative of our revenues for any future period and should
not be considered a meaningful indicator of our performance on an annual or quarterly basis.
Human Capital
The strength and talent of our workforce are critical to the success of our businesses, and we continually strive to
attract, develop and retain personnel commensurate with the needs of our businesses. Our human capital management
priorities are designed to support the execution of our business strategy and improve organizational effectiveness. We
support our employees’ financial, health, and social well-being through competitive compensation structures, including a
robust employee stock purchase program and retirement benefits, as well as innovative health and well-being programs
focused on promoting the physical and mental health of our workforce. In addition, in response to COVID-19, we
implemented changes to protect our employees and to support health and safety protocols. We also strive to create
opportunities for career development and growth. We provide training and development programs to foster connections,
leadership competency, and team and individual development, and we have a tuition reimbursement program to encourage
ongoing education.
We understand the importance of a diverse workforce, and we are committed to upholding a culture of diversity,
equity, and inclusion. We value the unique contributions of every person, and we hold firm to the ideals of fairness, equal
opportunity, and mutual respect for all forms of diversity and differing abilities. We are committed to pay equity and
protecting the rights of underrepresented groups within our organization, including women, racial and ethnic minorities,
and members of the LGBTQ+ community. Our broader diversity strategies include focus at all levels of our organization,
including with senior management and our Board of Directors. As of June 30, 2021, 49% of our global workforce was
female and 54% of our U.S. workforce was ethnically diverse.
As of June 30, 2021, we employed 6,778 people, of whom 4,158 were employed in manufacturing, 501 were
employed in engineering or research and development, 626 were employed in administration, 366 were employed in sales
and marketing and 1,127 were employed in service capacities. Of the total employees, 2,182 were employed in the
Americas, 3,763 were employed in Asia and 833 were employed in Europe.
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Available Information
We are subject to the informational requirements of the Exchange Act. Therefore, we file periodic reports, proxy
statements and other information with the SEC. The SEC maintains an internet website (http://www.sec.gov) that contains
reports, proxy statements and other information that issuers are required to file electronically.
Our internet address is: http://www.osi-systems.com. The information found on, or otherwise accessible through,
our website is not incorporated into, and does not form a part of this annual report on Form 10-K or any other report or
document we file with or furnish to the SEC. We make available, free of charge through our internet website, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and reports filed pursuant to Section 16 of the Exchange
Act, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. Also
available on our website free of charge are our Corporate Governance Guidelines, the Charters of our Nominating and
Governance, Audit, Compensation and Benefits, Technology, and Risk Management Committees of our Board of
Directors and our Code of Ethics and Conduct (which applies to all Directors and employees, including our principal
executive officer, principal financial officer and principal accounting officer). A copy of this annual report on Form 10-K
is available without charge upon written request addressed to: c/o Secretary, OSI Systems, Inc., 12525 Chadron Avenue,
Hawthorne, CA 90250 or by calling telephone number (310) 978-0516.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the
risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the
forward-looking statements contained in this report. We encourage you to carefully consider all such risk factors when
making investment decisions regarding our company. If any such risks, or any other risks that we do not currently consider
to be material, or which are not known to us, materialize, our business, financial condition and operating results could be
materially adversely affected.
Business and Industry Risks
If operators of, or algorithms installed in, our security and inspection systems fail to detect weapons, explosives
or other devices or materials that are used to commit a terrorist act, we could be exposed to product and professional
liability and related claims for which we may not have adequate insurance coverage.
Our business exposes us to potential product liability risks that are inherent in the development, manufacturing,
sale and service of security and inspection systems as well as in the provision of training to our customers in the use and
operation of such systems. Our customers use our security and inspection systems to help them detect items that could be
used in performing terrorist acts or other crimes. Some of our security and inspection systems require that an operator
interpret an image of suspicious items within a bag, parcel, container, vehicle or other vessel. Others signal to the operator
that further investigation is required. In either case, the training, reliability and competence of the customer’s operator are
crucial to the detection of suspicious items.
Security inspection systems that signal to the operator that further investigation is required are sometimes referred
to in the security industry as “automatic” detection systems. Nevertheless, if such a system were to fail to signal to an
operator when an explosive or other contraband was in fact present, resulting in significant damage, we would be subject
to risk of significant product liability claims. Furthermore, security inspection by technological means is circumstance and
application-specific. Our security and inspection systems are not designed to work under all circumstances and can
malfunction.
We also offer turnkey security screening solutions under which we perform certain of the security screening tasks
that have historically been performed by our customers. Such projects expose us to certain professional liability risks that
are inherent in performing security inspection services for the purpose of detecting contraband items, including items that
could be used in performing terrorist acts or other crimes. If a contraband item were to pass through our operations and be
used to perform a terrorist act or other crime, we would be subject to risk of significant professional liability claims.
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In addition, there are also many other factors beyond our control that could lead to liability claims should an act
of terrorism occur. Past terrorism attacks in the U.S. and in other locations worldwide and the potential for future attacks
have caused commercial insurance for such threats to become extremely difficult to obtain. In the event that we are found
liable following an act of terrorism, the insurance we currently have in place would not fully cover the claims for damages.
Further, if our security and inspection systems fail to, or are perceived to have failed to, help detect a threat, we could
experience negative publicity and reputational harm, which could have a material adverse effect on our business.
The loss of certain of our customers, including government agencies that can modify or terminate agreements
more easily than other commercial customers with which we contract, the failure to continue to diversify our customer
base or the non-renewal of certain material contracts could have a negative effect on our reputation and could have a
material adverse effect on our business, financial condition and results of operations.
We sell many of our products to prominent, well-respected institutions, including agencies and departments of
the U.S. Government, state and local governments, foreign governments, renowned hospitals and hospital networks, and
large military-defense and space-industry contractors. Many of these larger customers spend considerable resources testing
and evaluating our products and our design and manufacturing processes and services. Some of our smaller customers
know this and rely on this as an indication of the high-quality and reliability of our products and services. As a result, part
of our reputation and success depends on our ability to continue to sell to larger institutions that are known for demanding
high standards of excellence. The loss or termination of a contract by such an institution, even if for reasons unrelated to
the quality of our products or services, could therefore have a more wide-spread and potentially material adverse effect on
our business, financial condition and results of operations.
Our acquisition and alliance activities could result in disruption of our ongoing business and other operational
difficulties, unrecoverable costs, and other negative consequences, any of which could adversely impact our financial
condition and results of operations.
We intend to continue to make investments in companies, products and technologies, either through acquisitions,
investments or alliances. Acquisition and alliance activities often involve risks, including:
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difficulty in assimilating the acquired operations and employees and realizing synergies expected to result
from the acquisition;
potential liabilities of, or claims against, an acquired company, some of which might not be known until after
the acquisition;
difficulty in managing product co-development activities with our alliance partners;
difficulty in effectively coordinating sales and marketing efforts;
difficulty in combining product offerings and product lines quickly and effectively;
difficulty in retaining the key employees of the acquired operation;
disruption of our ongoing business, including diversion of management time;
inability to successfully integrate the acquired technologies and operations into our businesses and maintain
uniform standards, controls, policies and procedures;
unanticipated changes in market or industry practices that adversely impact our strategic and financial
expectations regarding an acquired company or acquired assets and require us to write off or dispose of such
acquired company or assets;
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lacking the experience necessary to enter into new product or technology markets successfully; and
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difficulty in integrating financial reporting systems and implementing controls, procedures and policies,
including disclosure controls and procedures and internal control over financial reporting, appropriate for
public companies of our size at companies that, prior to the acquisition, had lacked such controls, procedures
and policies.
Integrating acquired businesses has been and will continue to be complex, time consuming and expensive, and
can negatively impact the effectiveness of our internal control over financial reporting. The use of debt to fund acquisitions
or for other related purposes increases our interest expense and leverage. If we issue equity securities as consideration in
an acquisition, current stockholders percentage ownership and earnings per share may be diluted. As a result of these and
other risks, we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely
affect the conduct, operating results or financial condition of our business.
Substantial declines in crude oil prices or extended periods of low crude oil prices may adversely affect our
business, financial condition, and results of operations.
Some of our international customers have procurement budgets that are strongly correlated with fluctuations in
the price of crude oil. Historically, the market for crude oil has been volatile and unpredictable. Crude oil prices are subject
to rapid and significant fluctuations in response to global events and relatively minor changes in supply and demand.
Recently, as a result of increased supply and decreased demand, crude oil prices have declined sharply. While factors
relating the price of crude oil to demand for our products and services are complex, this period of depressed crude oil
prices may adversely affect our business, financial condition, and results of operations.
Unfavorable currency exchange rate fluctuations could adversely affect our financial results.
Our international sales and our operations in foreign countries expose us to risks associated with fluctuating
currency values and exchange rates. Gains and losses on the conversion of accounts receivable, accounts payable and other
monetary assets and liabilities to U.S. dollars may contribute to fluctuations in our results of operations. In addition, since
we conduct business in currencies other than the U.S. dollar but report our financial results in U.S. dollars, increases or
decreases in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of
operations.
We face aggressive competition in each of our operating divisions. If we do not compete effectively, our
business will be harmed.
We encounter aggressive competition from numerous competitors in each of our divisions. In the security and
inspection and patient monitoring and cardiology systems markets, competition is based primarily on such factors as
product performance, functionality and quality, cost, prior customer relationships, technological capabilities of the product,
price, certification by government authorities, past performance, local market presence and breadth of sales and service
organization. In the optoelectronic devices and electronics manufacturing markets, competition is based primarily on
factors such as expertise in the design and development of optoelectronic devices, product quality, timeliness of delivery,
price, customer technical support and on the ability to provide fully-integrated services from application development and
design through volume subsystem production. We may not be able to compete effectively with all of our competitors. To
remain competitive, we must develop new products and enhance our existing products and services in a timely manner.
We anticipate that we may have to downward adjust the prices of many of our products to stay competitive. In addition,
new competitors may emerge and entire product lines or service offerings may be threatened by new technologies or
market trends that reduce the value of these product lines or service offerings.
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Our insurance coverage may be inadequate to cover all significant risk exposures.
We maintain insurance for certain risks, and we believe our insurance coverage is consistent with general
practices within our industry. However, the amount of our insurance coverage may not cover all claims or liabilities and
we may be forced to bear substantial costs. Consistent with market conditions in the insurance industry, premiums and
deductibles for some of our insurance policies have been increasing and may continue to increase in the future. In some
instances, some types of insurance may become available only for reduced amounts of coverage, if at all. In addition, there
can be no assurance that our insurers would not challenge coverage for certain claims. If we were to incur a significant
liability for which we were not fully insured or that our insurers disputed, it could have a material adverse effect on our
business, financial condition and results of operations.
Healthcare cost containment pressures and legislative or regulatory reforms may affect our ability to sell our
products profitably.
Third-party payers globally are developing increasingly sophisticated methods of controlling healthcare costs
which can limit the amount that healthcare providers may be willing to pay for medical devices. In the United States,
hospital and other healthcare provider customers that purchase our products typically bill various third-party payers to
cover all or a portion of the costs and fees associated with the procedures or tests in which our products are used and bill
patients for any deductibles or co-payments. Because there is often no separate reimbursement for our products, any decline
in the amount payers are willing to reimburse our customers for the procedures and tests associated with our products
could make it difficult for customers to continue using, or adopt, our products and create additional pricing pressure for us.
There have been, and we expect there will continue to be, legislative and regulatory proposals to change the
healthcare system, and some could significantly affect the ways in which doctors, hospitals, healthcare systems and health
insurance companies are compensated for the services they provide, which could have a material impact on our business.
It is not clear at this time what changes may impact the ability of hospitals and hospital networks to purchase the patient
monitoring, diagnostic cardiology, and connected care systems that we sell or if it will alter market-based incentives that
hospitals and hospital networks currently face to continually improve, upgrade and expand their use of such equipment.
Efforts by governmental and third-party payers to reduce healthcare costs or the implementation of new legislative
reforms imposing additional government controls could cause a reduction in sales or in the selling price of our products,
which could adversely affect our business.
Consolidation in the healthcare industry could have an adverse effect on our revenues and results of
operations.
The healthcare industry has been consolidating and organizations such as group purchasing organizations,
independent delivery networks, and large single accounts such as the United States Veterans Administration, continue to
consolidate purchasing decisions for many of our healthcare provider customers. As a result, transactions with customers
are larger, more complex, and tend to involve more long-term contracts. The purchasing power of these larger customers
has increased, and may continue to increase, causing downward pressure on product pricing. If we are not one of the
providers selected by one of these organizations, we may be precluded from making sales to its members or participants.
Even if we are one of the selected providers, we may be at a disadvantage relative to other selected providers that are able
to offer volume discounts based on purchases of a broader range of products. Further, we may be required to commit to
pricing that has a material adverse effect on our revenues and profit margins, business, financial condition and results of
operations. We expect that market demand, governmental regulation, third-party reimbursement policies and societal
pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and
alliances, which may exert further downward pressure on the prices of our products and could adversely impact our
business, financial condition, and results of operations.
21
Technological advances and evolving industry and regulatory standards and certifications could reduce our
future product sales, which could cause our revenues to grow more slowly or decline.
The markets for our products are characterized by rapidly changing technology, changing customer needs,
evolving industry or regulatory standards and certifications and frequent new product introductions and enhancements.
The emergence of new industry or regulatory standards and certification requirements in related fields may adversely
affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were
incompatible with customer deployments of our applications. In addition, any products or processes that we develop may
become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development.
We cannot provide assurance that we will succeed in developing and marketing product enhancements or new products
that respond to technological change, new industry standards, changed customer requirements or competitive products on
a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements,
we cannot provide assurance that they will be profitable or that they will achieve market acceptance.
We develop certain of our security inspection technologies to meet the certification requirements of various
agencies worldwide, including the U.S. Transportation Safety Administration and the European Civil Aviation Conference
among others. Such standards frequently change, and we may not ultimately be able to develop technologies, or develop
in a timely way, solutions that are ultimately able to meet the new standards.
Certain of our U.S. Government contracts are dependent upon our employees obtaining and maintaining
required security clearances, as well as our ability to obtain security clearances for the facilities in which we perform
sensitive government work.
Certain of our U.S. Government contracts require our employees to maintain various levels of security clearances,
and we are required to maintain certain facility security clearances. If we cannot maintain or obtain the required security
clearances for our facilities and our employees, or obtain these clearances in a timely manner, we may be unable to perform
certain U.S. Government contracts. Further, loss of a facility clearance, or an employee’s failure to obtain or maintain a
security clearance, could result in a U.S. Government customer terminating an existing contract or choosing not to renew
a contract. Lack of required clearances could also impede our ability to bid on or win new U.S. Government contracts.
This could damage our reputation and adversely affect our business, financial condition and results of operations.
We are involved in various litigation matters, which could have a material adverse effect on our business,
financial condition or operating results.
Litigation can be lengthy, expensive and disruptive to our operations, and can divert our management’s attention
away from the running of our business. Claims arising out of actual or alleged violations of law could be asserted against
us by individuals, either individually or through class actions, or by governmental entities in investigations and
proceedings. If we are unsuccessful in our defense in litigation matters, or any other legal proceeding, we may be forced
to pay damages or fines, some of which may be in excess of our insurance coverage, and/or change our business practices,
any of which could have a material adverse effect on our business, financial condition and results of operations. For more
information about our litigation matters, see “Legal Proceedings” and Note 11 to the consolidated financial statements.
We could be subject to changes in our tax rates, the adoption of new U.S. or international tax legislation, or
exposure to additional tax liabilities.
We are subject to taxes in the U.S. and numerous foreign jurisdictions. Tax rates in various jurisdictions may be
subject to significant change due to economic and political conditions or otherwise. Our effective tax rates could be
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, or adoption of new tax legislation or changes in tax laws or their interpretation.
We are also subject to the examination of our tax returns and other tax matters by the U.S. Internal Revenue
Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome
resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to
the outcome of these examinations. If our effective tax rates were to increase, or if the ultimate determination of our taxes
owed is for an amount in excess of amounts previously accrued, our financial condition and operating results could be
materially adversely affected.
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Operational Risks
As a U.S. Government contractor, we are subject to extensive Federal procurement rules and regulations as
well as contractual obligations that are unique to doing business with the U.S. Government. Non-compliance with any
such rules, regulations or contractual obligations could negatively affect current programs, potential awards and our
ability to do business with the U.S. Government in the future.
U.S. Government contractors must comply with extensive procurement regulations and other requirements
including, but not limited to, those appearing in the Federal Acquisition Regulation (FAR) and its supplements, as well as
specific procurement rules and contractual conditions imposed by various U.S. Government agencies. In addition, U.S.
Government contracts typically contain provisions and are subject to laws and regulations that give the Government
agencies rights not typically found in commercial contracts, including providing the Government agency with the ability
to: (i) terminate, reduce the value of, or otherwise modify existing contracts; (ii) suspend or prohibit us from doing business
with the Government or a specific Government agency; and (iii) claim rights in technologies and systems invented,
developed or produced by us.
U.S. Government agencies and the agencies of many other governments with which we contract can terminate
their contracts with us for convenience, and in that event, we generally may recover only our incurred costs and expenses
on the work completed prior to termination. If an agency terminates a contract with us for default, we may be denied any
recovery and may be liable for excess costs incurred by the agency in procuring undelivered items from an alternative
source. Decisions by an agency to terminate one of our contracts for default could negatively affect our ability to win
future awards not only from such agency, but also from other government agencies and commercial customers, many of
whom evaluate past performance, or are required to review past performance information, when making their procurement
decisions.
U.S. Government agencies may also initiate civil False Claims Act litigation against us based on allegations
related to our performance of contracts for the U.S. Government, or to our compliance with procurement regulations and
other legal requirements to which such contracts are subject, or both. Such litigation can be expensive to defend and if
found liable can result in treble damages and significant civil penalties. The U.S. Government may also initiate
administrative proceedings that, if resulting in an adverse finding against us or any of our subsidiaries as to our present
responsibility to be a U.S. Government contractor or subcontractor, could result in our company or our subsidiaries being
suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export
privileges and, if satisfying the requisite level of seriousness, in our debarment from contracting with the U.S. Government
for a specified term as well as being subject to other remedies available to the U.S. Government.
Our revenues are dependent on orders of security and inspection systems, turnkey security screening solutions
and patient monitoring and diagnostic cardiology systems, which may have lengthy and unpredictable sales cycles.
Sales of security and inspection systems and turnkey security screening solutions often depend upon the decision
of governmental agencies to upgrade or expand existing airports, border crossing inspection sites, seaport inspection sites,
military facilities and other security installations. In the case of turnkey security screening solutions, the commencement
of screening operations may be dependent on the approval, by a government agency, of the protocols and procedures that
our personnel are to follow during the performance of their activities. In addition, turnkey screening solutions projects, in
contrast to the sale and installation of security inspection equipment, also require that we hire and manage large numbers
of local personnel in jurisdictions where we may not have previously operated. Sales outside of the United States of our
patient monitoring and diagnostic cardiology systems depend in significant part on the decision of governmental agencies
to build new medical facilities or to expand or update existing medical facilities. Accordingly, a significant portion of our
sales of security and inspection systems, turnkey security screening solutions and our patient monitoring and diagnostic
cardiology systems is often subject to delays associated with the lengthy approval processes. During these approval
periods, we expend significant financial and management resources in anticipation of future revenues that may not occur.
If we fail to receive such revenues after expending such resources, such failure could have a material adverse effect on our
business, financial condition and results of operations.
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If we do not introduce new products in a timely manner, our products could become obsolete and our operating
results would suffer.
We sell many of our products in industries characterized by rapid technological changes, frequent new product
and service introductions and evolving industry standards and customer needs. Without the timely introduction of new
products and enhancements, our products could become technologically obsolete over time, in which case our revenue and
operating results would suffer. The success of our new product offerings will depend upon several factors, including our
ability to: (i) accurately anticipate customer needs; (ii) innovate and develop new technologies and applications;
(iii) successfully commercialize new technologies in a timely manner; (iv) price our products competitively and
manufacture and deliver our products in sufficient volumes and on time; and (v) differentiate our offerings from our
competitors’ offerings.
Some of our products are used by our customers to develop, test and manufacture their products. We therefore
must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. In
developing any new product, we may be required to make a substantial investment before we can determine the commercial
viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest
heavily in research and development of products that do not lead to significant revenues.
Interruptions in our ability to purchase raw materials and subcomponents may adversely affect our
profitability.
We purchase raw materials and certain subcomponents from third parties. We generally do not have guaranteed
long-term supply arrangements with our suppliers. In addition, for certain raw materials and subcomponents that we use,
there are a limited number of potential suppliers that we have qualified or that we are currently able to qualify.
Consequently, some of the key raw materials and subcomponents that we use are currently available to us only from a
single vendor. The reliance on a single qualified vendor could result in delays in delivering products or increases in the
cost of manufacturing the affected products. Any material interruption in our ability to purchase necessary raw materials
or subcomponents or a significant increase in price of raw materials or subcomponents could adversely affect our ability
to fulfill customer orders and therefore could ultimately have a material adverse effect on our business, financial condition
and results of operations.
We contract with third-parties that may be unable to fulfill contracts on time.
