| Basis of Presentation | 1. Basis of Presentation Basis of Presentation The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the SEC. The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the operating results to be expected for the full 2020 fiscal year or any future periods. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for our company relate to contract revenue, profit and loss recognition, 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. Earnings Per Share Computations We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income available to common stockholders by the sum of the weighted average number of common shares and dilutive potential common shares outstanding during the period. Potential common shares consist of the shares issuable upon the exercise of stock options and restricted stock unit awards under the treasury stock method. The underlying equity component of the 1.25% convertible senior notes due 2022 (the “Notes”) discussed in Note 6 to the condensed consolidated financial statements will not have a net impact on diluted earnings per share unless the average price of our common stock exceeds the conversion price because the principal amount of the Notes is intended to be settled in cash upon conversion. There was no dilutive effect of the Notes for the three and nine months ended March 31, 2019 and 2020. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Three Months Ended March 31, Nine Months Ended March 31, 2019 2020 2019 2020 Net income available to common stockholders $ 19,626 $ 19,558 $ 48,135 $ 61,287 Weighted average shares outstanding—basic 18,079 18,182 18,085 18,251 Dilutive effect of equity awards 592 331 593 442 Weighted average shares outstanding—diluted 18,671 18,513 18,678 18,693 Basic earnings per share $ 1.09 $ 1.08 $ 2.66 $ 3.36 Diluted earnings per share $ 1.05 $ 1.06 $ 2.58 $ 3.28 Shares excluded from diluted earnings per share due to their anti-dilutive effect 44 145 46 100 Cash and Cash Equivalents We consider all highly liquid investments with maturities of three months or less as of the acquisition date to be cash equivalents. Our cash and cash equivalents totaled $101.0 million at March 31, 2020. Of this amount, approximately 64% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by our subsidiaries in Singapore, the United Kingdom, Malaysia, Mexico, Canada and Australia and to a lesser extent in Germany, India, and Albania among other countries. We have cash holdings in financial institutions that exceed insured limits for such institutions; however, we mitigate this risk by utilizing high credit quality financial institutions throughout the world. Fair Value of Financial Instruments Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable and debt instruments. 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, as the interest rates of these instruments are variable or comparable to current rates for financing available to us. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The "Level 1" category includes assets and liabilities measured at quoted prices in active markets for identical assets and liabilities. The “Level 2" category includes assets and liabilities measured from observable inputs other than quoted market prices. The "Level 3" category includes assets and liabilities for which valuation inputs are unobservable and significant to the fair value measurement. As of June 30, 2019 and March 31, 2020, there were no assets in the "Level 1" and "Level 3" categories. Our contingent payment obligations related to acquisitions, which are further discussed in Note 9 to the condensed consolidated financial statements, are in the “Level 3” category for valuation purposes. The fair values of our financial assets and liabilities are categorized as follows (in thousands): June 30, 2019 March 31, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Insurance company contracts $ — $ 35,899 $ — $ 35,899 $ — $ 32,441 $ — $ 32,441 Liabilities: Contingent consideration $ — $ — $ 16,577 $ 16,577 $ — $ — $ 13,206 $ 13,206 Goodwill Impairment 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 during our second fiscal 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, 2019 indicated that it is not more likely than not that the fair values of all three reporting units are less than their carrying amounts, including goodwill. Thus, we have determined that there is no goodwill impairment for any of the three reporting units. 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 users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Product Sales. Service Revenue. Contract Revenue. 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. 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 amount of consideration 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 the contract which may contain one or more performance obligations. In the event that customers are permitted to terminate such arrangements, the underlying contract typically requires payment by the customer 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 11 to our condensed consolidated financial statements for additional details of revenues by reporting segment. 