We contract with third-party vendors to service our equipment in the field. We have made such arrangements
because sometimes it is more efficient to outsource these activities than it is for our own employees to service our
equipment. In addition, some of these vendors maintain stocks of spare parts that are more efficiently accessed in
conjunction with a service agreement than would be the case if we were to maintain such spare parts independently. Any
material interruption in the ability of our vendors to fulfill such service contracts could adversely affect our ability to fulfill
customer orders and therefore could ultimately have a material adverse effect on our business, financial condition and
results of operations.
Additionally, purchasers of our security and inspection systems and turnkey security screening solutions
sometimes require the construction of the facilities that will house our systems and/or operations. We engage qualified
construction firms to perform this work. However, if such firms experience delays, if they perform sub-standard work or
if we fail to properly monitor the quality of their work or the timeliness of their progress, we may not be able to complete
our construction projects on time. In any such circumstance, we could face the imposition of delay penalties and breach of
contract claims by our customer. Any material delay caused by our construction firm subcontractors could therefore
ultimately have a material adverse effect on our business, financial condition and results of operations.
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We accumulate excess inventory from time to time.
Because of long lead times and specialized product designs, in certain cases we purchase components and
manufacture products in anticipation of customer orders based on customer forecasts. For a variety of reasons, such as
decreased end-user demand for our products or other factors, our customers might not purchase all the products that we
have manufactured or for which we have purchased components. To the extent that we are unsuccessful in recouping our
material and manufacturing costs, this could have a material adverse effect on our business, financial condition and results
of operations. In addition, because of the complex customer acceptance criteria associated with some of our products, on
some occasions, products the title of which has passed to our customers are still included in our inventory until revenue
recognition criteria are met. As a result, inventory levels are elevated from time to time.
Economic, political, legal, operational and other risks associated with international sales and operations could
adversely affect our financial performance.
Our businesses are subject to risks associated with doing business internationally. We anticipate that revenues
from international operations will continue to represent a substantial portion of our total revenue. In addition, many of our
manufacturing facilities, and therefore employees, suppliers, real property, capital equipment, cash and other assets are
located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including without
limitation:
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changes in foreign currency exchange rates;
changes in a country’s or region’s political or economic conditions, particularly in developing or emerging
markets;
political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed
conflict;
longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;
imposition of domestic and international taxes, export controls, tariffs, embargoes, sanctions, trade disputes,
and other trade restrictions;
difficulty in staffing and managing widespread operations;
difficulty in managing distributors and sales agents and their compliance with applicable laws;
changes in a foreign government’s budget, leadership and national priorities;
increased legal risks arising from differing legal systems; and
compliance with export control and anti-corruption legislation, including but not limited to, the Foreign
Corrupt Practices Act and UK Bribery Act and International Traffic in Arms Regulations.
Our operations are vulnerable to interruption or loss due to natural disasters, epidemics or pandemics such as
COVID-19, terrorist acts and other events beyond our control, which could adversely impact our operations.
Although we perform manufacturing in multiple locations, we generally do not have redundant manufacturing
capabilities in place for any particular product or component. As a result, we depend on our current facilities for the
continued operation of our business. A natural disaster, epidemic or pandemic, terrorist act, act of war, civil unrest, or
other natural or manmade disaster affecting any of our facilities could significantly disrupt our operations, or delay or
prevent product manufacturing and shipment for the time required to repair, rebuild, or replace our manufacturing facilities.
This delay could be lengthy and we could incur significant expenses to repair or replace the facilities. Any similar natural
or manmade disaster that affects a key supplier or customer could lead to a similar disruption in our business.
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As an example, the COVID-19 pandemic has resulted in governments around the world implementing stringent
measures to help combat the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel
restrictions, business curtailments, school closures, and other measures, which has led to a global economic slowdown and
impacted the financial markets of many countries. In particular, the COVID-19 pandemic has significantly reduced airline
passenger traffic, which reduces demand for certain of our security screening products and services. To slow and limit the
transmission of COVID-19, governments across the world have imposed significant air travel restrictions and businesses
and individuals have canceled air travel plans. These restrictions and cancelations have reduced demand for security
screening products and related services at airport checkpoints globally as the number of airline passengers requiring
screening has fallen. The pandemic has also hampered our ability to meet with our customers and prospective customers.
We often provide proposals and quotations to customers and prospective customers only after conducting both technical
surveys of the site where our security inspection equipment will be installed and in person meetings with technical and
operations staff of customers and prospective customers.
Many of our products and services are considered to be essential under federal, state and local guidelines.
Accordingly, we currently continue to operate across our global footprint; however, given recent government regulations,
many of our global facilities are not able to operate at optimal capacity. Notwithstanding our continued operations,
COVID-19 has had and may continue to have further negative impacts on our operations, supply chain, transportation
networks and customers, which may compress our margins, including as a result of preventative and precautionary
measures that we, other businesses and governments are taking.
In addition, the ability of our employees and employees of our suppliers and customers to work may be
significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures
noted above, which may significantly hamper our production throughout the supply chain and constrict sales channels.
Our customers may be directly impacted by business curtailments or weak market conditions and may not be willing or
able to fulfill their contractual obligations or open letters of credit and may seek to modify or terminate their contracts with
us. We may also experience delays in obtaining letters of credit or processing letter of credit payments due to the impacts
of COVID-19 on foreign issuing and U.S. intermediary banks. In addition, the COVID-19 pandemic may create an
increased risk of customer defaults or delays in payments. Our customers may terminate or amend their agreements for
the purchase or service of our products due to bankruptcy, lack of liquidity, lack of funding, operational failures, or other
reasons.
Further, while we currently do not anticipate issues under our credit agreements, events resulting from the effects
of the COVID-19 pandemic may negatively impact our ability to comply with our financial covenants in the future, which
could lead us to seek an amendment or waivers from our lenders, limit access to or require accelerated repayment of our
existing credit facilities or require us to pursue alternative financing. We have no assurance that any such alternative
financing, if required, could be obtained at terms acceptable to us, or at all, including as a result of the effects of COVID-19
on financial markets at such time. The extent to which COVID-19 may adversely impact our business depends on future
developments, which are highly uncertain and unpredictable, including new information concerning the severity of the
outbreak and the effectiveness of actions globally to contain or mitigate its effects. As we cannot predict the duration or
scope of the COVID-19 pandemic, the estimated negative impact to our results of operations, cash flows and financial
position cannot be reasonably estimated but might be material and last for an extended period of time.
The global supply chain has also been disrupted. Staffing or personnel shortages due to shelter-in-place orders
and quarantines have impacted and may continue to impact us and our suppliers. There have been widespread shortages
in certain product categories. If the supply chain for materials used in our production process continues to be adversely
impacted, our business, financial condition, and results of operations may be adversely impacted.
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Any recall of our products, either voluntarily or at the direction of the FDA or another governmental authority,
or the discovery of serious safety issues with our products that leads to corrective actions, could have a material adverse
impact on us.
Although we believe that existing data continue to support the efficacy and safety of our patient monitoring,
cardiology, and connected care products, in the future, longer term study outcomes could demonstrate conflicting clinical
effectiveness, a reduction of effectiveness, no clinical effectiveness or longer-term safety issues. This type of differing
data could have a detrimental effect on the market penetration and usage of our medical device products. As a result, our
sales may decline or expected growth would be negatively impacted. This could negatively impact our operating condition
and financial results.
More generally, all medical devices can experience performance problems that require review and possible
corrective action by us or a component supplier. We cannot provide assurance that component failures, manufacturing
errors, noncompliance with quality system requirements or good manufacturing practices, design defects and/or labeling
inadequacies in any device that could result in an unsafe condition or injury to the patient will not occur. The FDA and
similar foreign governmental authorities have the authority to require the recall of commercialized products in the event
of material deficiencies or defects in design or manufacture of a product or if a product poses an unacceptable risk to
health. Manufacturers may also, under their own initiative, stop shipment or recall a product if any material deficiency is
found or withdraw a product to improve device performance or for other reasons. A government-mandated or voluntary
recall by us could occur as a result of an unacceptable risk to health, component failures, manufacturing errors,
noncompliance with good manufacturing practices or quality system requirements, design or labeling defects or other
deficiencies and issues. Similar regulatory agencies in other countries have similar authority to recall products because of
material deficiencies or defects in design or manufacture that could endanger health. A recall involving our products could
be particularly harmful to our business, financial and operating results. In addition, under the FDA’s medical device
reporting regulations, we are required to report to the FDA any incident in which our product may have caused or
contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury. A future recall announcement could harm our reputation with
customers and negatively affect our sales. In addition, the FDA or a foreign governmental authority could take enforcement
action for failing to report the recalls when they were conducted.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or applicable
foreign regulatory authority may require, or we may decide, that we will need to obtain new approvals or clearances for
the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our
ability to replace the recalled devices in a timely manner. Moreover, we may face additional regulatory enforcement action,
including FDA warning letters, product seizure, injunctions, administrative penalties, civil penalties or criminal fines. We
may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face
material adverse publicity or regulatory consequences, which could harm our business, including our ability to market our
products in the future.
Any adverse event involving our products, whether in the United States or abroad, could result in future voluntary
corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall, orders
of repair, replacement or refund or other enforcement action. Any corrective action, whether voluntary or involuntary, as
well as defending ourselves in a lawsuit, will require the dedication of our time and capital and may harm our reputation
and financial results.
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We rely on third parties and our own systems for interaction with our customers and suppliers and employees,
and a failure of a key information technology system, process or site or any failure or interruption in the services
provided by these third parties or our own systems could have a material adverse impact on our ability to conduct
business.
We rely extensively on our information technology systems and systems and services provided by third parties
to interact with our employees and our customers and suppliers. These interactions include, but are not limited to, ordering
and managing materials from suppliers, converting materials to finished products, shipping product to customers,
processing transactions, summarizing and reporting results of operations, transmitting data used by our service personnel
and by and among our wide-spread personnel and facilities, complying with regulatory, legal and tax requirements, and
other processes necessary to manage our business. We do not control our third-party service providers and we do not
maintain redundant systems for some of such services, increasing our vulnerability to problems with such services. If the
systems on which we rely are damaged or cease to function properly due to any number of causes, ranging from failures
of our third-party service providers to catastrophic events, to power outages, to security breaches, we may suffer
interruptions in our ability to manage operations which may adversely impact our results of operations and/or financial
condition.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and
other serious negative consequences if we sustain cyber-attacks or other data security breaches that disrupt our
operations or result in the dissemination of proprietary or confidential information about us or our customers,
suppliers, or other third parties.
We manage and store proprietary information and sensitive or confidential data relating to our operations. We
may be subject to cyber-attacks on and breaches of the information technology systems we use for these purposes.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or
compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer
programmers and hackers also may be able to develop and deploy viruses, worms, malware, ransomware and other
malicious software programs that attack our systems or otherwise exploit any security vulnerabilities of our systems or
products. In addition, sophisticated hardware and operating system software and applications that we produce or procure
from third parties may contain defects in design or manufacture, including “bugs” and other problems that could
unexpectedly interfere with the operation of our systems or products. Cyber-threats in particular vary in technique and
sources, are persistent, frequently change and increasingly are more sophisticated, targeted and difficult to detect and
prevent.
We expend significant capital and resources to protect against the threat of security breaches, including
cyber-attacks, viruses, worms, malware, ransomware and other malicious software programs. Substantial additional
expenditures may be required before or after a cyber-attack or breach to mitigate in advance or to alleviate any problems
caused by cyber-attacks and breaches, including unauthorized access to or theft of data stored in our information systems
and the introduction of computer malware or ransomware to our systems. Our remediation efforts may not be successful,
and there could be interruptions, delays, or cessation of service.
We often identify attempts to gain unauthorized access to our systems. Given the rapidly evolving nature and
proliferation of cyber threats, there can be no assurance that our employee training, operational, and other technical security
measures or other controls will detect, prevent or remediate security or data breaches in a timely manner or otherwise
prevent unauthorized access to, damage to, or interruption of our systems and operations. We are likely to face attempted
cyber-attacks in the future. Accordingly, we may be vulnerable to losses associated with the improper functioning, security
breach, or unavailability of our information systems as well as any systems used in acquired operations.
In addition, breaches of our security measures and the unapproved use or disclosure of proprietary information
or sensitive or confidential data about us or our suppliers, customers or other third parties could expose us or any such
affected third party to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage
our brand and reputation or otherwise harm our business, even if we were not responsible for the breach. Furthermore, we
are exposed to additional risks because we rely in certain capacities on third-party software, data management, and cloud
service providers with possible security problems and security vulnerabilities beyond our control. Media or other reports
of perceived security vulnerabilities to our systems or those of our third-party suppliers, even if no breach has been
attempted or occurred, could adversely impact our brand and reputation and materially impact our business.
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Given increasing cyber security threats, there can be no assurance that we will not experience business
interruptions, data loss, ransom, misappropriation, or corruption or theft or misuse of proprietary information or related
litigation and investigation, any of which could have a material adverse effect on our financial condition and results of
operations and harm our business reputation.
Our inability to successfully manage the implementation of a company-wide enterprise resource planning
(“ERP”) system could adversely affect our operating results.
We are in the process of implementing a new company-wide ERP system. This process has been and continues
to be complex and time-consuming and we expect to incur additional capital outlays and expenses. This ERP system will
replace many of our existing operating and financial systems, which is a major undertaking from a financial management
and personnel perspective. Should the new ERP system not be implemented successfully throughout all our business units
on time and within budget, or if the system does not perform in a satisfactory manner, it could be disruptive and adversely
affect our operations, including our potential ability to report accurate, timely and consistent financial results; our ability
to purchase supplies, components and raw materials from and pay our suppliers; and our ability to deliver products and
services to customers on a timely basis and to collect our receivables from them. If the new ERP system is not successfully
and fully implemented, it could negatively affect our financial reporting, inventory management and our future sales,
profitability and financial condition.
Our credit facility contains provisions that could restrict our ability to finance our future operations or engage
in other business activities that may be in our interest.
Our credit facility contains a number of significant covenants that, among other things, limit our ability to:
(i) dispose of assets; (ii) incur certain additional indebtedness; (iii) repay certain indebtedness; (iv) create liens on assets;
(v) pay dividends on our Common Stock; (vi) make certain investments, loans and advances; (vii) repurchase or redeem
capital stock; (viii) make certain capital expenditures; (ix) engage in acquisitions, mergers or consolidations; and
(x) engage in certain transactions with subsidiaries and affiliates.
These covenants could limit our ability to plan for or react to market conditions, finance our operations, engage
in strategic acquisitions or disposals or meet our capital needs or could otherwise restrict our activities or business plans.
Our ability to comply with these covenants may be affected by events beyond our control. In addition, our credit facility
also requires us to maintain compliance with certain financial ratios. Our inability to comply with the required financial
ratios or covenants could result in an event of default under our credit facility. A default, if not cured or waived, may
permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further
extensions of credit under our credit facility. If our indebtedness is accelerated, we cannot be certain that we will have
sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness
on terms favorable to us or at all. If we are not able to refinance existing indebtedness on acceptable terms, our ability to
finance our operations, engage in strategic acquisitions, and otherwise meet our capital needs would be significantly
impaired.
We may not have the ability to raise the funds necessary to settle conversions of our 1.25% convertible senior
notes due 2022 (the “Notes”) or to repurchase the Notes upon a fundamental change, and our future debt may contain
limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of our Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental
change at a fundamental change repurchase price equal to 100% of the principal amount of our Notes to be repurchased,
plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, we will be required to make cash
payments in respect of the principal amount of the Notes being converted. We may not, however, have enough available
cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered or Notes being
converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by
law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time
when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Notes as required
by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change
itself could also lead to a default under agreements governing our current and future indebtedness. If the repayment of the
related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds
to repay the indebtedness and repurchase the Notes or make cash payments upon conversion of the Notes.
29
Legal and Regulatory Risks
The Support Anti-terrorism by Fostering Effective Technologies Act of 2002 (SAFETY Act) may not shield us
against all legal claims we may face following an act of terrorism.
The SAFETY Act provides important legal liability protections for providers of qualified anti-terrorism products
and services. Under the SAFETY Act, providers, such as our Security division, may apply to the U.S. Department of
Homeland Security for coverage of the products and services. If granted coverage, such providers would receive certain
legal protections against product liability, professional liability and certain other claims that could arise following an act
of terrorism. We have applied to the U.S. Department of Homeland Security for many of the products and services offered
by our Security division, but we do not enjoy coverage under the SAFETY Act (or the highest level of coverage) for every
product line, model number and service offering that our Security division provides. In addition, the terms of the SAFETY
Act coverage decisions awarded to us by the U.S. Department of Homeland Security contain conditions and requirements
that we may not (or may not be able to) continue to satisfy in the future.
If we fail to maintain the coverage that we currently enjoy or fail to apply in a timely way for coverage for new
products and services as we acquire or introduce them, or if the U.S. Department of Homeland Security limits the scope
of any coverage previously awarded to us, denies us coverage or continued coverage for a particular product, product line
or service offering, or delays in making decisions about whether to grant us coverage, we may become exposed to legal
claims that the SAFETY Act was otherwise designed to prevent. Moreover, the SAFETY Act was not designed to shield
providers of qualified anti-terrorism products and services from all types of claims that may arise from acts of terrorism,
including from many types of claims lodged in courts outside of the United States or acts of terrorism that occur outside
of the United States, which exposes us to legal claims and litigation defense costs despite the SAFETY Act awards we
have received.
Our patient monitoring, diagnostic cardiology, and connected care systems could give rise to product liability
claims and product recall events that could materially and adversely affect our financial condition and results of
operations.
The development, manufacturing and sale of medical devices expose us to significant risk of product liability
claims, product recalls and, sometimes, product failure claims. We face an inherent business risk of financial exposure to
product liability claims if the use of our medical devices results in personal injury or death. Substantial product liability
litigation currently exists within the medical device industry. Some of our patient monitoring, diagnostic cardiology, and
connected care products may become subject to product liability claims and/or product recalls. Future product liability
claims and/or product recall costs may exceed the limits of our insurance coverages, or such insurance may not continue
to be available to us on commercially reasonable terms, or at all. In addition, a significant product liability claim or product
recall could significantly damage our reputation for producing safe, reliable and effective products, making it more difficult
for us to market and sell our products in the future. Consequently, a product liability claim, product recall or other claim
could have a material adverse effect on our business, financial condition, operating results and cash flows.
Our global operations expose us to legal compliance risks related to certain anti-bribery and anti-corruption
laws.
We are required to comply with the U.S. Foreign Corrupt Practices Act, which prohibits United States companies
from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. It also requires us to maintain specific record-keeping standards and adequate internal accounting controls. In
addition, we are subject to similar requirements in other countries. Bribery, corruption, and trade laws and regulations, and
the enforcement thereof, are increasing in frequency, complexity and severity on a global basis. Although we have internal
policies and procedures with the intention of assuring compliance with these laws and regulations, our employees,
distributors, resellers and contractors involved in our international sales may take actions in violations of such policies. If
our internal controls and compliance program do not adequately prevent or deter our employees, distributors, resellers,
contractors and/or other third parties with whom we do business from violating anti-bribery, anti-corruption or similar
laws and regulations, we may incur severe fines, penalties and reputational damage.
30
We are subject to import and export controls that could subject us to liability or impair our ability to compete
in international markets.
Due to the international scope of our operations, we are subject to a complex system of import- and export-related
laws and regulations, including U.S. export control and customs regulations and customs regulations of other countries.
These regulations are complex and vary among the legal jurisdictions in which we operate. Any alleged or actual failure
to comply with such regulations may subject us to government scrutiny, investigation, and civil and criminal penalties,
and may limit our ability to import or export our products or to provide services outside the United States. Depending on
severity, any of these penalties could have a material impact on our business, financial condition and results of operations.
Our business is subject to complex and evolving U.S. and international laws and regulation regarding privacy
and data protection. If we fail to meet our compliance obligations under applicable privacy and data protection
regulations, even if such compliance by us is inadvertent, or if we are unable to comply with changes to such
requirements, we might be subject to fines, legal disputes, or other liabilities that could have a material adverse effect
on our financial condition and results of operations.
Regulatory authorities around the world are considering legislative and regulatory proposals concerning data
protection, and the interpretation and application of data protection laws in the U.S., the EU, and elsewhere are often
uncertain and in flux. These laws may be interpreted and applied in a manner that is inconsistent with our data practices.
If our data practices are found to be in conflict with privacy and data protection laws or regulations, we could face fines
or orders requiring that we change our data practices, which could have an adverse effect on our business and results of
operations.
We must comply with extensive federal and state requirements regarding the use, retention, security, and
re-disclosure of patient healthcare information. HIPAA and the regulations that have been issued under it contain
substantial restrictions and complex requirements with respect to the use and disclosure of certain individually identifiable
health information, referred to as “protected health information”. The HIPAA Privacy Rule prohibits a covered entity or a
business associate from using or disclosing protected health information unless the use or disclosure is validly authorized
by the individual or is specifically required or permitted under the HIPAA Privacy Rule and only if certain complex
requirements are met. The HIPAA Security Rule establishes administrative, organizational, physical, and technical
safeguards to protect the privacy, integrity, and availability of electronic protected health information maintained or
transmitted by covered entities and business associates. The HIPAA Breach Notification Rule requires that covered entities
and business associates, under certain circumstances, notify patients when there has been an improper use or disclosure of
protected health information. Any failure or perceived failure of our Company or our products to meet HIPAA standards
and related regulatory requirements could expose us to certain notification, penalty, and enforcement risks, damage our
reputation, and adversely affect demand for our products and force us to expend significant capital and other resources to
address the privacy and security requirements of HIPAA.
In addition, there are other federal laws that include specific privacy and security obligations, above and beyond
HIPAA, for certain types of health information and impose additional sanctions and penalties. All 50 states, the District of
Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted legislation requiring notice to individuals of security
breaches involving protected health information, which is not uniformly defined among the breach notification laws.
Organizations must review each state’s definitions, mandates, and notification requirements and timelines to appropriately
prepare and notify affected individuals and government agencies, including the attorney general, in compliance with such
state laws. Further, most states have enacted patient confidentiality laws that protect against the disclosure of confidential
medical information, and many states have adopted or are considering adopting further legislation in this area. These state
laws may be more stringent than HIPAA requirements. California passed the California Consumer Privacy Act, which
imposes significant changes in data privacy regulation, and New York has passed the Stop Hacks and Improve Electronic
Data Security Act, which expands the state’s existing privacy laws. Recent legal developments in the EU have created
compliance uncertainty regarding certain transfers of personal data from the EU to the United States. For example, GDPR,
a regulation implemented on May 25, 2018 in the EU on data protection and privacy for all individuals in the EU and the
EEA, applies to all enterprises, regardless of location, that are doing business in the EU or that collect and analyze data
tied to EU and EEA residents. GDPR creates a range of new compliance obligations, including stringent technical and
security controls surrounding the storage, use, and disclosure of personal information, and significantly increases financial
penalties for noncompliance.
31
We are facing an increasingly complex international regulatory environment which is constantly changing
and if we fail to comply with international regulatory requirements, or are unable to comply with changes to such
requirements, our financial performance may be harmed.
Our international operations and sales subject us to an international regulatory environment which is becoming
increasingly complex and is constantly changing due to factors beyond our control. Risks associated with our international
operations and sales include, without limitation, those arising from the following factors:
•
•
•
•
•
•
•
differing legal and court systems and changes to such systems;
differing labor laws and changes in those laws;
differing tax laws and changes in those laws;
differing environmental laws and changes in those laws;
differing laws governing our distributors and sales agents and changes in those laws;
differing protection of intellectual property and changes in that protection; and
differing import and export requirements and changes to those requirements.
If we fail to comply with applicable international regulatory requirements, even if such non-compliance by us is
inadvertent, or if we are unable to comply with changes to such requirements, our financial performance may be harmed.
Substantial government regulation in the United States and abroad may restrict our ability to sell our patient
monitoring, diagnostic cardiology, and connected care systems, and failure to comply with such laws and regulations
may have a material adverse impact on our business.
The FDA and comparable regulatory authorities in foreign countries extensively and rigorously regulate our
patient monitoring, diagnostic cardiology, and connected care systems, including the research and development, design,
testing, clinical trials, manufacturing, clearance or approval, safety and efficacy, labeling, advertising, promotion, pricing,
recordkeeping, reporting, import and export, post-approval studies and sale and distribution of these products. In the United
States, before we can market a new medical device, or a new use of, new claim for, or significant modification to, an
existing product, we must first receive clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act as
discussed under Part I, Item 1, “Business - Regulation of Medical Devices.” Some modifications made to products cleared
through a 510(k) may require a new 510(k). The FDA can delay, limit or deny clearance or approval of a device for many
reasons.
Our future products may not obtain FDA clearance on a timely basis, or at all. Further, the FDA makes periodic
inspections of medical device manufacturers and in connection with such inspections issues observations when the FDA
believes the manufacturer has failed to comply with applicable regulations. If FDA observations are not addressed to the
FDA’s satisfaction, the FDA may issue a warning letter and/or proceed directly to other forms of enforcement action,
which could include the shutdown of our production facilities, adverse publicity, and civil and criminal penalties. The
expense and costs of any corrective actions that we may take, which may include product recalls, correction and removal
of products from customer sites and/or changes to our product manufacturing and quality systems, could adversely impact
our financial results. Issuance of a warning letter may also lead customers to delay purchasing decisions or cancel orders.
Our patient monitoring, diagnostic cardiology, and connected care systems must also comply with the laws and
regulations of foreign countries in which we develop, manufacture and market such products. In general, the extent and
complexity of medical device regulation is increasing worldwide. This trend is likely to continue, and the cost and time
required to obtain marketing clearance in any given country may increase as a result. Our products may not obtain any
necessary foreign clearances on a timely basis, or at all.
32
Once any of our patient monitoring, diagnostic cardiology, or connected care systems is cleared for sale,
regulatory authorities may still limit the use of such product, prevent its sale or manufacture or require a recall or
withdrawal of such product from the marketplace. Following initial clearance from regulatory authorities, we continue to
be subject to extensive regulatory requirements. Government authorities can withdraw marketing clearance or impose
sanctions due to our failure to comply with regulatory standards or due to the occurrence of unforeseen problems following
initial clearance. Ongoing regulatory requirements are wide-ranging and govern, among other things: (i) annual inspections
to retain a CE mark for sale of products in the EU; (ii) product manufacturing; (iii) patient health data protection and
medical device security; (iv) supplier substitution; (v) product changes; (vi) process modifications; (vii) medical device
reporting; and (viii) product sales and distribution.
We may be subject to fines, penalties, injunctions, or other enforcement actions if we are determined to be
promoting the use of our products for unapproved or “off-label” uses, resulting in damage to our reputation and
business.
Our promotional materials and training methods must comply with FDA and other applicable laws and
regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or approved
by the FDA known as “off-label” use. If the FDA determines that our promotional materials or training constitutes
promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to
regulatory or enforcement actions, including the issuance of warning letters, untitled letters, fines, penalties, consent
decrees, injunctions, or seizures, which could have an adverse impact on our reputation and financial results. We could
also be subject to enforcement action under other federal or state laws, including the False Claims Act.
Our failure to comply with federal, state, and foreign laws and regulations relating to our healthcare business
could have an adverse effect on our business.
Although we do not provide healthcare services, submit claims for third-party reimbursement or receive payments
directly from Medicare, Medicaid or other third-party payers for our products, we are subject to healthcare fraud and abuse
regulation and enforcement by federal and state governments. Healthcare fraud and abuse and health information privacy
and security laws potentially applicable to our operations are discussed in Part I, Item 1, “Business – Regulation of Medical
Devices.”
The risk of our being found in violation of these laws and regulations is increased because many of them have
not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of
interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the Affordable
Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal health
care fraud statutes; a person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate
them to have committed a violation. In addition, the Affordable Care Act provided that the government may assert that a
claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the False Claims Act.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available
under such laws, it is possible that some of our business activities could be subject to challenge under one or more of such
laws. Any action against us for violation of these laws could cause us to incur significant legal expenses and divert our
management’s attention from the operation of our business. If our operations are found to be in violation of any of the
laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including
civil and criminal penalties, damages, fines, exclusion from governmental health care programs, disgorgement, contractual
damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations,
any of which could impair our ability to operate our business and our financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
33
ITEM 2. PROPERTIES
As of June 30, 2021, we owned the following principal facilities:
Location
Hawthorne, California . . . . . . . . . . . . . . . . . . . . . . . . Corporate headquarters and administrative,
Description of Facility
manufacturing, engineering, sales and marketing
and service for our Optoelectronics and
Manufacturing division
Billerica, Massachusetts . . . . . . . . . . . . . . . . . . . . . . Manufacturing, engineering, sales and marketing
and service for our Security division
Snoqualmie, Washington . . . . . . . . . . . . . . . . . . . . . Headquarters and administrative, manufacturing,
engineering, sales, marketing and service for our
Healthcare division
Stoke on Trent, United Kingdom . . . . . . . . . . . . . . . Manufacturing, engineering, sales, marketing and
Surrey, United Kingdom . . . . . . . . . . . . . . . . . . . . . . Manufacturing, engineering, sales, marketing and
Batam, Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing for our Optoelectronics and
service for our Security division
service for our Security division
Manufacturing division
As of June 30, 2021, we leased the following principal facilities:
Approximate
Square
Footage
88,000
186,200
177,000
90,000
59,000
56,200
Location
Johor Bahru, Malaysia . . . . . . . . . . . . . . . . Manufacturing, engineering, sales and
Description of Facility
Approximate
Square Footage Expiration
Johor Bahru, Malaysia . . . . . . . . . . . . . . . . Manufacturing, engineering, sales and
service for our Security division
167,600 2022 ~ 2024
service for our Optoelectronics and
Manufacturing division
110,100 2022 ~ 2024
Torrance, California . . . . . . . . . . . . . . . . . . Manufacturing, engineering, sales and
marketing and service for our Security
division
Batam, Indonesia (1) . . . . . . . . . . . . . . . . . . Manufacturing for our Optoelectronics and
91,900
2022
Andover, Massachusetts . . . . . . . . . . . . . . . Manufacturing, engineering, sales and
marketing and service for our Security
division
64,200
2027
Manufacturing division
101,700 2021 ~ 2023
(1)
This is comprised of multiple leases, at the same or nearby facilities.
We believe that our facilities are in adequate condition to support our current operations but expect to expand as
necessary to support our anticipated future growth. We currently anticipate that we will be able to renew the leases that
are scheduled to expire in the next few years on terms that are substantially the same as those currently in effect. However,
even if we were not able to renew one or more of the leases, we believe that suitable substitute space is available to relocate
any of the facilities. Accordingly, we do not believe that our failure to renew any of the leases that are scheduled to expire
in the next few years will have a material adverse effect on our operations.
34
ITEM 3. 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 11, “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements in Item 8, which is
incorporated by reference into this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Other Information
Our Common Stock is traded on The Nasdaq Global Select Market under the symbol “OSIS.”
As of August 18, 2021, there were approximately 102 holders of record of our Common Stock. This number does
not include beneficial owners holding shares through nominees or in “street” name.
Issuer Purchases of Equity Securities
The following table contains information about the shares of common stock we purchased during the quarter
ended June 30, 2021:
April 1 to April 30, 2021 . . . . . . . . . . . . . . . . . .
May 1 to May 31, 2021 . . . . . . . . . . . . . . . . . . . .
June 1 to June 30, 2021 . . . . . . . . . . . . . . . . . . . .
Total number of
shares (or units)
purchased as
part of publicly
Maximum number (or
approximate dollar
value) of shares (or
Total number of Average price
units) that may yet be
shares (or units) paid per share (or announced plans or purchased under the
Purchased
plans or programs (1)
2,677,412
2,584,722
2,547,995
$
programs
—
92,690
36,727
129,417
—
92,690
36,727
129,417
unit)
—
95.37
97.41
95.95
(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.
The following table provides information concerning our equity compensation plans as of June 30, 2021.
Plan category
Equity compensation plans approved
Number of securities to Weighted-average
exercise price of
be issued upon exercise
outstanding options,
of outstanding options,
warrants and rights
warrants and rights
(a)
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
by security holders (1) . . . . . . . . . . . . . . . .
255,220
$
50.24
2,061,345 (2)(3)(4)
Equity compensation plans not
approved by security holders . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
255,220
$
N/A
50.24
—
2,061,345
(1)
(2)
(3)
Includes shares of our Common Stock issuable upon exercise of options under our 2006 Equity Participation Plan
and our Amended and Restated 2012 Incentive Award Plan.
These shares are available for future issuance under our Amended and Restated 2012 Incentive Award Plan,
which was approved by our shareholders on December 10, 2020.
Awards of restricted stock units or other awards that convey the full value of the shares subject to the award are
counted as 1.87 shares for every one award granted.
36
(4)
Shares subject to awards outstanding under the 2006 Equity Participation Plan that terminate, expire or lapse for
any reason also become available for future issuance under our Amended and Restated 2012 Incentive Award
Plan.
Performance Graph
The graph below compares the cumulative total stockholder return for the period beginning on the market close
on the last trading day before the beginning of our fifth preceding fiscal year through and including the end of our last
completed fiscal year with (a) The Nasdaq Composite Index and (b) a peer group of publicly-traded issuer(s) with which
we have generally competed.
The peer group includes the following companies: Conmed Corp, Leidos Holdings Inc., Smiths Group Plc.
The graph assumes that $100.00 was invested on June 30, 2016 in (a) our Common Stock, (b) The Nasdaq
Composite Index, and (c) the companies comprising the peer group described above (weighted according to the issuer’s
stock market capitalization at the beginning of each period for which a return is indicated). The graph assumes that all
dividends were reinvested. Historical stock price performance is not necessarily indicative of future stock price
performance.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any Company filing under the Securities Act of 1933, as amended, or the Exchange Act,
except as shall be expressly set forth by specific reference in such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among OSI Systems, Inc., the NASDAQ Composite Index,
and a Peer Group
$350
$300
$250
$200
$150
$100
$50
$0
6/16
6/17
6/18
6/19
6/20
6/21
OSI Systems, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 6/30/16 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
37
The following table provides the same information in tabular form as of June 30:
OSI Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 129.28 133.03 193.76 128.40 174.85
The Nasdaq Composite Index . . . . . . . . . . . . . . . . . . . . . . . . 100.00 128.30 158.57 170.91 216.96 315.10
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 138.66 161.37 186.10 194.56 240.24
2016
2017
2018
2019
2020
2021
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”)
is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a
supplement to, and should be read in conjunction with, our financial statements and the accompanying notes.
Overview
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.
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 55% of our total consolidated revenues for fiscal 2021.
As a result of terrorist attacks and smuggling operations against the U.S. and in other locations worldwide,
security and inspection products have increasingly been used at a wide range of facilities other than airports, such as border
crossings, railways, seaports, cruise line terminals, freight forwarding operations, sporting venues, government and
military installations and nuclear facilities. We believe that our wide-ranging product portfolio together with our ability to
provide turnkey screening solutions position us to competitively pursue security and inspection opportunities as they arise
throughout the world.
Currently, the U.S. federal government is discussing various options to address the U.S. federal government’s
overall fiscal challenges and we cannot predict the outcome of these efforts. While we believe that national security
spending will continue to be a priority, U.S. government budget deficits and the national debt have created increasing
pressure to examine and reduce spending across many federal agencies. Additionally, there continues to be volatility in
international markets that has impacted international security spending. We believe that the diversified product portfolio
and international customer mix of our Security division position us well to withstand the impact of these uncertainties and
even benefit from specific initiatives within various governments. However, depending on how future budgetary
reductions may be implemented and how the U.S. federal government and our other international customers manage their
fiscal challenges, including the impact of the COVID-19 pandemic, we believe that these actions could have a material,
adverse effect on our business, financial condition and results of operations.
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
38
hospital or even outside the hospital. Revenues from our Healthcare division accounted for 19% of our total consolidated
revenues for fiscal 2021.
The healthcare markets in which we operate are highly competitive. We believe that our customers choose among
competing products on the basis of product performance, functionality, value and service. Although there has been an
increase in demand for patient monitoring products due to the COVID-19 pandemic, there is continued uncertainty
regarding the U.S. federal government budget and the Affordable Care Act, either of which may impact hospital spending,
third-party payer reimbursement and fees to be levied on certain medical device revenues, any of which could adversely
affect our business and results of operations. In addition, hospital capital spending appears to have been impacted by
strategic uncertainties surrounding the Affordable Care Act and economic pressures. We also believe that global economic
uncertainty has caused some hospitals and healthcare providers to delay purchases of our products and services. During
this period of uncertainty, sales of our healthcare products may be negatively impacted. A prolonged delay could have a
material adverse effect on our business, financial condition and results of operations.
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 our own Security and Healthcare divisions. Revenues from external customers in our
Optoelectronics and Manufacturing division accounted for 26% of our total consolidated revenues for fiscal 2021.
Consolidated Results
Discussion and analysis of our financial condition and results of operations for fiscal 2019 has been omitted from
this Annual Report on Form 10-K, and is available in Item 7 of Part II, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended June 30, 2020.
Fiscal 2021 Compared with Fiscal 2020. We reported consolidated sales of $1,146.9 million in fiscal 2021, a
1.6% decrease compared to the prior year, which drove a year-over-year decrease in gross profit of $0.7 million. Our
income from operations increased by 10% from the prior year to $115.4 million in fiscal 2021. This increase in profitability
was driven primarily by a decrease in operating expenses due to strong cost controls.
Acquisitions. We acquired several businesses during fiscal years 2021 and 2020 as described in Note 2 to the
consolidated financial statements, none of which were considered material.
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.
39
Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic 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. While we do not
expect these pandemic-related impacts to be long-term, there is substantial uncertainty regarding the duration and ultimate
impact of the COVID-19 pandemic. Our Healthcare division has experienced increased demand for certain products as a
result of COVID-19. In our Security division, during the latter part of fiscal 2020 and in fiscal 2021, 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. During fiscal 2021, bookings accelerated, but 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. 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. For a further discussion of potential risks to our business from the COVID-19
pandemic, see Part I, Item 1A. “Risk Factors” in this annual report on Form 10-K.
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. In addition to the
COVID-19 pandemic, these other global macroeconomic factors, coupled with the U.S. political climate, 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 has experienced some increased
demand for its patient monitoring products as a result of the COVID-19 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 situation, 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.
40
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. 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. 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.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted
in the United States (“U.S. GAAP”). Our preparation of these consolidated financial statements requires us to make
judgments and estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances. As a result, actual results may differ from such estimates. Our senior management has reviewed
these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors. The
following summarizes our critical accounting policies and significant estimates used in preparing our consolidated
financial statements:
Revenue Recognition. Product Sales. We recognize revenue from sales of products upon shipment or delivery
when control of the product transfers to the customer, depending on the terms of each sale, and when collection is probable.
In the circumstance where terms of a product sale include subjective customer acceptance criteria, revenue is deferred
until we have achieved the acceptance criteria unless the customer acceptance criteria are perfunctory or inconsequential.
We generally offer customers payment terms of less than one year. In cases when payment terms extend beyond one year,
we consider whether the contract has a significant financing component.
Service Revenue. Revenue from services includes installation and implementation of products and turnkey
security screening services and after-market services. Generally, revenue from services is recognized over time as the
services are performed. Revenues from out of warranty service maintenance contracts are recognized ratably over the
respective terms of such contracts. Deferred revenue for such services arises from payments received from customers for
services not yet performed.
Contract Revenue. Sales agreements with customers can be project specific, cover a period of time, and can be
renewable periodically. The contracts may contain terms and conditions with respect to payment, delivery, installation,
services, warranty and other rights. In certain instances, we consider an accepted customer order, governed by a master
sales agreement, to be the contract with the customer when legal rights and obligations exist. Contracts with customers
may include the sale of products and services, as discussed in the paragraphs above. In certain instances, contracts can
contain multiple performance obligations as discussed in the paragraph below. According to the terms of a sale contract,
we may receive consideration from a customer prior to transferring goods to the customer, and we record these
prepayments as a contract liability. We also record deferred revenue, typically related to service contracts, when
consideration is received before the services have been performed. We recognize contract liabilities and deferred revenue
as net sales after all revenue recognition criteria are met.
When determining revenue recognition for contracts, we make judgments based on our understanding of the
obligations in each contract. We determine whether or not customer acceptance criteria are perfunctory or inconsequential.
The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the timing of
revenue recognition.
41
Multiple Performance Obligations. Certain agreements with customers include the sale of capital equipment
involving multiple elements that may include civil works to prepare a site for the installation of equipment, manufacture
and delivery of equipment, installation and integration of equipment, training of customer personnel to operate the
equipment and after-market service of the equipment. We generally separate multiple elements in a contract into separate
performance obligations if those elements are distinct, both individually and in the context of the contract. If multiple
promises comprise a series of distinct services which are substantially the same and have the same pattern of transfer, they
are combined and accounted for as a single performance obligation.
In cases where obligations in a contract are distinct and thus require separation into multiple performance
obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance
obligation based on its relative standalone selling price. The value allocated to each performance obligation is then
recognized as revenue when the revenue recognition criteria for each distinct performance obligation has been met.
The standalone selling price for each performance obligation is an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for transferring the good or service. When there is only
one performance obligation associated with a contract, the entire sale value is attributed to that obligation. When a contract
contains multiple performance obligations the standalone selling price is first estimated using the observable price, which
is generally a list price net of applicable discount, or the price used to sell the good or service in similar circumstances. In
circumstances when a selling price is not directly observable, we will estimate the standalone selling price using
information available to us including our market assessment and expected cost plus margin.
The timetable for fulfilment of each of the distinct performance obligations can range from completion in a short
amount of time and entirely within a single reporting period to completion over several reporting periods. The timing of
revenue recognition for each performance obligation may be dependent upon several milestones, including physical
delivery of equipment, completion of factory acceptance test, completion of site acceptance test, installation and
connectivity of equipment, certification of training of personnel and, in the case of after-market service deliverables, the
passage of time (typically evenly over the post-warranty period).
We often provide a guarantee to support our performance under multiple performance obligation contracts. In the
event that customers are permitted to terminate such arrangements, the underlying contract typically requires payment for
deliverables and reimbursement of costs incurred through the date of termination.
Allowance for Doubtful Accounts. The allowance for doubtful accounts involves estimates based on
management’s judgment, review of individual receivables and analysis of historical bad debts. We monitor collections and
payments from our customers, and we maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We also assess current economic trends that might impact the level
of credit losses in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be required.