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 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer. 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 for service and warranty contracts, at the onset of the contract and before the 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. Contract assets and liabilities were as follows (in thousands): June 30, March 31, Contract Assets: 2019 2020 Change % Change Unbilled revenue $ 19,287 $ 34,706 $ 15,419 80 % Contract Liabilities: Advances from customers $ 43,227 $ 32,968 $ (10,259) (24) % Deferred revenue—current 33,641 30,745 (2,896) (9) % Deferred revenue—long-term 9,506 14,511 5,005 53 % Contract assets increased during the nine months ended March 31, 2020 primarily due to satisfaction of performance obligations for explosive detection systems and cargo and vehicle inspection systems in our Security division which have not yet been billed to customers. The net decrease in contract liabilities was primarily due to satisfaction of performance obligations and application of payments against customer billings on cargo and vehicle system contracts in our Security division. Remaining Performance Obligations Practical Expedients. financing component Lease Accounting 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. 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 condensed consolidated financial statements. The components of operating lease expense were as follows (in thousands): Three Months Ended Nine Months Ended March 31, 2020 March 31, 2020 Operating lease cost $ 2,525 $ 7,771 Variable lease cost 237 551 Short-term lease cost 350 745 $ 3,112 $ 9,067 Supplemental balance sheet assets and liabilities related to operating leases were as follows (in thousands): Balance Sheet Category March 31, 2020 Operating lease ROU assets, net Other assets $ 26,397 Operating lease liabilities, current portion Other accrued expenses and current liabilities $ 8,118 Operating lease liabilities, long-term Other long-term liabilities 18,648 Total operating lease liabilities $ 26,766 Weighted average remaining lease term 4.4 years Weighted average discount rate 4.3% Supplemental cash flow information related to operating leases was as follows (in thousands): Three Months Ended Nine Months Ended March 31, 2020 March 31, 2020 Cash paid for operating lease liabilities $ 2,466 $ 7,664 ROU assets obtained in exchange for new lease obligations 2,239 3,718 Maturities of operating lease liabilities under ASC 842 (defined below) at March 31, 2020 were as follows (in thousands): March 31, 2020 Less than one year $ 9,036 1 – 2 years 6,808 2 – 3 years 4,318 3 – 4 years 3,562 4 – 5 years 2,529 Thereafter 3,143 29,396 Less: Imputed interest (2,630) Total lease liabilities $ 26,766 Maturities of minimum operating lease liabilities under non-cancelable leases under ASC 840 (defined below) at June 30, 2019 were as follows (in thousands): June 30, 2019 Less than one year $ 9,802 1 – 2 years 8,082 2 – 3 years 5,473 3 – 4 years 3,397 4 – 5 years 2,954 Thereafter 4,583 Total lease liabilities $ 34,291 Recently Adopted Accounting Pronouncement Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which requires a lessee to recognize ROU assets and lease liabilities, initially measured at present value of the lease payments, on its balance sheet for leases and classified as either financing or operating leases. We adopted ASC 842 on July 1, 2019, using the modified retrospective method, and we elected the package of practical expedients provided in ASC 842. In accordance with ASC 842, we did not restate comparative periods and instead reported comparative prior year periods under ASC 840, “Leases.” The cumulative effect of the changes made to our July 1, 2019 consolidated condensed balance sheet for the adoption of the new lease standard was as follows (in thousands): Balance at Effect of Adoption Balance at Balance Sheet June 30, 2019 of ASC 842 July 1, 2019 Assets Other assets $ 56,518 $ 30,066 $ 86,584 Liabilities Other accrued expenses and current liabilities $ 112,956 $ 8,324 $ 121,280 Other long-term liabilities 65,398 21,742 87,140 The adoption of the new lease accounting guidance did not have a material impact on the condensed consolidated statement of operations or the condensed consolidated statement of cash flows for the nine months ended March 31, 2020. Recently Issued Accounting Pronouncements Not Yet Adopted Income Taxes In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles of ASC 740, and is intended to improve consistency and simplify GAAP in several other areas of ASC 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for publicly-traded business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. 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. Retirement Benefit Plans In August 2018, the FASB issued authoritative guidance under 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 are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of the adoption of this guidance on our 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 non-cancellable 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 are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements. |