Inventory. Inventories are stated at the lower of cost or net realizable value. We write down inventory for
slow-moving and obsolete inventory based on historical usage, orders on hand, assessments of future demands, and market
conditions, among other items. If these factors are less favorable than those projected, additional inventory write-downs
may be required.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using the
straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage value.
Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the useful life of the
asset or the lease term. Leased capital assets are included in property and equipment. Amortization of property and
equipment under capital leases is included with depreciation expense. In the event that property and equipment are idle,
as a result of excess capacity or the early termination, non-renewal or reduction in scope of a turnkey screening operation,
such assets are assessed for impairment on a periodic basis and when an indication that impairment may exist.
42
Income Taxes. Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities
available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different
interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in
determining our tax expense and in evaluating our tax positions including evaluating uncertainties. We review our tax
positions quarterly and adjust the balances as new information becomes available.
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in
future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets
and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these
future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of
taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of
income inherently rely on estimates. To provide insight, we use our historical experience and our short and long-range
business forecasts. We believe it is more likely than not that a portion of the deferred income tax assets may expire unused
and therefore have established a valuation allowance against them. Although realization is not assured for the remaining
deferred income tax assets, we believe it is more likely than not that the deferred tax assets will be fully recoverable within
the applicable statutory expiration periods. However, deferred tax assets could be reduced in the near term if our estimates
of taxable income are significantly reduced or available tax planning strategies are no longer viable.
Business Combinations. In connection with the acquisition of a business, we record the fair value of purchase
consideration for the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is
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. Our
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is up to
one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are
recorded to earnings.
Impairment of Goodwill, Other Intangible Assets and Long-Lived Assets. Goodwill represents the excess
purchase consideration over the estimated fair value of the assets acquired and liabilities assumed in a business
combination. Goodwill is allocated to our segments based on the nature of the product line of the acquired business. The
carrying value of goodwill is not amortized but is annually tested for impairment as of the end of the second quarter and
more frequently if there is an indicator of impairment. We assess qualitative factors of each of our three reporting units to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. The assessments conducted as of December 31, 2020 indicated that it is not more likely than not that the fair
values of our three reporting units are less than their carrying amounts, including goodwill. Despite the COVID-19
pandemic, there were no qualitative factors which would trigger impairment testing between measurement dates. Thus,
we have determined that there is no goodwill impairment for any of our three reporting units.
We evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Impairment is considered to exist if the total
estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment does
exist, we measure the impairment loss and record it based on the discounted estimate of future cash flows. In estimating
future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are largely independent
of the cash flows from other asset groups. Our estimate of future cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth rates and other factors.
Although we believe the assumptions and estimates we have made in the past have been reasonable and
appropriate, different assumptions and estimates could materially impact our reported financial results. More conservative
estimates of the anticipated future benefits from these businesses could result in impairment charges, which would decrease
net income and result in lower asset values on our balance sheet.
43
Stock-Based Compensation Expense. We account for stock-based compensation using fair value recognition
provisions. Thus, we record stock-based compensation as a charge to earnings net of the estimated impact of forfeited
awards. As such, we recognize stock-based compensation cost only for those stock-based awards that are estimated to
ultimately vest over their requisite vesting period, based on the vesting provisions of the individual grants.
The process of estimating the fair value of stock-based compensation awards and recognizing stock-based
compensation cost over their requisite vesting period involves significant assumptions and judgments. We estimate the
fair value of stock option awards on the date of grant using the Black-Scholes option-valuation model which requires that
we make certain assumptions regarding: (i) the expected volatility in the market price of our Common Stock; (ii) dividend
yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise.
We estimate the fair value of restricted stock unit awards on the date of the grant using the market price of our Common
Stock on that date. In addition, we estimate the expected impact of forfeited awards and recognize stock-based
compensation cost only for those awards expected to vest. If actual forfeiture rates differ materially from our estimates,
stock-based compensation expense could differ significantly from the amounts we have recorded in the current period. We
periodically review actual forfeiture experience and revise our estimates, as necessary. We recognize the cumulative effect
of changes in the estimated forfeiture rate as compensation cost in earnings in the period of the revision. As a result, if we
revise our assumptions and estimates, our stock-based compensation expense could change materially in the future. Certain
restricted stock units vest based upon the achievement of pre-established performance criteria. We estimate the fair value
of performance-based awards at the date of grant based upon the probability that the specified performance criteria will be
met, adjusted for estimated forfeitures. Each quarter we update our assessment of the probability that the specified
performance criteria will be achieved and adjust our estimate of the fair value of the performance-based awards if
necessary. We amortize the fair values of performance-based awards over the requisite service period adjusted for
estimated forfeitures for each separately vesting tranche of the award. See Note 9 to the consolidated financial statements
for a further discussion of stock-based compensation.
Legal and Other Contingencies. We are subject to various claims and legal proceedings. We review the status
of each significant legal dispute to which we are a party and assess our potential financial exposure, if any. If the potential
financial exposure from any claim or legal proceeding is considered probable and the amount can be reasonably estimated,
we record a liability and an expense for the estimated loss. Significant judgment is required in both the determination of
probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to
these matters, accruals are based only on the best information available at the time. As additional information becomes
available, we reassess the potential liability related to our pending claims and litigation and revise our estimates
accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of
operations and financial position.
Net Revenues
The table below and the discussion that follows are based upon the way we analyze our business. See Note 14 to
the consolidated financial statements for additional information about business segments.
Fiscal
2019
% of
Net Revenues
Fiscal
2020
% of
Net Revenues
Fiscal
2021
2019‑2020 2020‑2021
% of
Net Revenues % Change % Change
Security . . . . . . . . . . . . . $ 747.5
Healthcare . . . . . . . . . . .
188.5
Optoelectronics /
Manufacturing . . . . . .
246.1
Total Net Revenues . . . $ 1,182.1
(Dollars in millions)
63%
16%
$ 742.0
185.3
64%
16%
$ 633.3
212.3
21%
238.7
$ 1,166.0
20%
301.3
$ 1,146.9
55%
19%
26%
(1)%
(2)%
(3)%
(1)%
(15)%
15%
26%
(2)%
Fiscal 2021 Compared with Fiscal 2020. Revenues for the Security division during the fiscal year ended June 30,
2021 continued to be impacted by the COVID-19 pandemic most notably in our aviation and cargo businesses, as we
experienced delays in the timing of delivery and installation of equipment and related services, as well as the timing of
receipt of new orders. Our product revenues decreased by approximately $66 million. We also experienced a decrease in
revenues of $60 million associated with the expiration of a contract in Mexico in June 2020. Excluding revenues
attributable to the Mexico contract, our service revenues increased approximately $18 million.
44
Revenues for the Healthcare division during the year ended June 30, 2021 increased year-over-year due to an
increase in sales of $26 million attributable to patient monitoring systems, cardiology equipment, supplies and accessories
and related service revenue. Some of this increase was due to increased demand for our patient monitoring products as a
result of the COVID-19 pandemic.
Revenues for the Optoelectronics and Manufacturing division during the year ended June 30, 2021 increased
year-over year as a result of an increase in revenue in our contract manufacturing business of approximately $51 million
and an increase in sales of approximately $11 million in our optoelectronics business, which includes a $7 million increase
in revenues from a small business acquired in February 2020.
Gross Profit
Fiscal
2019
% of
Net Revenues
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . $ 430.6
36.4%
$ 420.6
$ 419.9
36.6%
Net Revenues
% of
Fiscal
2020
(Dollars in millions)
36.1%
Fiscal
2021
% of
Net Revenues
Fiscal 2021 Compared with Fiscal 2020. 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 decreased year-over-year primarily as a result of the change in
revenues. While certain raw material and component costs increased, these increases were mitigated by operational
efficiencies. Gross profit as a percentage of net revenues during the year ended June 30, 2021 increased on a year-over-year
basis due to (i) an improved gross margin in our Healthcare division (which has the highest gross margin among our
divisions) as a result of the benefit of economies of scale associated with increased sales, combined with operating
efficiencies, (ii) increase in Healthcare revenue as a percentage of total net revenues, and (iii) an increase in gross margin
in our Security division. Our gross margin decreased within the Optoelectronics and Manufacturing division due to a less
favorable sales mix.
Operating Expenses
Fiscal
2019
% of
Net Revenues
Fiscal
2020
% of
Net Revenues
Fiscal
2021
(Dollars in millions)
% of
2019‑2020 2020‑2021
Net Revenues % Change % Change
Selling, general and
administrative . . . . . . . . . . . . $ 262.5
56.5
Research and development . . .
Impairment, restructuring
22.2%
4.8%
$ 252.0
57.3
21.6%
4.9%
$ 240.7
53.7
21.0%
4.7%
and other charges . . . . . . . . .
3.8
Total operating expenses . . . $ 322.8
0.3%
27.3%
6.5
$ 315.8
0.6%
27.1%
10.1
$ 304.5
0.9%
26.5%
(4)%
1%
69%
(2)%
(5)%
(6)%
55%
(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.
Fiscal 2021 Compared with Fiscal 2020. SG&A expense for the year ended June 30, 2021 decreased as compared
to the same prior-year period due to reduced travel and entertainment and marketing expenses of $6 million and $3 million,
respectively, due to the COVID-19 pandemic, and decreased third-party sales commissions of $8 million. These decreases
were offset by an increase in the provision for losses on accounts receivable of $5 million.
45
Research and Development
Our Security and Healthcare divisions have historically invested substantial amounts in research and development
(“R&D”). We intend to continue this trend in future years, although specific programs may or may not continue to be
funded and funding levels may fluctuate. R&D expenses included research related to new product development and
product enhancement expenditures.
Fiscal 2021 Compared with Fiscal 2020. The decrease in R&D expense during the year ended June 30, 2021
from the same prior-year period reflected a decrease in materials and supplies consumed in research activities of $2 million
and reduced travel expenses of $1 million due to the COVID-19 pandemic.
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. We have undertaken certain restructuring activities in an effort to align our global capacity and infrastructure with
demand by our customers and fully integrate acquisitions, thereby improving our operational efficiency. Our efforts have
helped enhance our ability to improve operating margins, retain and expand existing relationships with customers and
attract new business. We may utilize similar measures in the future to realign our operations to further increase our
operating efficiencies. The effect of these efforts may materially affect our future operating results.
Fiscal 2021 Compared with Fiscal 2020. During the year ended June 30, 2021, we incurred $7.2 million for exit
activities associated with an expired turnkey contract in Mexico. Such exit costs include $2.8 million for employee
terminations, $1.1 million for facility closure and other exit costs, direct transaction costs of $2.7 million, and $0.6 million
for right-of-use asset impairment for a leased facility. We also incurred costs of $2.1 million for other employee
terminations and facility closure costs for operational efficiency activities, $0.3 million for acquisition-related activities,
and $0.5 million for certain legal charges, net of insurance reimbursements. Impairment, restructuring and other charges
in fiscal 2020 included (i) $5.5 million for impairment of assets associated with the write-off of intangible and fixed assets
due to abandonment of a non-core product line in our Healthcare division and a strategic shift in the intended use of an
intangible asset in the Security division, (ii) $4.2 million for employee termination and facility closure costs and (iii) $0.4
million in acquisition-related costs. These charges in fiscal 2020 were partially offset by a net $3.6 million recovery of
certain legal costs as a result of insurance reimbursements.
Interest and Other Expense, Net
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21.6 $
Fiscal
2019
Fiscal
2020
(Dollars in millions)
18.8 $
Fiscal
2021
16.7
Fiscal 2021 Compared with Fiscal 2020. For the year ended June 30, 2021, interest and other expense, net was
$16.7 million as compared to $18.8 million in the comparable prior-year period. This decrease was driven by lower average
levels of borrowing under our revolving credit facility as well as lower average interest rates during the fiscal year ended
June 30, 2021 compared to the same period in the prior year. Interest expense included $9.0 million and $8.8 million of
non-cash interest expense during the years ended June 30, 2021 and 2020, respectively, mainly related to the Notes (see
Note 8 to the condensed consolidated financial statements for further discussion).
Provision for 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, (vi) return to provision
adjustments and (vii) changes in tax legislation.
46
Fiscal 2021 Compared with Fiscal 2020. For the years ended June 30, 2021 and 2020, we recognized a provision
for income taxes of $24.6 million and $10.9 million, respectively. The effective tax rate for the years ended June 30, 2021
and 2020 was 24.9% and 12.6%, respectively. During the year ended June 30, 2021, we recognized a net discrete tax
benefit of $1.2 million for equity-based compensation under ASU 2016-09. During the year ended June 30, 2020, we
recognized a discrete tax benefit of $12.6 million, comprised of $6.8 million for equity-based compensation under
ASU 2016-09 and $5.8 million for a return to provision true-up adjustment.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit
facility. Cash and cash equivalents totaled $80.6 million at June 30, 2021, an increase of $4.5 million, or 5.9%, from $76.1
million at June 30, 2020. During fiscal 2021, we generated $139.1 million of cash flow from operations. These proceeds
were used for the following: $15.8 million invested in capital expenditures, $3.0 million for the acquisition of a business,
$59.3 million for net repayment of bank borrowings and long-term debt and $49.0 million for share repurchases and taxes
paid related to the net share settlement of equity awards. If we continue to net settle equity awards, we will use additional
cash to pay our tax withholding obligations in connection with such settlements. 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 foreseeable future. In addition, without repatriating earnings from non-U.S. subsidiaries, we anticipate that
cash generated from operations will be able to satisfy our obligations in the United States.
We have a five-year revolving credit facility that allows us to borrow up to $535 million. As of June 30, 2021,
there were no outstanding borrowings under our revolving credit facility and letters-of-credit outstanding totaled $63.2
million. See Note 8 to the consolidated financial statements for further discussion.
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
fiscal 2021, we generated cash from operations of $139.1 million compared to $129.2 million in the prior fiscal year. This
increase was driven by change in net working capital.
Cash Used in Investing Activities. Net cash used in investing activities was $34.7 million during fiscal 2021 as
compared to $42.7 million used during the prior year. During fiscal 2021, we used cash of $3.0 million for the acquisition
of businesses as compared to $8.9 million in the prior fiscal year. Net capital expenditures in fiscal 2021 were $15.8 million
compared to $20.4 million in the prior year.
Cash Used in Financing Activities. Net cash used in financing activities was $103.9 million during fiscal 2021,
compared to $104.7 million during the prior year. The changes in cash flows from financing activities primarily relate to
(i) net repayments of borrowings on bank lines of credit and debt totaling $59.3 million in fiscal 2021 compared to $29.2
million in fiscal 2020; and (ii) $49.1 million used for share repurchases and taxes paid related to the net share settlement
of equity awards in fiscal 2021 compared to $76.3 million in the prior year.
Borrowings
Outstanding lines of credit and current and long-term debt totaled $277.3 million at June 30, 2021, a decrease of
$49.7 million from $327.0 million at June 30, 2020. As of June 30, 2021, we were in compliance with all financial
covenants under our various borrowing agreements. See Note 8 to the consolidated financial statements for further
discussion.
We anticipate that cash generated from our operations, in addition to existing cash borrowing arrangements and
future access to capital markets should be sufficient to meet our cash requirements for at least the next 12 months.
However, our future capital requirements will depend on many factors, including future business acquisitions, capital
expenditures, litigation, stock repurchases and levels of research and development spending, among other factors. The
adequacy of available funds will depend on many factors, including the success of our businesses in generating cash,
continued compliance with financial covenants contained in our credit facility and the health of capital markets in general,
among other factors.
47
Cash Held by Foreign Subsidiaries
Our cash and cash equivalents totaled $80.6 million at June 30, 2021. Of this amount, approximately 71% was
held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by
our subsidiaries in the United Kingdom, India, Malaysia, Singapore, Canada, and Australia, and to a lesser extent in
Albania and Germany among 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.
Stock Repurchase Program
In April 2020, the Board of Directors authorized a new share repurchase program of up to 1,000,000 shares, and
in August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares authorized under
the stock repurchase program. This program does not expire unless our Board of Directors acts to terminate the program.
During fiscal 2021, we repurchased 452,005 shares. As of June 30, 2021, 2,547,995 shares remained available for
repurchase.
The timing and actual numbers of shares purchased depends on a variety of factors, including stock price, general
business and market conditions and other investment opportunities. Repurchases may be made from time to time under
the program through open-market purchases or privately-negotiated transactions at our discretion. Upon repurchase, the
shares are restored to the status of authorized but unissued shares, and we record them as a reduction in the number of
shares of Common Stock issued and outstanding in our consolidated financial statements.
Dividends
We have not paid any cash dividends since the consummation of our initial public offering in 1997.
Off-Balance Sheet Arrangements
As of June 30, 2021, we had no significant off-balance sheet arrangements, as defined in Item 303 of
Regulation S-K, other than those previously disclosed.
New Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our
consolidated financial statements, see Note 1 to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to certain market risks, which are inherent in our financial instruments and arise from transactions
entered into in the normal course of business. We may enter into derivative financial instrument transactions in order to
manage or reduce market risk in connection with specific foreign-currency-denominated transactions. We do not enter into
derivative financial instrument transactions for speculative purposes.
We are subject to interest rate risk on our borrowings under our bank lines of credit. Consequently, our interest
expense would fluctuate with changes in the general level of these interest rates if we were to borrow any amounts under
the credit facility.
48
Importance of International Markets
International markets provide us with significant growth opportunities. Our financial results in future periods
could, however, be adversely affected by periodic economic downturns in different regions of the world, changes in trade
policies or tariffs, civil or military conflict and other political instability. We monitor economic and currency conditions
around the world to evaluate whether there may be any significant effect on our international sales in the future.
Foreign Currency
Our international operations are subject to certain opportunities and risks, including from foreign currency
fluctuations and governmental actions. We conduct business in more than 20 countries. We closely monitor our operations
in each country in which we do business and seek to adopt appropriate strategies that are responsive to changing economic
and political environments, and to fluctuations in foreign currencies. Weaknesses in the currencies of some of the countries
in which we do business are often offset by strengths in other currencies. Foreign currency financial statements are
translated into U.S. dollars at period-end rates, except that revenues, costs and expenses are translated at average rates
during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we
exclude those resulting from translation of financial statements from income and include them as a component of
accumulated other comprehensive loss. Transaction gains and losses, which were included in our consolidated statement
of operations, amounted to a gain (loss) of approximately $0.1 million, $(3.4) million, and $(1.3) million for the fiscal
years ended June 30, 2019, 2020 and 2021, respectively. A 10% appreciation of the U.S. dollar relative to the local currency
exchange rates would have resulted in a net increase in our operating income of approximately $10.2 million in fiscal
2021. Conversely, a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted
in a net decrease in our operating income of approximately $10.2 million in fiscal 2021.
Inflation
We do not believe that inflation has had a material impact on our results of operations.
Interest Rate Risk
The principal maturity and estimated value of our long-term debt exposure for each of the fiscal years set forth
below as of June 30, 2021 were as follows (in thousands):
Maturity
2021
2022
2023
2024
2025
2026 and
thereafter
Convertible senior notes . . . . . . . . . . . . $ — $ — $ 287,500 $ — $ — $
1.25 % — % — %
Cash interest rate on convertible notes . 1.25 % 1.25 %
$
Finance lease obligations . . . . . . . . . . . . $ 846
$
Average interest rate of finance lease
$ 787
$ —
$ —
—
Total
Fair Value
— $ 287,500 $ 307,280
1.25 %
— %
$
1,633
$
—
1.25 %
1,633
obligations . . . . . . . . . . . . . . . . . . . . .
4.0 %
4.0 %
— % — % — %
— %
4.0 %
4.0 %
At June 30, 2021, we had no borrowings under our revolving credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We make reference here to the Index to Consolidated Financial Statements that appears on page F-1 of this report.
The Report of Independent Registered Public Accounting Firm from Moss Adams LLP, the Consolidated Financial
Statements, the Notes to Consolidated Financial Statements, and Supplementary Data—Unaudited Quarterly Results listed
in the Index to Consolidated Financial Statements, which appear beginning on page F-2 of this report, are incorporated by
reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
49
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 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 Annual
Report on Form 10-K, 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
(as such term is defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act) for the Company. Under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in 2013. Based on that evaluation, management concluded that our internal control over
financial reporting was effective as of June 30, 2021.
Moss Adams LLP, an independent registered public accounting firm, has audited and reported on the consolidated
financial statements of OSI Systems, Inc. and on the effectiveness of our internal control over financial reporting. The
report of Moss Adams LLP is contained in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2021
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.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
50
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our
annual stockholders’ meeting, presently scheduled to be held in December 2021.
51
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this report:
PART IV
1. Financial Statements. Please see the accompanying Index to Consolidated Financial Statements,
which appears on page F-1 of the report. The Report of Independent Registered Public Accounting
Firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements
listed in the Index to Consolidated Financial Statements, which appear beginning on page F-2 of
this report, are incorporated by reference into Item 8 above.
2. Financial Statement Schedules.
Supplementary Data—Unaudited Quarterly Results
No other financial statement schedules are presented as the required information is either not applicable
or included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. Reference is made to item 15(b) below.
(b)
Exhibits. The exhibits listed on the accompanying Exhibit Index immediately preceding the signature
page are filed as part of, or are incorporated by reference into, this report.
(c)
Financial Statement Schedules. Reference is made to Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY
None.
52
OSI SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm—Moss Adams LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Supplementary Data—Unaudited Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-41
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
OSI Systems, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of OSI Systems, Inc. and subsidiaries (the
“Company”) as of June 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2021, and the related notes
(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control
over financial reporting as of June 30, 2021, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of June 30, 2021 and 2020, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal
Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in
Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion
on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to
accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Inventories
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated inventories
balance was $294.2 million as of June 30, 2021. The Company values its inventories at the lower of cost or net realizable
value. The Company writes down inventory for slow-moving and obsolete inventory based on historical usage, orders on
hand, assessments of future demands and market conditions, among other items. As disclosed by management, if these
factors are less favorable than those projected, additional inventory write-downs may be required.
The valuation of inventories requires management to make significant assumptions and complex judgments about
the methods and assumptions used to determine its net realizable value. The assumptions included in the assessment of net
realizable value by inventory category were retention periods, future usage and market demand for their products.
Additionally, management makes qualitative judgments related to discontinued, slow moving and obsolete inventories.
The primary procedures we performed to address this critical audit matter included:
• Testing the design and operating effectiveness of internal controls over the valuation of inventories, including
those related to the Company’s methodology for valuing specific inventory categories;
• Testing management’s process for determining the valuation of inventories, including:
o Evaluating the reasonableness of the methodology selected to determine the net realizable value of
inventories
o Evaluating the reasonableness of the significant assumptions used by management including those
related to forecasted inventory usage and backlog;
o Testing the completeness, accuracy, and relevance of the underlying data used in management’s
estimate;
F-3
o Testing the mathematical accuracy of management’s calculation
o Testing the calculations related to the application of Company policies to specific inventory categories
within each division;
o Testing the completeness and appropriateness of specific reserves identified by management;
o Performing inquiries with appropriate non-financial personnel, including sales and production
employees, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors
to corroborate management’s assertions regarding qualitative judgments about discontinued, slow
moving and obsolete inventories; and
• Performing substantive analytical procedures to assess the reasonableness of the reserve and management’s
valuation adjustment.
/s/ Moss Adams LLP
Los Angeles, California
August 23, 2021
We have served as the Company’s auditor since 2006.
F-4
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts and par value)
CURRENT ASSETS:
ASSETS
June 30,
2020
2021
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,613
290,653
294,208
43,930
709,404
118,004
320,304
127,608
109,047
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,268,541 $ 1,384,367
76,102 $
269,840
241,226
30,541
617,709
127,936
310,627
128,279
83,990
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses and current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,000 $
926
84,940
46,127
28,155
110,953
330,101
267,072
5,846
93,370
696,389
—
846
141,263
50,816
38,463
113,379
344,767
276,421
7,157
116,202
744,547
Commitments and contingencies (Note 11)
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
105,724
outstanding, 18,011,982 and 17,854,110 shares at June 30, 2020 and 2021, respectively . .
548,842
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,746)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
639,820
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,268,541 $ 1,384,367
122,553
474,793
(25,194)
572,152
See accompanying notes to Consolidated Financial Statements.
F-5
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Net revenues:
Year Ended June 30,
2019
2020
2021
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 856,712 $ 850,478 $ 872,809
274,093
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,146,902
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
315,566
1,166,044
325,403
1,182,115
Cost of goods sold:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share:
572,673
178,848
751,521
430,594
575,342
170,063
745,405
420,639
262,484
56,509
3,827
322,820
107,774
(21,610)
86,164
(21,368)
64,796 $
251,961
57,308
6,483
315,752
104,887
(18,765)
86,122
(10,870)
75,252 $
586,935
140,049
726,984
419,918
240,747
53,696
10,104
304,547
115,371
(16,731)
98,640
(24,591)
74,049
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.58 $
3.46 $
4.14 $
4.05 $
4.12
4.03
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,097
18,720
18,191
18,600
17,968
18,388
See accompanying notes to Consolidated Financial Statements.
F-6
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss):
2019
64,796 $
Year Ended June 30,
2020
75,252 $
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,059)
116
(1,943)
62,853 $
(6,590)
(1,877)
(8,467)
66,785 $
2021
74,049
10,186
262
10,448
84,497
See accompanying notes to Consolidated Financial Statements.
F-7
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands, except share data)
Common Stock
Number of
Retained
Accumulated
Other
Comprehensive
Shares
Amount
Earnings Income (Loss) Total
Balance-July 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,032,374 $ 169,475 $ 334,745 $
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock/RSUs . . . . . . . . . . . . . . . .
Shares issued under employee stock purchase
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of
169,799
364,410
4,972
—
75,313
—
(288,316)
4,180
25,251
(21,029)
—
—
—
—
—
equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
(186,560)
—
—
(13,936)
—
—
—
64,796
—
Balance-June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . 18,167,020 $ 168,913 $ 399,541 $
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock/RSUs . . . . . . . . . . . . . . . .
Shares issued under employee stock purchase
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of
equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
201,150
390,613
1,817
—
71,595
—
(562,707)
4,286
23,817
(51,775)
—
—
—
—
—
(255,689)
—
—
(24,505)
—
—
—
75,252
—
Balance-June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 18,011,982 $ 122,553 $ 474,793 $
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . .
Vesting of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued under employee stock purchase
program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . .
Taxes paid related to net share settlement of
equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . .
88,657
313,892
1,302
—
68,180
—
(452,005)
4,215
26,771
(37,468)
—
—
—
—
—
(176,596)
—
—
(11,649)
—
—
—
74,049
—
Balance-June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . 17,854,110 $ 105,724 $ 548,842 $
(14,784) $ 489,436
4,972
—
—
—
—
—
—
4,180
25,251
(21,029)
(13,936)
—
64,796
—
(1,943)
(1,943)
(16,727) $ 551,727
1,817
—
—
—
—
—
—
4,286
23,817
(51,775)
(24,505)
—
75,252
—
(8,467)
(8,467)
(25,194) $ 572,152
1,302
—
—
—
—
—
—
4,215
26,771
(37,468)
(11,649)
—
74,049
—
10,448
10,448
(14,746) $ 639,820
See accompanying notes to Consolidated Financial Statements.
F-8
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended June 30,
2020
2021
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,796 $ 75,252 $ 74,049
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects from acquisitions:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount and issuance costs . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities—net of business acquisitions:
56,234
25,251
2,741
(8,536)
9,026
—
292
49,758
23,817
4,741
(431)
9,383
5,458
178
43,855
26,771
9,823
432
9,756
552
(109)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advances from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(27,206)
39,447
(6,175)
(16,623)
3,355
(12,489)
(11,001)
119,112
(37,071)
30,752
(10,566)
(8,893)
4,205
(15,188)
(2,215)
129,180
(28,955)
(47,768)
(34,430)
55,601
10,486
9,796
9,207
139,066
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(27,412)
—
—
(18,271)
(2,803)
(48,486)
(20,388)
—
—
(8,940)
(13,359)
(42,687)
(15,760)
(4,892)
2,710
(3,000)
(13,751)
(34,693)
CASH FLOWS FROM FINANCING ACTIVITIES
(59,000)
Net payments on bank lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
739
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,057)
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,517
Proceeds from exercise of stock options and employee stock purchase plan . . .
(1,007)
Payment of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(37,468)
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,649)
Taxes paid related to net share settlement of equity awards . . . . . . . . . . . . . . . .
(103,925)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,063
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,511
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,102
Cash and cash equivalents—end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,316 $ 76,102 $ 80,613
Supplemental disclosure of cash flow information:
(29,000)
770
(970)
6,103
(5,353)
(51,775)
(24,505)
(104,730)
(1,977)
(20,214)
96,316
(25,006)
1,409
(3,122)
9,152
(5,782)
(21,029)
(13,936)
(58,314)
(810)
11,502
84,814
5,979
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,862 $
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,794 $ 19,077 $ 12,778
7,713 $
See accompanying notes to Consolidated Financial Statements.
F-9
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED JUNE 30, 2021
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business—OSI Systems, Inc., together with our subsidiaries, is a vertically integrated designer
and manufacturer of specialized electronic systems and components for critical applications. We sell our products and
provide related services in diversified markets, including homeland security, healthcare, defense and aerospace.
We have three reporting segments: (i) Security, providing security and inspection systems and turnkey security
screening solutions; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and connected care systems and
associated accessories; and (iii) Optoelectronics and Manufacturing, providing specialized electronic components and
electronic manufacturing services for our Security and Healthcare divisions, as well as third parties for applications in the
defense and aerospace markets, among others.
Through our Security segment, we provide security screening products and related services globally. These
products fall into the following categories: baggage and parcel inspection; cargo and vehicle inspection; hold (checked)
baggage screening; people screening; radiation detection; and explosive and narcotics trace detection. In addition to these
products, we also provide site design, installation, training and technical support services to our customers. We also provide
turnkey security screening solutions, which can include the construction, staffing and long-term operation of security
screening checkpoints for our customers.
Through our Healthcare segment, we design, manufacture, market and service patient monitoring, diagnostic
cardiology, and connected care systems and associated accessories globally. These products are used by care providers in
critical care, emergency and perioperative areas within hospitals as well as physicians’ offices, medical clinics and
ambulatory surgery centers, among others.
Through our Optoelectronics and Manufacturing segment, 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, X-ray security and inspection systems and medical imaging, chemistry
analysis and diagnostics instruments, telecommunications, scanners and industrial automations, internet of things (IoT)
and consumer wearable products. This division provides products and services to OEM customers and end users as well
as to our Security and Healthcare divisions.
Consolidation—The consolidated financial statements include the accounts of OSI Systems, Inc. and our
wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in joint ventures over which we have significant influence but do not have voting
control are accounted for using the equity method. Investments over which we do not have significant influence or control
are not material and are carried at cost as there is no readily determinable fair value for the equity interests.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the
reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, fair
values of assets acquired and liabilities assumed in business combinations, values for inventories reported at lower of cost
or net realizable value, stock-based compensation expense, income taxes, accrued warranty costs, and the recoverability,
useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. 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.
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.
F-10
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Our cash and cash equivalents totaled $80.6 million at June 30, 2021. Of this amount, approximately 71% was
held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by
our subsidiaries in the United Kingdom, India, Malaysia, Singapore, Canada and Australia, and to a lesser extent in Albania
and Germany among other countries. We have cash holdings in financial institutions that exceed insured limits for such
financial institutions; however, we mitigate this risk by utilizing international financial institutions of high credit quality.
Accounts Receivable—We monitor collections and payments from our customers, and we maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We
determine the allowance based on known troubled accounts, historical experience, current economic trends that might
impact the level of credit losses in the future and other available information. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Inventories—Inventories are generally stated at the lower of cost (first-in, first-out) or net realizable value. We
write down inventory for slow-moving and obsolete inventory based on historical usage, orders on hand, assessments of
future demands, market conditions among other items. If these factors are less favorable than those projected, additional
inventory write-downs may be required.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged while assets are used in service and are computed using the
straight-line method over the estimated useful lives of the assets taking into consideration any estimated salvage value.
Amortization of leasehold improvements is calculated on the straight-line method over the shorter of the useful life of the
asset or the lease term. Leased capital assets are included in property and equipment. Amortization of property and
equipment under capital leases is included with depreciation expense. In the event that property and equipment are idle,
as a result of excess capacity or the early termination, non-renewal or reduction in scope of a turnkey screening operation,
such assets are assessed for impairment on a periodic basis or if any indicators of impairment exist.
Goodwill and Other Intangible Assets and Valuation of Long-Lived Assets—Goodwill represents the excess
purchase price over the estimated fair value of the assets acquired and liabilities assumed in a business combination.
Goodwill is allocated to our segments based on the nature of the product line of the acquired business. The carrying value
of goodwill is not amortized but is annually tested for impairment as of the end of the second quarter and more frequently
if there is an indicator of impairment. We assess qualitative factors of each of our three reporting units to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The
assessments conducted as of December 31, 2020 indicated that it is not more likely than not that the fair values of our three
reporting units are less than their carrying amounts, including goodwill. Despite the COVID-19 pandemic, there were no
qualitative factors which would trigger impairment testing between measurement dates. Thus, we have determined that
there is no goodwill impairment for any of the three reporting units.
We evaluate long-lived assets with finite lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Impairment is considered to exist if the total
estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If impairment does
exist, we measure the impairment loss and record it based on the discounted estimate of future cash flows. In estimating
future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are largely independent
of the cash flows from other asset groups. Our estimate of future cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth rates and other factors.
F-11
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Income Taxes—Deferred income taxes are provided for temporary differences between the financial statement
and income tax basis of our assets and liabilities, based on enacted tax rates. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred income tax assets will not be realized. Income tax accounting
standards prescribe a two-step process for the financial statement measurement and recognition of a tax position taken or
expected to be taken in a tax return. The first step involves the determination of whether it is more likely than not (greater
than 50 percent likelihood) that a tax position will be sustained upon examination, based on the technical merits of the
position. The second step requires that any tax position that meets the more likely than not recognition threshold be
measured and recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. See Note 10 for additional information.
Fair Value of Financial Instruments—Our financial instruments consist primarily of cash and cash equivalents,
insurance company contracts, accounts receivable, accounts payable, debt instruments and foreign currency forward
contracts. The carrying values of financial instruments, other than long term debt instruments, are representative of their
fair values due to their short-term maturities. The carrying values of our long-term debt instruments are considered to
approximate their fair values because the interest rates of these instruments are variable or comparable to current rates for
financing available to us. The fair values of our foreign currency forward contracts were not significant as of June 30, 2021.
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 11 to the consolidated financial statements, are in the “Level 3”
category for valuation purposes.
The fair values of our financial assets and liabilities as of June 30, 2020 and 2021 are categorized as follows (in
thousands):
Assets—Insurance company
contracts . . . . . . . . . . . . . . . . . . $
— $ 37,155 $
— $ 37,155 $
— $ 47,113 $
— $ 47,113
Level 1 Level 2 Level 3 Total
Level 1 Level 2 Level 3 Total
June 30, 2020
June 30, 2021
Liabilities—Contingent
consideration . . . . . . . . . . . . . . . $
— $
— $ 13,867 $ 13,867 $
— $
— $ 19,431 $ 19,431
Derivative Instruments and Hedging Activity—Our use of derivatives consists of foreign currency forward
contracts. These forward contracts are utilized to partially mitigate certain balance sheet exposures or used as a net
investment hedge to protect against potential changes resulting from short-term foreign currency fluctuations. These
contracts have original maturities of up to three months. We do not use hedging instruments for speculative purposes.
The net investment hedge has been designated as a hedge instrument and accounted for under Accounting
Standards Codification (“ASC”) 815 “Derivatives and Hedging”. Hedge effectiveness is assessed using the spot method,
consistent with guidance in ASC 815 whereby the change in fair value of the forward contract is recorded in the same
manner as the related currency translation adjustments, within other comprehensive income, as the hedging instrument is
expected to be fully effective unless the amount hedged exceeds the net investment in the foreign operation, or the foreign
operation is liquidated. We settled the net investment hedge in the second quarter of fiscal 2021, and the amount recorded
in other comprehensive loss was not significant. There were no net investment hedges outstanding as of June 30, 2021.
F-12
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The net gains or losses from the foreign currency forward contracts, which are not designated as hedge
instruments, are reported in the consolidated income statement. We initiated these forward contracts in the first quarter of
fiscal 2021 and the amounts reported in the consolidated income statement for the year ending June 30, 2021 were not
significant. The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and
market-based observable inputs over the contractual term. Unrealized gains are recognized as assets and unrealized losses
are recognized as liabilities. As of June 30, 2021, we held foreign currency forward contracts with notional amounts
totaling $26.1 million. Unrealized gains and losses from the forward currency forward contracts as of June 30, 2021 were
not significant. There were no derivative instruments as of June 30, 2020.
Revenue Recognition
We recognize revenue under Accounting Standards Codification Topic 606, Revenue from Contracts with
Customers (“ASC 606”), which superseded all prior revenue recognition methods and industry-specific guidance. The
core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of control for promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. In applying the revenue recognition principles, an entity is required to identify the contract(s)
with a customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the
performance obligations and recognize revenue as the performance obligations are satisfied (i.e., either over time or at a
point in time). ASC 606 further requires that companies disclose sufficient information to enable readers of financial
statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers.
Product Sales. We recognize revenue from sales of products upon shipment or delivery when control of the
product transfers to the customer, depending on the terms of each sale, and when collection is probable. In the circumstance
where terms of a product sale include subjective customer acceptance criteria, revenue is deferred until we have achieved
the customer acceptance criteria unless such acceptance criteria are perfunctory or inconsequential. We generally offer
customers payment terms of less than one year. In cases when payment terms extend beyond one year, we consider whether
the contract has a significant financing component.
Service Revenue. Revenue from services includes installation and implementation of products and turnkey
security screening services and after-market services. Generally, revenue from services is recognized over time as the
services are performed. Revenues from out of warranty service maintenance contracts are recognized ratably over the
respective terms of such contracts. Deferred revenue for such services arises from payments received from customers for
services not yet performed.
Contract Revenue. Sales agreements with customers can be project specific, cover a period of time, and can be
renewable periodically. The contracts may contain terms and conditions with respect to payment, delivery, installation,
services, warranty and other rights. In certain instances, we consider an accepted customer order, governed by a master
sales agreement, to be the contract with the customer when legal rights and obligations exist. Contracts with customers
may include the sale of products and services, as discussed in the paragraphs above. In certain instances, contracts can
contain multiple performance obligations as discussed in the paragraph below. According to the terms of a sale contract,
we may receive consideration from a customer prior to transferring goods to the customer, and we record these
prepayments as a contract liability. We also record deferred revenue, typically related to service contacts, when
consideration is received before the services have been performed. We recognize contract liabilities and deferred revenue
as net sales after all revenue recognition criteria are met.
F-13
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
When determining revenue recognition for contracts, we make judgments based on our understanding of the
obligations in each contract. We determine whether or not customer acceptance criteria are perfunctory or inconsequential.
The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the amount
and timing of revenue recognition. Critical judgments also include estimates of warranty reserves, which are established
based on historical experience and knowledge of the product under warranty.
Multiple Performance Obligations. Certain agreements with customers include the sale of capital equipment
involving multiple elements that may include civil works to prepare a site for the installation of equipment, manufacture
and delivery of equipment, installation and integration of equipment, training of customer personnel to operate the
equipment and after-market service of the equipment. We generally separate multiple elements in a contract into separate
performance obligations if those elements are distinct, both individually and in the context of the contract. If multiple
promises comprise a series of distinct services which are substantially the same and have the same pattern of transfer, they
are combined and accounted for as a single performance obligation.
In cases where obligations in a contract are distinct and thus require separation into multiple performance
obligations, revenue recognition guidance requires that contract consideration be allocated to each distinct performance
obligation based on its relative standalone selling price. The value allocated to each performance obligation is then
recognized as revenue when the revenue recognition criteria for each distinct obligation or bundle of obligations has been
met.
The standalone selling price for each performance obligation is an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for transferring the good or service. When there is only
one performance obligation associated with a contract, the entire sale value is attributed to that obligation. When a contract
contains multiple performance obligations the standalone selling price is first estimated using the observable price, which
is generally a list price net of applicable discount, or the price used to sell the good or service in similar circumstances. In
circumstances when a selling price is not directly observable, we will estimate the standalone selling price using
information available to us including our market assessment and expected cost plus margin.
The timetable for fulfilment of each of the distinct performance obligations can range from completion in a short
amount of time and entirely within a single reporting period to completion over several reporting periods. The timing of
revenue recognition for each performance obligation may be dependent upon several milestones, including physical
delivery of equipment, completion of factory acceptance test, completion of site acceptance test, installation and
connectivity of equipment, certification of training of personnel and, in the case of after-market service deliverables, the
passage of time (typically evenly over the post-warranty period of the service deliverable).
We often provide a guarantee to support our performance under multiple performance obligations. In the event
that customers are permitted to terminate such arrangements, the underlying contract typically requires payment for
deliverables and reimbursement of costs incurred through the date of termination.
We disaggregate revenue by reporting segment (Security, Optoelectronics and Manufacturing, and Healthcare)
to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other
communications and public filings. Refer to Note 14 for additional details of revenues by reporting segment.
F-14
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
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 sheet. We may also receive consideration, per the terms of a contract, from customers prior to
transferring goods to the customer. We record customer deposits as contract liabilities. Additionally, we may receive
payments, most typically 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.
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.
Freight—We record shipping and handling fees that we charge to our customers as revenue and related costs as
cost of goods sold.
Research and Development Costs—Research and development costs are those costs related to the development
of a new product, process or service, or significant improvement to an existing product, process or service. Such costs are
charged to operations as incurred.
Stock-Based Compensation—Stock-based compensation cost is measured at the grant date based on the
estimated fair value of the award and is recognized as expense over the employee’s requisite service period for all
stock-based awards granted or modified. Certain restricted stock unit awards vest based on the achievement of pre-
established performance criteria. The fair value of performance-based awards is estimated at the date of grant based upon
the probability that the specified performance criteria will be met, adjusted for estimated forfeitures. Each quarter we
update our assessment of the probability that the specified performance criteria will be achieved and adjust the estimate of
the fair value of the performance-based awards if necessary. We amortize the fair value of performance-based awards over
the requisite service period for each separately vesting tranche of the award. See Note 9 to the consolidated financial
statements.
Impairment, Restructuring and Other Charges—We account for certain charges related to restructuring
activities, litigation, acquisition-related costs and other non-routine charges as Impairment, restructuring and other charges
in the consolidated financial statements. See Note 7 for additional information about these charges.
Credit Risk and Concentration—Financial instruments that are potentially subject to concentrations of credit
risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. We restrict investments in
cash equivalents to financial institutions with high credit standing. Credit risk on accounts receivable is minimized as a
result of the large and diverse nature of our company’s worldwide customer base. As of June 30, 2020, one customer
accounted for 13% of accounts receivable. As of June 30, 2021, no customer accounted for greater than 10% of accounts
receivable. In fiscal years 2020 and 2021, no customer accounted for greater than 10% of revenues. We perform ongoing
credit evaluations of our customers’ financial condition and maintain allowances for potential credit losses.
Our cash and cash equivalents totaled $76.1 million and $80.6 million at June 30, 2020 and 2021, respectively.
Of these amounts, approximately 63% and 71% was held by our foreign subsidiaries at June 30, 2020 and 2021,
respectively.
F-15
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
For cost, quality control, technological, and efficiency reasons, we purchase certain materials, parts, and
components only from single vendors with whom we have ongoing relationships. We do, however, qualify second sources
for many of our materials, parts, and components. While management believes that relying on key vendors improves the
efficiency and reliability of business operations, relying on any one vendor for a significant aspect of business can have a
significant negative impact on revenue and profitability if that vendor fails to perform at acceptable service levels for any
reason, including financial difficulties of the vendor.
Foreign Currency Translation and Transactions—We transact business in various foreign currencies. In
countries where the functional currency of the underlying operations has been determined to be the local country’s
currency, revenues and expenses of operations outside the United States are translated into United States dollars using
average exchange rates while assets and liabilities of operations outside the United States are translated into United States
dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included in
stockholders’ equity as a component of accumulated other comprehensive income (loss) in the accompanying consolidated
balance sheets. We also have subsidiaries where the United States dollar has been designated as the functional currency
based on individual facts and circumstances. Remeasurement of non-United States dollar monetary assets and liabilities
are translated using period-end exchange rates and associated gains and losses are recognized in the consolidated
statements of operations. Non-monetary assets and liabilities are translated using historical exchange rates. Transaction
gains and losses, which were included in our consolidated statement of operations, amounted to a gain (loss) of
approximately $0.1 million, $(3.4) million and $(1.3) million for the fiscal years ended June 30, 2019, 2020 and 2021,
respectively.
Business Combinations—Under ASC 805, the acquisition method of accounting requires us to record assets
acquired and 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 believed to be reasonable, but which are inherently uncertain and unpredictable and,
as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition
date, as additional information becomes available for preliminary estimates, we may record adjustments to the preliminary
assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are
included in earnings.
Earnings per Share—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.
In periods where a net loss is reported, basic and diluted net loss per share are the same since the effect of potential common
shares is antidilutive and therefore excluded. The underlying equity component of the 1.25% convertible senior notes due
2022 (the “Notes”) discussed in Note 8 to the condensed consolidated financial statements will have a net impact on diluted
earnings per share when the average price of our common stock exceeds the conversion price of $107.46 because the
principal amount of the Notes is intended to be settled in cash upon conversion. There was no dilutive effect of the Notes
for the years ended June 30, 2019, 2020 and 2021.
F-16
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per
share amounts):
2019
2020
2021
Net income available to common stockholders . . . . . . . . . . . . $ 64,796 $ 75,252 $74,049
17,968
Weighted average shares outstanding—basic . . . . . . . . . . . . . .
18,191
420
Dilutive effect of equity awards . . . . . . . . . . . . . . . . . . . . . . . . .
409
Weighted average shares outstanding—diluted . . . . . . . . . . . .
18,388
18,600
3.58 $ 4.14 $ 4.12
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.46 $ 4.05 $ 4.03
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares excluded from diluted earnings per
18,097
623
18,720
share due to their anti-dilutive effect . . . . . . . . . . . . . . . . . . .
40
120
47
Warranty Provision—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, whose activity for
each of the three fiscal years ended June 30, 2021 is summarized in the following table (in thousands):
Warranty provision as of June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Warranty claims provided for/assumed in acquisition . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Warranty claims provided for/assumed in acquisition . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Warranty claims provided for/assumed in acquisition . . . . . . . . . . . . . . . . . . . . . .
Settlements made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provision as of June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,819
8,867
(8,962)
21,724
7,551
(8,450)
20,825
5,419
(6,508)
19,736
Leases—Right of use ("ROU") assets represent our right to use an underlying asset during the reasonably certain
lease terms, and lease liabilities represent our obligation to make lease payments arising from the leases. We recognize
ROU lease assets and lease liabilities at lease commencement on our consolidated balance sheet based on the present value
of lease payments over the lease term using a discount rate determined based on our incremental borrowing rate since the
rate implicit in each lease is not readily determinable. We elected the package of practical expedients, which permits us to
not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification of any expired
or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We elected the practical
expedient to account for each separate lease component of a contract and its associated non-lease components as a single
lease component. We also elected the hindsight practical expedient, which allows us to use hindsight in determining the
lease term. We do not record an ROU asset and corresponding lease liability for leases with an initial term of one year or
less ("short-term leases"). The terms in our leases may include options to extend or terminate the lease. We recognize ROU
assets and liabilities when it is reasonably certain that we will exercise those options. Judgment is required in our
assessment as to whether renewal or termination options are reasonably certain to be exercised and factors such as
contractual terms compared to current market rates and the importance of the facility and location to our operations, among
others, are considered. Lease payments are made in accordance with the lease terms, and lease expense, including
short-term lease expense, is recognized on a straight-line basis over the lease term.
F-17
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
We lease facilities and certain equipment under various operating lease agreements. The majority of our lease
arrangements are comprised of fixed payments while certain of our other leases provide for periodic rent increases. Our
leases may contain escalation clauses and renewal options. Most of the leases require us to pay for certain other costs such
as common area maintenance and property taxes. Rent expense for leases with periodic rent increases or escalation clauses
is recognized on a straight-line basis over the minimum lease term. The lease agreements do not contain any material
residual value guarantees or material restrictive covenants. We also have finance leases for fleet vehicles that are not
material to the consolidated financial statements.
Subsequent Events—In accordance with ASC 855 the Company's management evaluated material events after the balance
sheet date through the date of the filing of this report with the Securities and Exchange Commission, and there are no
disclosable subsequent events.
Recent Accounting Guidance
Recently Adopted Accounting Pronouncements
Retirement Benefit Plans
In August 2018, the FASB issued authoritative guidance under Accounting Standards Update (“ASU”) 2018-14,
Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the
Disclosure Requirements for Defined Benefit Plans. This ASU eliminates requirements for certain disclosures and requires
additional disclosures under defined benefit pension plans and other post-retirement plans. We adopted this new guidance
in the first quarter of fiscal 2021, and it did not have a significant impact on our disclosures in the consolidated financial
statements.
Intangibles
In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and
Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement that is a Service Contract. This ASU requires implementation costs incurred by customers in cloud computing
arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for
internal-use software and deferred over the noncancellable term of the cloud computing arrangements plus any option
renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the
service provider. We adopted this new guidance in the first quarter of fiscal 2021, and it did not have a significant impact
on our consolidated financial statements.
Reference Interest Rate
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting, which temporarily simplifies the accounting for contract modifications,
including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference
interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous
accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge
accounting for hedging relationships affected by reference rate reform if certain conditions are met. Modifications to debt
agreements for a change in the reference interest rate will be accounted for by prospectively adjusting the effective interest
rate. The new standard was effective upon issuance and generally can be applied to applicable contract modifications
through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference
interest rates; however, the adoption of this new guidance for modifications to contracts, if any, is not expected to have a
significant impact on our consolidated financial statements.
F-18
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Recently Issued Accounting Pronouncements Not Yet Adopted
Convertible Debt
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an
Entity's Own Equity (“ASU 2020-06”). Under ASU 2020-06, the embedded conversion features are no longer separated
from the host contract for convertible instruments with conversion features that are not required to be accounted for as
derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as
paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its
amortized cost will be accounted for as a single equity instrument measured at its historical cost, as long as no other
features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of
convertible debt instruments typically will be closer to the coupon interest rate. ASU 2020-06 also provides for certain
disclosures with regard to convertible instruments and associated fair values. We are required to adopt this new guidance
in the first quarter of fiscal 2023. Early adoption is permitted for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. We intend to early adopt the new guidance on July 1, 2021 using the modified
retrospective approach and expect to record a $19 million increase to retained earnings and a reduction of $27 million
previously recorded in common stock as if there had been no equity component. Additionally, we also expect to record an
increase to the convertible notes balance by approximately $10 million. Interest expense recognized in future periods will
be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles of ASC 740 and is
intended to improve consistency and simplify GAAP by clarifying and amending existing guidance for income taxes and
related topics. We are required to adopt this new guidance in the first quarter of fiscal 2022. Early adoption is permitted
in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are
currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.
2. BUSINESS COMBINATIONS
Under ASC 805, Business Combinations, the acquisition method of accounting requires us to record assets
acquired less liabilities assumed in an acquisition at their estimated fair values at the date of acquisition. Any excess of the
total estimated purchase consideration over the estimated fair value of the assets acquired less liabilities assumed should
be recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to,
future expected cash flows from acquired customers, acquired technology, trade names, useful lives and discount rates.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. We may record adjustments to the
assets acquired and liabilities assumed, with corresponding adjustments to goodwill, during the one-year post-acquisition
measurement period as additional information becomes available. Upon the conclusion of the measurement period, any
subsequent adjustments are reflected in reported earnings.
Fiscal Year 2021 Business Acquisition
In July 2020, we (through our Healthcare division) acquired a privately-held software development company for
$3.0 million, plus up to $12.0 million in potential contingent consideration. The goodwill recognized for this business is
deductible for income tax purposes. This acquisition was financed with available cash on hand. This business acquisition
was not material to our consolidated financial statements. Accordingly, pro-forma historical results of operations and
certain other disclosures related to this business have not been presented.
F-19
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Other Business Acquisitions
In fiscal 2020 we paid an aggregate of $8.9 million, plus an insignificant amount of future contingent
consideration, for four business acquisitions. The goodwill recognized for these businesses are deductible for income tax
purposes. These acquisitions were financed with available cash on hand.
In fiscal 2019 we paid an aggregate of $18.3 million, plus up to $6 million in future contingent consideration,
which may be earned over a five-year period, for three business acquisitions. The majority of the goodwill recognized for
these businesses are deductible for income tax purposes. These acquisitions were financed with cash on hand and
borrowings under our credit facility.
These business acquisitions, individually and in the aggregate, were not material to our consolidated financial
statements. Accordingly, pro-forma historical results of operations related to these businesses have not been presented.
3. BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet accounts (in thousands):
Accounts receivable, net
June 30,
2020
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,488 $
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .
(17,648)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269,840 $
2021
315,926
(25,273)
290,653
Inventories
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Property and equipment, net
Estimated
Useful
Lives
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A $
Buildings, civil works and improvements . . . . . . . . . 5-40 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . 1-13 years
Equipment and tooling . . . . . . . . . . . . . . . . . . . . . . . . 3-10 years
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . 3-10 years
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
3-5 years
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10 years
N/A
Computer software implementation in process . . . . .
N/A
Construction in process . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . .
Property and equipment, net . . . . . . . . . . . . . . . . . .
$
June 30,
2020
132,797 $
50,023
58,406
241,226 $
2021
160,313
59,594
74,301
294,208
June 30,
2020
16,516 $
57,709
9,052
128,657
3,166
17,487
18,217
11,817
3,598
266,219
(138,283)
127,936 $
2021
16,357
57,555
8,874
129,735
3,275
19,349
23,090
11,102
4,011
273,348
(155,344)
118,004
During fiscal 2019, 2020 and 2021, depreciation expense was approximately $20.5 million, $21.5 million and
$22.4 million, respectively.
F-20
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by segment for fiscal 2020 and 2021 are as follows (in
thousands):
Optoelectronics
and
Security
Division
Healthcare Manufacturing
Division
Division
Balance as of June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,079 $ 40,064 $
Goodwill acquired or adjusted during the period . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . .
3,973
(425)
—
(81)
Balance as of June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203,627 $ 39,983 $
Goodwill acquired or adjusted during the period . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . .
2,322
477
3,244
357
Balance as of June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206,426 $ 43,584 $
Intangible assets consisted of the following (amounts in thousands):
Consolidated
66,965 $ 307,108
5,006
1,033
(1,487)
(981)
67,017 $ 310,627
5,566
—
4,111
3,277
70,294 $ 320,304
June 30, 2020
June 30, 2021
Weighted
Average Carrying Accumulated Intangibles Carrying Accumulated Intangibles
Lives
Net
Amortization
Amortization
Value
Value
Gross
Gross
Net
Amortizable assets:
Software development costs . . . . . . 8-9 years $ 41,332 $ (16,295) $ 25,037 $ 49,183 $ (15,679) $ 33,504
Patents . . . . . . . . . . . . . . . . . . . . . . . 19 years
6,156
Developed technology. . . . . . . . . . . 10 years 55,719 (19,556) 36,163 60,665 (25,923) 34,742
Customer relationships/backlog . . . 7 years 64,128 (32,110) 32,018 50,676 (26,588) 24,088
171,141 (70,545) 100,596 169,277 (70,787) 98,490
Total amortizable assets . . . . . . . .
(2,597)
(2,584)
9,962
7,378
8,753
Non-amortizable assets:
In-process R&D . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . .
—
533
—
533
533
533
— 28,585
— 27,150 28,585
27,150
$ 198,824 $ (70,545) $ 128,279 $ 198,395 $ (70,787) $ 127,608
Amortization expense related to intangible assets was $21.4 million, $20.7 million and $21.5 million for fiscal
2019, 2020 and 2021, respectively.
At June 30, 2021, the estimated future amortization expense was as follows (in thousands):
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,594
16,199
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,658
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,316
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,390
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,333
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,490
F-21
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
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. During fiscal
2019, 2020 and 2021, we capitalized software development costs in the amounts of $2.7 million, $11.9 million and
$12.9 million, respectively.
5. CONTRACT ASSETS AND LIABILITIES
The table below shows the balance of contract assets and liabilities as of June 30, 2020 and 2021, including the
change between the periods. There were no substantial non-current contract assets for the periods presented.
Contract Assets (in thousands)
Unbilled revenue (included in accounts
receivable, net) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,011 $ 40,853 $ (2,158)
(5)%
June 30,
June 30,
2020
2021
Change
% Change
Contract Liabilities (in thousands)
Advances from customers . . . . . . . . . . . . . . . . . . $ 28,155 $ 38,463 $ 10,308
(174)
Deferred revenue—current . . . . . . . . . . . . . . . . . .
1,684
Deferred revenue—long-term . . . . . . . . . . . . . . .
32,689
14,898
32,863
13,214
Change % Change
37 %
(1)%
13 %
June 30,
June 30,
2020
2021
Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the
aggregate transaction price allocated to performance obligations under an original contract with a term greater than one
year which are fully or partially unsatisfied at the end of the period. As of June 30, 2021, the aggregate amount of the
transaction price allocated to remaining performance obligations was approximately $251.5 million. We expect to
recognize revenue on approximately 57% of the remaining performance obligations over the next 12 months, and the
remainder is expected to be recognized thereafter. During the year ended June 30, 2021, we recognized revenue of
$58.6 million from contract liabilities existing as of July 1, 2020.
6. LEASES
The components of operating lease expense for the fiscal years ended June 30, 2020 and 2021 were as follows
(in thousands):
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended June 30,
2021
2020
9,384
10,232 $
927
746
907
943
11,218
11,921 $
F-22
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Supplemental balance sheet assets and liabilities related to operating leases were as follows (in thousands):
Operating lease ROU assets, net . . . . . . . . . . . . . . . .
Balance Sheet Category
Other assets
June 30, 2020
$
27,936 $
June 30, 2021
23,439
Operating lease liabilities, current portion . . . . . . . . .
Operating lease liabilities, long-term . . . . . . . . . . . . .
Total operating lease liabilities . . . . . . . . . . . . . . . .
Other accrued expenses
and current liabilities
Other long-term liabilities
$
$
8,537 $
19,713
28,250 $
7,499
16,317
23,816
Weighted average remaining lease term . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . .
4.1 years
4.1 %
Supplemental cash flow information related to operating leases for the year ended June 30, 2021 was as follows
(in thousands):
Cash paid for operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
ROU assets obtained in exchange for new lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended June 30,
2021
2020
9,884
7,664 $
4,212
3,718
Maturities of operating lease liabilities under ASC 842 (defined below) at June 30, 2021 were as follows (in thousands):
Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 – 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 – 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 – 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 – 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
June 30, 2021
8,291
5,944
4,828
3,001
2,233
1,944
26,241
(2,425)
23,816
$
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 year ended June 30, 2021, we incurred $7.2 million for exit activities associated with an expired
turnkey contract in Mexico. Such exit costs include $2.8 million for employee terminations, $1.1 million for facility closure
and other exit costs, direct transaction costs of $2.7 million, and $0.6 million for right-of-use asset impairment for a leased
facility. We also incurred costs of $1.6 million for other employee terminations and $0.5 million for other facility closure
costs for operational efficiency activities, $0.3 million for acquisition-related activities, and $0.5 million for certain legal
charges, net of insurance reimbursements.
F-23
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
During fiscal 2020, we incurred $0.4 million in costs for professional fees relating to acquisitions, $4.0 million
in employee termination costs as part of operational efficiency initiatives, and $0.2 million in costs associated with the
consolidation of facilities in our Security division. Additionally, legal fees and settlement costs resulted in a net recovery
of $3.6 million as a result of insurance reimbursements of certain legal costs. During the year ended June 30, 2020, we
also impaired an intangible asset for IPR&D in the Security division due to a strategic shift in the direction of the project
and abandoned a non-core product line in our Healthcare division which resulted in the write-off of assets, including
intangible and fixed assets. As a result, $5.5 million of assets, including intangible and fixed assets, were written off as we
determined that these assets had no value and were permanently impaired. These impairment charges were included in
impairment, restructuring and other charges in our consolidated statements of operations.
The following tables summarize impairment, restructuring and other charges for the periods set forth below
(in thousands):
2019
Optoelectronics
and
Security Healthcare Manufacturing
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Employee termination costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . . . . . . . . . . . .
Legal costs (recoveries), net . . . . . . . . . . . . . . . . . . . . . . . . . .
132
—
—
1,629
1,918
—
Division Division
— $
— $
Total expensed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
132 $ 3,547 $
Division
Corporate Total
287 $ 1,021 $ 1,308
2,448
—
687
2,002
—
84
(1,931)
(1,931)
—
1,058 $ (910) $ 3,827
2020
Optoelectronics
and
Security Healthcare Manufacturing
Division Division
Division
Corporate Total
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,200 $ 3,258 $
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . . . . . . . . . . . .
Legal costs (recoveries), net . . . . . . . . . . . . . . . . . . . . . . . . . .
309
2,748
231
—
—
466
—
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,488 $ 3,724 $
— $
41
618
—
—
— $ 5,458
350
—
4,016
184
231
—
(3,572)
(3,572)
659 $ (3,388) $ 6,483
2021
Optoelectronics
and
Security Healthcare Manufacturing
Division Division
Division
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee termination costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility closures/consolidation . . . . . . . . . . . . . . . . . . . . . . . .
Legal costs (recoveries), net . . . . . . . . . . . . . . . . . . . . . . . . . .
552 $
249
4,130
2,691
1,675
—
Total expensed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,297 $
— $
27
—
—
—
—
27 $
F-24
Corporate Total
552
— $
276
—
4,445
—
2,691
—
1,675
—
465
465
465 $ 10,104
— $
—
315
—
—
—
315 $
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The accrued liability for restructuring and other charges is included in other accrued expenses and current
liabilities in the consolidated balance sheet. The changes in the accrued liability for restructuring and other charges for
fiscal 2020 and 2021 were as follows (in thousands):
Acquisition-
Employee
Facility
Closure /
Related
Costs
Termination Consolidation
Costs
Cost
Legal
Costs and
Settlements Total
Balance as of June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . $
Restructuring and other charges (benefit), net . . . . . .
Payments, adjustments and reimbursements, net . . . .
Balance as of June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . $
Restructuring and other charges, net . . . . . . . . . . . . . .
Payments, adjustments and reimbursements, net . . . .
Balance as of June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . $
— $
432 $
350
(350)
4,016
(3,903)
— $
545 $
— $
231
(30)
201 $
276
(276)
4,368
(4,663)
1,675
(1,490)
— $
250 $
386 $
6,331 $ 6,763
1,025
(3,572)
(5,160)
(877)
1,882 $ 2,628
9,475
3,156
(2,266)
(8,695)
2,772 $ 3,408
8. BORROWINGS
Revolving Credit Facility
We have a revolving credit facility with an aggregate committed amount of up to $535 million which matures in
April 2024. The credit facility includes a $300 million sub-limit for letters of credit. Under certain circumstances, we have
the ability to increase the facility by the greater of $250 million or such amount as would not cause our secured leverage
ratio to exceed a specified level. Borrowings under this facility bear interest at LIBOR plus a margin of 1.0% as of June 30,
2021 (which margin can range from 1.0% to 1.75% based on our consolidated net leverage ratio as defined in the credit
facility). The LIBOR index is expected to be discontinued by the end of calendar year 2021. The terms of our credit facility
allow for replacement if that occurs. Letters of credit reduce the amount available to borrow under the credit facility by
their face value amount. The unused portion of the facility bears a commitment fee of 0.10% as of June 30, 2021 (which
fee can range from 0.10% to 0.25% based on our consolidated net leverage ratio as defined in the credit facility). Our
borrowings under the credit agreement are guaranteed by certain of our U.S.-based subsidiaries and are secured by
substantially all of our assets and substantially all the assets of certain of our subsidiaries. The agreement contains various
representations and warranties, affirmative, negative and financial covenants and conditions of default. As of June 30,
2021, there were no borrowings outstanding under the revolving credit facility and $63.2 million outstanding under the
letters of credit sub facility.The amount available to borrow under the credit facility as of June 30, 2021 was $471.8 million.
Loan amounts under the revolving credit facility may be borrowed, repaid and re-borrowed during the term. The principal
amount of each revolving loan is due and payable in full on the maturity date. We have the right to repay each revolving
loan in whole or in part from time to time without penalty. It is our practice to routinely borrow and repay several times
per year under this revolving facility. Therefore, borrowings under the credit facility are included in current liabilities. As
of June 30, 2021, we are in compliance with all financial covenants under this credit facility.
1.25% Convertible Senior 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 revolving credit facility).
F-25
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The Notes are convertible prior to March 1, 2022 only upon specified events and during specified periods and
are, thereafter convertible, at any time, in each case at an initial conversion rate of 9.3056 per $1,000 principal amount of
the Notes, which is equal to an initial conversion price of approximately $107.46 per share or a 38.5% premium to our
stock price at the time of the issuance. The conversion rate is subject to adjustment upon certain events. Upon conversion,
the indenture provides that the Notes may be settled, at our election, in shares of our common stock, cash or a combination
of cash and shares of common stock. We have irrevocably elected a combination settlement method to satisfy the
conversion obligation, which provides for us to settle the principal amount of the Notes in cash and to settle the excess
conversion value, if any, in shares of common stock, as well as cash in lieu of fractional shares.
We may redeem the Notes if the last reported sale price of our common stock has been at least 130% of the
conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive
trading days. 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 during fiscal year 2021, the Notes are not yet convertible.
Pursuant to ASC 470-20, we allocated the $287.5 million gross proceeds of the Notes between liability and equity
components. The initial $242.4 million liability component was determined based on the fair value of similar debt
instruments excluding the conversion feature for similar terms and priced on the same day the Notes were issued. The
initial $45.1 million equity component represents the debt discount and was calculated as the difference between the fair
value of the debt and the gross proceeds of the Notes. Issuance costs of $7.7 million were allocated between debt ($6.5
million) and equity ($1.2 million) components with the portion allocated to the debt presented as an offset against long
term debt in the consolidated balance sheet and being amortized as interest expense over the life of the Notes using the
effective interest method. The total interest expense recognized for the fiscal year ended June 30, 2021 related to the Notes
was $13.4 million, which consisted of $3.6 million of contractual interest expense, $8.6 million of debt discount
amortization and $1.2 million of amortization of debt issuance costs. For fiscal year ended June 30, 2020, the total interest
expense was $13.0 million, which consisted of $3.6 million of contractual interest expense, $8.2 million of debt discount
amortization and $1.2 million of amortization of debt issuance costs. For fiscal year ended June 30, 2019, the total interest
expense was $12.6 million, which consisted of $3.6 million of contractual interest expense, $7.8 million of debt discount
amortization and $1.2 million of amortization of debt issuance costs. As of June 30, 2020 and 2021, the unamortized debt
discount was $19.1 million and $10.5 million, respectively, which was being amortized over the remaining contractual
term to maturity of the Notes using an effective interest rate of 4.50%. The unamortized debt issuance cost of $2.5 million
and $1.4 million as of June 30, 2020 and 2021, respectively, is amortized on a straight-line basis, which approximates the
effective interest method, over the life of the Notes.
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 June 30, 2021, $65.7 million was outstanding under these
letter-of-credit facilities. As of June 30, 2021, the total amount available under these credit facilities was $8.8 million.
F-26
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Long-term debt consisted of the following at June 30, 2020 and 2021 (in thousands):
1.25% convertible notes due 2022:
2020
2021
Principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,500 $ 287,500
(10,494)
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,372)
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
275,634
1,633
277,267
Less current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(846)
Long-term portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,072 $ 276,421
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,075)
(2,547)
265,878
2,120
267,998
(926)
Fiscal year principal payments of long-term debt as of June 30, 2021 are as follows (in thousands):
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
846
276,110
241
70
—
277,267
9. STOCKHOLDERS’ EQUITY
Stock-based Compensation
As of June 30, 2021, we maintained the Amended and Restated 2012 Incentive Award Plan (the “2012 Plan”)
and the Amended and Restated 2006 Equity Participation Plan (the “ 2006 Plan”) as stock-based employee compensation
plans. No further grants may be made under the 2006 Plan. The 2012 Plan and the 2006 Plan are collectively referred to
as the “OSI Plans.”
We recorded stock-based compensation expense in the consolidated statements of operations as follows
(in thousands):
2019
2020
2021
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
760
25,457
554
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . $ 25,251 $ 23,817 $ 26,771
22,546
563
23,876
643
732 $
708 $
As of June 30, 2021, total unrecognized compensation cost related to share-based compensation grants under the
OSI Plans were estimated at $0.5 million for stock options and $13.9 million for restricted stock units (“RSUs”). We
expect to recognize these costs over a weighted-average period of 1.9 years with respect to the stock options and 2.1 years
for grants of RSUs.
OSI Plans
Awards are granted in the form of incentive options, nonqualified options, restricted stock awards, stock
appreciation rights, RSUs, performance shares and stock bonuses, amongst other forms of equity, to qualified employees,
directors and consultants.
F-27
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Under the OSI Plans, the exercise price of nonqualified options and incentive stock options may not be less than
the fair market value of our Common Stock on the date of grant. The exercise price of nonqualified options and incentive
stock options granted to individuals who own more than 10% of our voting stock may not be less than 110% of the fair
market value of our Common Stock on the date of grant. Stock options granted under the OSI Plans typically vest over
three years based on continued service. Restricted stock and RSUs typically vest over three to four years based on
continued service. Certain restricted stock awards granted to senior management vest based on the achievement of pre-
established performance criteria.
Stock Option Fair Value Estimation Assumptions. We estimate the fair value of our stock options at the date
of grant using the Black-Scholes option-pricing valuation model. Our valuation model is affected by our stock price as
well as weighted average assumptions for a number of subjective variables described below.
Expected Dividend. Expected dividend is based on historical patterns and our anticipated dividend payments
over the expected holding period.
Risk-Free Interest Rate. The risk-free interest rate for stock options is based on U.S. Treasuries for a maturity
matching the expected holding period.
Expected Volatility. Expected volatility is based on our historical share price volatility matching the expected
holding period. No single method of estimating volatility is proper under all circumstances and to the extent that a company
can derive implied volatility based on the trading of its financial instruments on a public market, it may be appropriate to
use both implied and historical volatility in its assumptions. We have certain financial instruments that are publicly traded
from which we can derive the implied volatility. Therefore, we use implied and historical volatility for valuing our stock
options. We believe that implied and historical volatility is a better indicator of expected volatility because it is generally
reflective of both historical volatility and expectations of how future volatility will differ from historical volatility.
Expected Holding Period. We use historical stock option exercise data to estimate the expected holding period.
Changes in assumptions can materially impact the estimated fair value of stock options. The weighted average
assumptions used in the valuation model are presented in the table below.
Expected dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected holding period (in years) . . . . . . . . . . . . . . . . . . . . . . .
2019 2020 2021
—
—
—
2.6 %
0.4 %
1.6 %
28.0 % 26.0 % 26.0 %
4.5
4.5
4.5
F-28
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The following summarizes stock option activity for fiscal years 2019, 2020 and 2021:
Weighted-Average
Remaining Contractual Intrinsic Value
(in thousands)
Aggregate
Term
Number of
Options
Weighted-
Average
Exercise
Price
32.80
677,525
Outstanding at June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
73.37
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,259
32.11
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (169,799)
(11,101)
Expired or forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70.50
515,884 $ 33.74
Outstanding at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . .
101.31
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,263
20.48
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (201,150)
Expired or forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81.79
(1,693)
326,304 $ 44.41
Outstanding at June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . .
82.17
22,171
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.19
(88,657)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired or forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.46
(4,598)
255,220 $ 50.24
Outstanding at June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . .
221,090 $ 44.80
Exercisable at June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . .
2.5 years $
1.5 years $
13,118
12,567
The per-share weighted-average grant-date fair value of stock options granted under the OSI Plans was $20.45,
$24.88 and $18.37 for fiscal 2019, 2020 and 2021, respectively. The total intrinsic value of options exercised during fiscal
2021 was $3.9 million.
Restricted Stock Units—A summary of RSU activity for the periods indicated was as follows:
Shares
Weighted-
Average
Fair Value
526,377 $ 71.56
Nonvested at June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74.40
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375,580
70.92
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (364,410)
(16,407)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74.13
521,140 $ 73.97
Nonvested at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87.88
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
308,431
68.63
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (390,613)
(15,368)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83.36
423,590 $ 88.68
Nonvested at June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.40
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
339,311
86.12
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (313.892)
(13,084)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85.78
435,925 $ 84.16
Nonvested at June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The per-share weighted average grant-date fair value of RSUs granted under the OSI Plans was $74.40, $87.88,
and $80.40 for fiscal 2019, 2020 and 2021, respectively. The total fair value of shares vested during fiscal 2019, 2020 and
2021 was $25.8 million, $26.8 million, and $27.0 million, respectively.
F-29
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
In December 2020, our shareholders authorized an increase of 1.65 million shares for the 2012 Plan resulting in
a maximum pool of 7.1 million shares. As of June 30, 2021, there were approximately 2.1 million shares available for
grant under the 2012 Plan. Under the terms of the 2012 Plan, RSUs and restricted stock granted from the pool of shares
available for grant reduce the pool by 1.87 shares for each award granted. 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 97,514, 81,621, and 136,242 performance-based awards during fiscal 2019, 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 400% of the original number of shares or units awarded.
Employee Stock Purchase Plan
We have an employee stock purchase plan under which eligible employees may purchase a limited number of
shares of Common Stock at a discount of up to 15% of the market value of such stock at pre-determined, plan-defined
dates. During the three years ended June 30, 2019, 2020 and 2021, employees purchased 70,857, 69,399, and 63,499
shares, respectively. As of June 30, 2021, there were 537,935 shares of our Common Stock available for issuance under
the plan.
Stock Repurchase Program
During fiscal 2019, 2020 and 2021, we repurchased 288,316 shares, 562,707 shares and 452,005 shares,
respectively, of Common Stock under our then current programs.
In April 2020, the Board of Directors authorized a new share repurchase program of up to 1,000,000 shares of
Common Stock. In August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares
authorized under the stock repurchase program. Repurchases may be made from time to time under the program through
open-market purchases or privately-negotiated transactions at our discretion. Upon repurchase, the shares are restored to
the status of authorized but unissued shares, and we record them as a reduction in the number of shares of Common Stock
issued and outstanding in our consolidated financial statements. As of June 30, 2021, 2,547,995 shares were available for
repurchase under the current program.
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.
10. INCOME TAXES
The following is a geographical breakdown of income before the provision for income taxes (in thousands):
Pre-tax income:
2019
2020
2021
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,575 $ 41,025 $ 34,323
64,317
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pre-tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,164 $ 86,122 $ 98,640
45,097
79,589
F-30
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Our provision (benefit) for income taxes consists of the following (in thousands):
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
541 $ 2,661 $ 4,407
1,190
577
883
18,562
8,063
28,480
24,159
11,301
29,904
Deferred:
2019
2020
2021
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,697) $ 2,882 $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred provision (benefit) . . . . . . . . . . . . . . . . . . . . . . .
679
464
(711)
432
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,368 $ 10,870 $ 24,591
1,214
(8,053)
(8,536)
45
(3,358)
(431)
As of June 30, 2020 and 2021, our liability for uncertain tax positions was $6.0 million and $10.0 million,
respectively. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$9.4 million.
We recognize potential interest and penalties related to income tax matters in income tax expense. As of June 30,
2021, we had accrued $1.4 million for interest and penalties. Our uncertain tax positions are related to tax years that remain
subject to examination by the relevant tax authorities. These include fiscal years after 2017 for federal purposes, fiscal
years after 2016 for state purposes and fiscal years after 2009 for various foreign jurisdictions. Facts and circumstances
could arise that could cause us to reduce the liability for unrecognized tax benefits, including, but not limited to, settlement
of income tax positions or expiration of statutes of limitation. Since the ultimate resolution of uncertain tax positions
depends on many factors and assumptions, we are not able to estimate the range of potential changes in the liability for
unrecognized tax benefits or the timing of such changes.
A summary of activity of unrecognized tax benefits for fiscal 2020 and 2021 is as follows (in thousands).
Additions on tax positions for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax positions from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,386
1,764
451
(291)
Balance at June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,310
5,937
678
(248)
Balance at June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,677
Additions on tax positions for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions on tax positions from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction in tax positions from prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-31
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
Deferred income tax assets (liabilities) consisted of the following (in thousands):
June 30,
2020
2021
Deferred income tax assets:
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock and deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,277 $
4,241
2,725
2,927
11,999
2,762
4,879
7,243
9,911
2,178
64,142
(17,371)
46,771
Deferred income tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withholding tax on unrepatriated foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State transition tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,459)
(27,907)
(5,114)
(7,295)
(1,754)
(4,432)
(1,399)
(143)
(49,503)
(2,732) $
16,767
3,745
2,819
5,266
10,391
489
4,466
10,522
12,323
2,685
69,473
(16,177)
53,296
(2,137)
(31,779)
(6,851)
(10,355)
(1,754)
(2,384)
(929)
(107)
(56,296)
(3,000)
The components of the net deferred income tax liability are classified in the consolidated balance sheets as follows
(in thousands):
Long term deferred income tax asset, included in other assets . . . . . . . . . $ 3,114 $ 4,157
(7,157)
Long term deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,732) $ (3,000)
(5,846)
2020
2021
The components of current taxes receivable and payable and prepaid taxes are classified in the consolidated
balance sheets as follows (in thousands):
Current taxes receivable and prepaid taxes, included in prepaid
expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,614 $
10,383
Current taxes payable, included in other accrued expenses and
current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,528 $
(4,086)
(4,377)
6,006
2020
2021
F-32
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
As of June 30, 2021, we had state and foreign net operating loss carryforwards of approximately $25.7 million
and $8.9 million, respectively. As of June 30, 2021, we had federal and state tax credit carryforwards of
approximately $10.4 million and $8.9 million, respectively. Our credit carryforwards will begin to expire in the tax year
ending June 30, 2034.
We have established valuation allowances that relate to the net operating loss of certain subsidiaries, capital
losses, and tax credits. During the year ended June 30, 2021, we recorded a net aggregated decrease of $1.2 million to
these valuation allowances. We review the adequacy of individual valuation allowances and release such allowances when
it is determined that it is more likely than not that the related benefits will be realized.
We recognized all excess tax benefits and tax deficiencies as income tax expense or benefit in the current year.
An income tax expense of approximately $1.4 million and $4.2 million was recognized in fiscal 2020 and 2021,
respectively.
The consolidated effective income tax rate differs from the federal statutory income tax rate due primarily to the
following:
2019
Provision for income taxes at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income subject to tax at other than federal statutory rate . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Officers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax on foreign currency gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax on foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in prior year estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global intangible low-taxed income, net of foreign tax credits . . . . . . . . . . . . . . . . . . . .
Foreign Derived Intangible Income Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withholding tax on foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.0 %
(1.6)
2.9
(3.2)
3.5
(1.8)
0.1
0.2
1.6
1.0
—
1.0
(0.4)
—
0.5
24.8 %
June 30,
2020
21.0 %
(1.6)
(0.8)
(6.7)
4.4
(1.3)
1.2
2.1
1.1
(2.1)
(6.4)
1.8
(0.6)
—
0.5
12.6 %
2021
21.0 %
(1.7)
0.6
(.9)
5.8
(5.9)
4.2
(0.2)
1.2
(1.8)
—
0.5
(1.3)
3.4
—
24.9 %
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in
an international environment with significant operations in various locations outside the U.S. Accordingly, the
consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
11. COMMITMENTS AND CONTINGENCIES
Acquisition-Related Contingent Obligations—Under the terms and conditions of the purchase agreements
associated with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain
sales or profitability milestones through the acquired operations. For agreements that contain contingent consideration
caps, the remaining maximum amount of such potential future payments is $30.2 million as of June 30, 2021.
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
$1.6 million and $1.0 million, respectively, during the fiscal years ended June 30, 2020 and 2021, respectively.
F-33
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 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
earn-out obligations are primarily based on unobservable inputs, which may include projected revenues, gross margins,
operating income, and the estimated probability of achieving the earn-outs.
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,
2020 to June 30, 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, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,867
7,304
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,740)
—
Payments on contingent earn-out obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending fair value, June 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,431
Advances from Customers—We receive advances from customers associated with certain contracts. These
advances are paid in cash by customers, and we account for these as liabilities until our contractual obligations are
complete.
Environmental Contingencies—We are subject to various environmental laws. Our practice is to conduct
appropriate environmental investigations at our manufacturing facilities in North America, Asia-Pacific, and Europe, and,
to the extent practicable, on all new properties in order to identify, as of the date of such investigation, potential areas of
environmental concern related to past and present activities or from nearby operations. In certain cases, we have conducted
further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate
by independent environmental consultants.
We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California facility
that resulted from unspecified on- and off-site releases occurring prior to our occupancy. We believe the releases are of a
historical nature and not uncommon to the region in general. We continue to take voluntary actions, in cooperation with
the local governing agency, to fully investigate the site in order to develop appropriate remedial actions.
We have not accrued for loss contingencies relating to the Hawthorne facility or any other environmental matters
because we believe that, although unfavorable outcomes may be possible, they are not considered by our management to
be probable and reasonably estimable. 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 a breach 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 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 June 30,2021.
F-34
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 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.
Legal Proceedings—In December 2017, a short seller released a report regarding our compliance with the FCPA.
Following that report, we and certain of our executive officers have been named as defendants in several lawsuits in the
District Court that were filed in December 2017 and February 2018. Each of the complaints closely tracks the allegations
set forth in the short seller's report. All of the actions, which were consolidated by the District Court in March 2018 in an
action captioned Arkansas Teacher Retirement System et al. v. OSI Systems, Inc. et 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. In April 2018 and March 2019, two shareholder
derivative complaints were filed purportedly on behalf of the Company against certain members of our Board of Directors
(as individual defendants), a former member of our Board of Directors, and a member of management. The derivative
actions, which were consolidated by the District Court in November 2019 in an action captioned Kocen and Riley v.
Chopra, et al. 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
believe that the actions are without merit and intend to defend them vigorously, and we expect to incur costs associated
with defending against these actions. The Arkansas Teacher Retirement System consolidated action is in its early discovery
stage. The ultimate outcomes are uncertain and we cannot reasonably predict the timing or outcomes, or estimate the
amount of loss, if any, or their effect, if any, on our financial statements.
The SEC and the DOJ are conducting an investigation of trading in our securities and have each subpoenaed
information regarding trading by executives, directors, and employees, as well as our operations and disclosures in and
around the time of certain trades. With respect to these trading related matters, in fiscal year 2018, we took action with
respect to a senior level employee. At this time, we are unable to predict what, if any, action may be taken by the DOJ or
SEC as a result of these trading related investigations, or any penalties or remedial measures these agencies may seek. We
place a high priority on compliance with our anticorruption and securities trading policies and are cooperating with each
of the government investigations.
We are involved in various other claims and legal proceedings arising in the ordinary course of business. 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.
F-35
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
12. RELATED-PARTY TRANSACTIONS
In 1994, we, together with an unrelated company, formed ECIL-Rapiscan Security Products Limited, a joint
venture organized under the laws of India. We own a 36% interest in the joint venture, our Chairman and Chief Executive
Officer owns a 10.5% interest, and one of our Executive Vice Presidents owns a 4.5% ownership interest. Our initial
investment in the joint venture was approximately $0.1 million. For each of the years ended June 30, 2019, 2020 and 2021
our equity earnings in the joint venture were less than $0.1 million. We, our Chairman and Chief Executive Officer and
our Executive Vice President collectively control less than 50% of the board of directors voting power in the joint venture.
As a result, we account for the investment under the equity method of accounting. The joint venture was formed for the
purpose of the manufacture, assembly, service and testing of security and inspection systems and other products. Some of
our subsidiaries are suppliers to the joint venture partner, which in turn manufactures and sells the resulting products. Sales
to the joint venture partner for fiscal 2019, 2020 and 2021 were approximately $4.0 million, $2.3 million and $2.4 million,
respectively. Receivables from the joint venture were $0.3 million and $0.5 million as of June 30, 2020 and 2021,
respectively.
13. EMPLOYEE BENEFIT PLANS
Employee Retirement Savings Plans
We have various qualified employee retirement savings plans. Participants can contribute certain amounts to the
plans and we match a certain portion of employee contributions. We contributed approximately $6.4 million, $6.5 million
and $6.7 million to the plans for the fiscal years ended June 30, 2019, 2020 and 2021, respectively.
Deferred Compensation Plan
We have a deferred compensation plan, which meets the requirements for deferred compensation under
Section 409A of the Internal Revenue Code. The plan provides that selected employees are eligible to defer up to 80% of
their salaries and up to 100% of their bonuses. We may also make employer contributions to participant accounts in certain
circumstances. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their
vested benefit at the end of their elected deferral period or after termination of their employment for any reason or at a
later date to comply with the restrictions of Section 409A. Discretionary company contributions and the related earnings
are subject to a vesting schedule dependent upon years of service to us and, also, vest completely upon the participant’s
disability or death while employed by us or immediately prior to a change of control. We made contributions of
$0.5 million for each of fiscal year 2019, 2020 and 2021. As of June 30, 2021, we held assets of $32.8 million and liabilities
of $32.3 million related to this plan. Assets related to this plan are included in other assets and liabilities related to this
plan are included in other long-term liabilities in the consolidated balance sheets. The plan liabilities include accrued
employer contributions not yet funded to the plan.
Employee Pension Plans
We sponsor a number of qualified and nonqualified pension plans for our employees at certain locations. In
accordance with accounting standards for employee pension and postretirement benefits, we fully recognize the
overfunded or underfunded status of each of our defined benefit plans as an asset or liability in the consolidated balance
sheets. The asset or liability equals the difference between the fair value of the plans’ assets and their benefit obligations.
The liabilities associated with underfunded plans are classified as noncurrent, except to the extent the fair value of the
plans’ assets is less than the plans’ estimated benefit payments over the next 12 months. We measure our pension and
postretirement benefit plans’ assets and benefit obligations as of June 30.
F-36
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The following provides a reconciliation of the changes in the plans’ benefit obligations and fair value of assets
for fiscal years 2020 and 2021, and a statement of the funded status as of June 30, 2020 and 2021 (in thousands):
2020
2021
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,059 $ 16,225
700
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
477
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,272
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(45)
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(195)
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,434
Change in Plan Assets
5,358
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . .
710
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(148)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,010
Funded status and net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,867) $ (11,424)
Amount recognized in consolidated balance sheets consists of:
(155)
442
1,260
770
(151)
16,225
5,781
(156)
(160)
(107)
5,358
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . .
(11,093)
3,424
226 $
1,503
(12,927)
4,319
One of our defined benefit pension plans is considered a nonqualified plan, therefore we have funded a separate
rabbi trust which comprises insurance company contracts with fair values of $10.7 million and $14.3 million as of June 30,
2020 and 2021, respectively. These amounts are not included in the fair value of plan assets in the table above.
The following table provides the net periodic benefit costs for the fiscal years ended June 30, (in thousands):
2019
2020
2021
Net Periodic Benefit Costs
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
457 $
223
(270)
56
103
569 $
442 $
—
(251)
(61)
34
164 $
477
—
(242)
668
75
978
Plan Assumptions
Weighted average assumptions at year-end:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.7 % 2.6 %
4.2 % 4.2 %
— %
— %
2020 2021
F-37
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The long-term return on assets has been derived from the weighted average of assumed returns on each of the
major asset categories. The weighted average is based on the actual proportion of each major asset class held, rather than
a benchmark portfolio of assets. The expected returns for each major asset class have been derived from a combination of
both historical market returns and current market data as well as the views of a range of investment managers. There is no
assumed rate of compensation increase as most of the plan participants are retirees or no longer employed by OSI.
Plan Assets and Investment Policy
Fiscal year ended
June 30, 2020
Fiscal year ended
June 30, 2021
Equity securities . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined . . . . . . . . . . . . . . . . . . . . . .
Proportion of
Fair Value
80 %
19 %
1 %
100 %
Expected Rate
of Return
Proportion of
Fair Value
83 %
16 %
1 %
100 %
5.0 %
1.0 %
0.5 %
4.2 %
Expected Rate
of Return
4.9 %
0.8 %
0.4 %
4.2 %
The defined benefit plans’ assets are invested in a range of pooled investment funds that provide access to a
diverse range of asset classes. The investment objective is to maximize the investment return over the long term without
exposing the fund to an unnecessary level of risk. Within this objective, it is recognized that benefits will be secured by
the purchase of annuities at the time of employee retirement.
The benchmark is to hold assets in both equity and debt securities. The proportion in each investment class is not
mandated and is allowed to fluctuate with market movements. The equity holdings are maintained in balanced funds under
the control of investment managers.
Day-to-day equities selection decisions are delegated to investment managers, although these are monitored
against performance and risk targets. Due to the nature of the pooled funds, there are no significant holdings in any single
company (greater than 5% of the total assets). The investment strategy is reviewed on a regular basis, based on the results
of third-party liability studies.
Projected Benefit Payments
The following table reflects estimated benefits payments, based upon the same assumptions used to measure the
benefit obligation and net pension cost, as of June 30, 2021 (in thousands):
July 1, 2021 to June 30, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2022 to June 30, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2023 to June 30, 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2024 to June 30, 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2025 to June 30, 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2026 to June 30, 2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Benefits
198
217
5,862
1,411
1,897
6,321
Company Contribution
As of June 30, 2021, our weighted average contribution rate is under 1% of pensionable salaries.
F-38
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
14. 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, Summary of Significant Accounting Policies.
The following tables present our results of operations and identifiable assets by industry segment (in thousands):
2019
Optoelectronics
and
Security Healthcare Manufacturing
Division Division
Division
Corporate Eliminations Consolidated
Revenues:
External customer revenue . . . . . . . . . . . . . . . . $ 747,550 $ 188,477 $
Revenue between product segments . . . . . . . . .
—
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 747,550 $ 188,477 $
Income (loss) from operations . . . . . . . . . . . . . . . $ 97,426 $ 12,277 $
Segments assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 793,810 $ 157,639 $
1,372 $
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . $ 15,830 $
5,426 $
Depreciation and amortization . . . . . . . . . . . . . . . $ 39,788 $
246,088 $
42,542
288,630 $
— $
—
—
29,519 $ (30,598) $
237,851 $ 79,498 $
4,760 $ 5,450 $
9,269 $ 1,751 $
— $ 1,182,115
—
(42,542)
(42,542) $ 1,182,115
(850) $ 107,774
(3,934) $ 1,264,864
27,412
56,234
— $
— $
Revenues:
2020
Optoelectronics
and
Security Healthcare Manufacturing
Division Division
Division
Corporate Eliminations Consolidated
External customer revenue . . . . . . . . . . . . . . . $ 742,043 $ 185,322 $
Revenue between product segments . . . . . . . .
—
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $ 742,043 $ 185,322 $
Income (loss) from operations . . . . . . . . . . . . . . $ 90,063 $ 15,766 $
Segments assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 758,054 $ 208,857 $
1,404 $
8,648 $
Capital expenditures . . . . . . . . . . . . . . . . . . . . . $
4,390 $
Depreciation and amortization . . . . . . . . . . . . . . $ 34,907 $
— $
—
—
238,679 $
45,149
283,828 $
30,566 $ (31,630) $
— $ 1,166,044
—
(45,149)
(45,149) $ 1,166,044
122 $ 104,887
232,408 $ 109,178 $ (39,956) $ 1,268,541
20,388
49,758
4,045 $
1,676 $
6,291 $
8,785 $
— $
— $
Revenues:
2021
Optoelectronics
and
Security Healthcare Manufacturing
Division Division
Division
Corporate Eliminations Consolidated
External customer revenue . . . . . . . . . . . . . . . $ 633,340 $ 212,315 $
Revenue between product segments . . . . . . . .
—
—
Total revenues . . . . . . . . . . . . . . . . . . . . . . . $ 633,340 $ 212,315 $
Income (loss) from operations . . . . . . . . . . . . . . $ 85,515 $ 31,563 $
Segments assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 798,192 $ 220,411 $
2,144 $
3,290 $
Capital expenditures . . . . . . . . . . . . . . . . . . . . . $
5,364 $
Depreciation and amortization . . . . . . . . . . . . . . $ 26,572 $
F-39
— $
—
—
301,247 $
48,640
349,887 $
38,465 $ (39,769) $
— $ 1,146,902
—
(48,640)
(48,640) $ 1,146,902
(403) $ 115,371
282,039 $ 121,293 $ (37,568) $ 1,384,367
15,760
43,855
3,612 $
2,594 $
6,714 $
9,325 $
— $
— $
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE YEARS ENDED JUNE 30, 2021
The following tables present the revenues and identifiable assets by geographical area (in thousands):
Geographic region:
External
revenues
Intersegment
revenues
2019
Total
Long-lived
Long-lived
Consolidated tangible assets
assets
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 565,316 $ 10,107 $ 575,423 $ 117,414 $ 476,314
436
71,225
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,039
45,804
Other Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503,789
682,345
Total Americas . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,896
292,297
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,237
30,484
Other Europe, Middle East and Africa . . . . . . . . .
93,133
322,781
Total EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,046
176,989
Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
—
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 1,182,115 $ 179,906 $ 619,968
—
—
10,107
214
—
214
32,221
(42,542)
71,225
45,804
692,452
292,511
30,484
322,995
209,210
(42,542)
436
3,178
121,028
30,282
8,833
39,115
19,763
N/A
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,182,115 $
Geographic region:
External
revenues
Intersegment
revenues
2020
Total
Long-lived
Long-lived
Consolidated tangible assets
assets
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 571,134 $ 16,515 $ 587,649 $ 118,322 $ 475,856
974
66,626
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,551
45,896
Other Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . .
506,381
683,656
Total Americas . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,382
268,940
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,611
46,099
Other Europe, Middle East and Africa . . . . . . . . .
85,993
315,039
Total EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,414
167,349
Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
—
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 1,166,044 $ 180,882 $ 619,788
—
—
16,515
529
—
529
28,105
(45,149)
66,626
45,896
700,171
269,469
46,099
315,568
195,454
(45,149)
974
8,539
127,835
21,823
7,252
29,075
23,972
N/A
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,166,044 $
Geographic region:
External
revenues
Intersegment
revenues
2021
Total
Long-lived
Long-lived
Consolidated tangible assets
assets
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 589,579 $ 17,498 $ 607,077 $ 126,100 $ 493,423
2,379
10,583
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,960
66,732
Other Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . .
525,762
666,894
Total Americas . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,348
221,423
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,389
29,879
Other Europe, Middle East and Africa . . . . . . . . .
88,737
251,302
Total EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,865
228,706
Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
—
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 1,146,902 $ 199,452 $ 647,364
—
—
17,498
874
—
874
30,268
(48,640)
10,583
66,732
684,392
222,297
29,879
252,176
258,974
(48,640)
2,379
8,055
136,534
25,183
8,389
33,572
29,346
N/A
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,146,902 $
Pursuant to Accounting Standards Codification 280 “Segment Reporting,” external revenues are attributed to
individual countries based upon the location of our selling entity.
* * * * * *
F-40
SUPPLEMENTARY DATA
UNAUDITED QUARTERLY RESULTS
The following tables present unaudited quarterly financial information for the four quarters ended June 30, 2020
and 2021 (in thousands, except per share data):
September 30,
2019
Quarter Ended
December 31, March 31,
2019
2020
(Unaudited)
June 30,
2020
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
290,852 $ 305,342 $ 292,883 $ 276,967
175,419
191,641
101,548
99,211
183,776
109,107
194,569
110,773
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges (benefit), net . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . $
62,177
14,246
(2,099)
74,324
24,887
(4,736)
20,151
592
20,743 $
1.14 $
1.10 $
65,576
15,358
4,548
85,482
23,625
(4,706)
18,919
639
60,306
63,902
12,823
14,881
4,963
(929)
78,092
77,854
23,456
32,919
(4,479)
(4,844)
18,977
28,075
(7,089)
(5,012)
20,986 $ 19,558 $ 13,965
0.78
0.76
1.08 $
1.06 $
1.15 $
1.12 $
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Costs of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
254,908 $ 276,009 $ 283,787 $ 332,198
214,131
159,157
118,067
95,751
179,768
104,019
173,928
102,081
September 30,
2020
Quarter Ended
December 31, March 31,
2020
2021
(Unaudited)
June 30,
2021
68,123
57,906
56,101
13,898
13,932
13,784
2,192
(285)
(162)
84,213
71,553
69,723
33,854
32,466
32,358
(4,142)
(4,167)
(4,233)
29,712
28,299
28,125
(8,087)
(3,818)
(9,526)
20,038 $ 18,773 $ 25,894
1.44
1.40
1.04 $
1.03 $
1.12 $
1.10 $
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment, restructuring and other charges (benefit), net . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . $
58,617
12,082
8,359
79,058
16,693
(4,189)
12,504
(3,160)
9,344 $
0.52 $
0.51 $
F-41
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
Certificate of Incorporation of OSI Systems, Inc. (1)
Bylaws of OSI Systems, Inc. (1)
Form of Common Stock Certificate (1)
Indenture (including the form of Note) related to the 1.25% Convertible Senior Notes due 2022, dated as of February 22, 2017, between
OSI Systems, Inc. and Branch Banking and Trust Company, as trustee (14)
Form of 1.25% Convertible Senior Note due 2022 (included in Exhibit 4.2) (14)
Description of Capital Stock
Amended and Restated OSI Systems, Inc. Deferred Compensation Plan (2)
OSI Systems, Inc. Nonqualified Defined Benefit Plan (3)
Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase Plan (4)
First Amendment to Amended and Restated OSI Systems, Inc. 2008 Employee Stock Purchase Plan (17)
Form of Indemnification Agreement for Directors and Executive Officers of OSI Systems, Inc. (5)
Sixth Amendment to Credit Agreement dated April 23, 2019 between Wells Fargo Bank, N.A. and OSI Systems, Inc. (15)
Amended and Restated 2006 Equity Participation Plan of OSI Systems, Inc. (6)
Employment Agreement effective as of January 1, 2012 between Deepak Chopra and OSI Systems, Inc. (7)
Amendment to Employment Agreement effective as of July 1, 2015 between Deepak Chopra and OSI Systems, Inc. (12)
Second Amendment to Employment Agreement effective as of December 31, 2017 by and between Deepak Chopra and
OSI Systems, Inc. (8)
Employment Agreement effective as of January 1, 2012 between Alan Edrick and OSI Systems, Inc. (7)
Amendment to Employment Agreement effective as of July 1, 2015 between Alan Edrick and OSI Systems, Inc. (12)
Employment Agreement effective as of January 1, 2012 between Ajay Mehra and OSI Systems, Inc. (7)
Amendment to Employment Agreement effective as of May 1, 2015 between Ajay Mehra and OSI Systems, Inc. (13)
Second Amendment to Employment Agreement effective April 29, 2019 between Ajay Mehra and OSI Systems, Inc. (18)
Employment Agreement effective as of January 1, 2012 between Victor Sze and OSI Systems, Inc. (7)
Amendment to Employment Agreement effective as of July 1, 2015 between Victor Sze and OSI Systems, Inc. (12)
Second Amendment to Employment Agreement effective April 29, 2019 between Victor Sze and OSI Systems, Inc. (18)
Offer Letter dated July 3, 2017 between Malcolm Maginnis and OSI Systems, Inc. (16)
Amended and Restated Retirement Benefit Award Agreement effective as of December 31, 2017 by and between Deepak Chopra and
OSI Systems, Inc. (8)
First Amendment to Amended and Restated Retirement Benefit Award Agreement effective as of June 19, 2020 by and between
Deepak Chopra and OSI Systems, Inc. (19)
Second Amendment to Amended and Restated Retirement Benefit Award Agreement effective as of August 19, 2020 by and between
Deepak Chopra and OSI Systems, Inc. (19)
Amended and Restated OSI Systems, Inc. 2012 Incentive Award Plan (9)
Form of Restricted Stock Award Agreement (10)
Form of Restricted Stock Unit Award Agreement (10)
Form of Stock Option Agreement (10)
OSI Systems, Inc. Code of Ethics and Conduct effective May 23, 2016 (11)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on the signature page of this Form 10-K)
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906
The following financial information from the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2021 formatted in
No.
3.1
3.2
4.1
4.2
4.3
4.4*
10.1†
10.2†
10.3†
10.4†
10.5†
10.6
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†
10.25†
10.26†
14.1
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*
32.2*
101.1
XBRL (eXtensible Business Reporting Language) as follows:
(i) the consolidated balance sheets
(ii) the consolidated statements of operations
(iii) the consolidated statements of comprehensive income
(iv) the consolidated statements of stockholders’ equity
(v) the consolidated statements of cash flows
(vi) the notes to the consolidated financial statements, tagged in summary and detail
104
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in
Exhibits 101)
† Denotes a management contract or compensatory plan or arrangement.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Previously filed with our Current Report on Form 8-K filed on March 8, 2010.
Previously filed with our Quarterly Report on Form 10-Q filed on May 2, 2014.
Previously filed with our Current Report on Form 8-K filed on October 10, 2008.
Previously filed with our Quarterly Report on Form 10-Q filed on October 24, 2014.
Previously filed with our Annual Report on Form 10-K filed on August 27, 2010.
Previously filed with our Current Report on Form 8-K filed on December 1, 2010.
Previously filed with our Current Report on Form 8-K filed on April 6, 2012.
Previously filed with our Current Report on Form 8-K filed on January 5, 2018.
Previously filed with our Proxy Statement on Schedule 14A filed on October 21, 2020.
Previously filed with our Registration Statement on Form S-8 filed on August 16, 2013.
Previously filed with our Current Report on Form 8-K filed on May 23, 2016.
Previously filed with our Quarterly Report on Form 10-Q filed on January 28, 2016.
Previously filed with our Quarterly Report on Form 10-Q filed on October 30, 2015.
Previously filed with our Current Report on Form 8-K filed on February 22, 2017.
Previously filed with our Current Report on Form 8-K filed on April 23, 2019.
Previously filed with our Quarterly Report on Form 10-Q filed on October 26, 2018.
Previously filed with our Proxy Statement on Schedule 14A filed on October 21, 2016.
Previously filed with our Quarterly Report on Form 10-Q filed on May 2, 2019.
Previously filed with our Annual Report on Form 10-K filed on August 21, 2020.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 23, 2021
OSI SYSTEMS, INC.
(Registrant)
By:
/s/ ALAN EDRICK
Alan Edrick,
Executive Vice President & Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby
constitute and appoint Deepak Chopra, Alan Edrick and Victor Sze, and each of them singly, our true and lawful attorneys
with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the
Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names
and in our capacities as officers and directors to enable OSI Systems, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission in connection
therewith, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to
said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ DEEPAK CHOPRA
Deepak Chopra
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ ALAN EDRICK
Alan Edrick
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
/s/ WILLIAM F. BALLHAUS, JR.
William F. Ballhaus, Jr.
Director
/s/ GERALD CHIZEVER
Gerald Chizever
/s/ STEVEN C. GOOD
Steven C. Good
/s/ JAMES B. HAWKINS
James B. Hawkins
/s/ MEYER LUSKIN
Meyer Luskin
/s/ KELLI BERNARD
Kelli Bernard
Director
Director
Director
Director
Director
II-1
August 23, 2021
August 23, 2021
August 23, 2021
August 23, 2021
August 23, 2021
August 23, 2021
August 23, 2021
August 23, 2021
Corporate Information
BOARD OF DIRECTORS
Deepak Chopra
President, Chief Executive Officer and Chairman of the Board
Independent Auditors
Moss Adams LLP
Los Angeles, California
William F. Ballhaus, Jr.
Director
Kelli Bernard
Director
Gerald Chizever
Director
Steven C. Good
Director
James B. Hawkins
Director
Meyer Luskin
Director
EXECUTIVE OFFICERS
Deepak Chopra
President, Chief Executive Officer and Chairman of the Board
Alan Edrick
Executive Vice President and Chief Financial Officer
Ajay Mehra
Executive Vice President and President,
Cargo Scanning and Solutions
Victor Sze
Executive Vice President and General Counsel
Mal Maginnis
President, Rapiscan Systems
Manoocher Mansouri
President, Optoelectronics and Manufacturing Division
Shalabh Chandra
President, Healthcare Division
Paul Morben
President, OSI Electronics
Transfer Agent
Broadridge Corporate Issuer Solutions, Inc.
Ardmore, PA
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m.
Thursday, December 9, 2021 at
12525 Chadron Avenue
Hawthorne, CA 90250
Safe Harbor Statement
This Annual 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.
Forward-looking statements relate to the Company’s current
expectations, beliefs, and projections concerning matters that
are not historical facts. Forward-looking statements are not
guarantees of future performance and involve uncertainties,
risks, assumptions, and contingencies, many of which are
outside the Company’s control and which may cause actual
results to differ materially from those described in or implied
by any forward-looking statement. Undue reliance should not
be placed on forward-looking statements, which are based on
currently available information and speak only as of the date
on which they are made. The Company assumes no obligation
to update any forward-looking statement made in this Annual
Report that becomes untrue because of subsequent events,
new information, or otherwise, except to the extent it is
required to do so in connection with its ongoing requirements
under Federal securities laws. For a further discussion of
factors that could cause the Company’s future results to
differ materially from any forward-looking statements, see the
section entitled “Risk Factors” in the Company’s Form 10-K for
the year ended June 30, 2021 and other risks described therein
and in documents subsequently filed by the Company from
time to time with the Securities and Exchange Commission.
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