OSI Systems (OSIS) 10-Q 2021 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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	33-0238801
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

(310) 978-0516

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

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

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

As of April 22, 2021, there were 17,980,207 shares of the registrant’s common stock outstanding.

OSI SYSTEMS, INC.

INDEX

		PAGE
PART I — FINANCIAL INFORMATION		3
Item 1 —	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2020 and March 31, 2021	3
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2020 and 2021	4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2020 and 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended March 31, 2020 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2020 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3 —	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4 —	Controls and Procedures	32
PART II — OTHER INFORMATION		33
Item 1 —	Legal Proceedings	33
Item 1A —	Risk Factors	33
Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3 —	Defaults Upon Senior Securities	33
Item 4 —	Mine Safety Disclosures	33
Item 5 —	Other Information	33
Item 6 —	Exhibits	34
Signatures		35

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	June 30,		March 31,
	2020		2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	76,102	$	92,465
Accounts receivable, net		269,840		258,594
Inventories		241,226		283,523
Prepaid expenses and other current assets		30,541		26,828
Total current assets		617,709		661,410
Property and equipment, net		127,936		125,477
Goodwill		310,627		319,211
Intangible assets, net		128,279		130,058
Other assets		83,990		89,804
Total assets	$	1,268,541	$	1,325,960
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank lines of credit	$	59,000	$	0
Current portion of long-term debt		926		925
Accounts payable		84,940		122,719
Accrued payroll and related expenses		46,127		40,860
Advances from customers		28,155		48,132
Other accrued expenses and current liabilities		110,953		113,433
Total current liabilities		330,101		326,069
Long-term debt		267,072		273,997
Deferred income taxes		5,846		1,507
Other long-term liabilities		93,370		108,494
Total liabilities		696,389		710,067
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value— 10,000,000 shares authorized; 0 shares issued or outstanding		—		—
Common stock, $0.001 par value—100,000,000 shares authorized; issued and outstanding, 18,011,982 shares at June 30, 2020 and 17,980,207 shares at March 31, 2021		122,553		110,744
Retained earnings		474,793		522,948
Accumulated other comprehensive loss		(25,194)		(17,799)
Total stockholders’ equity		572,152		615,893
Total liabilities and stockholders’ equity	$	1,268,541	$	1,325,960

See accompanying notes to condensed consolidated financial statements.

3

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2021		2020		2021
Net revenues:
Products	$	213,257	$	217,124	$	646,790	$	608,238
Services		79,626		66,663		242,287		206,466
Total net revenues		292,883		283,787		889,077		814,704
Cost of goods sold:
Products		141,069		144,958		436,120		409,692
Services		42,707		34,810		133,866		103,161
Total cost of goods sold		183,776		179,768		569,986		512,853
Gross profit		109,107		104,019		319,091		301,851
Operating expenses:
Selling, general and administrative		65,576		57,906		191,655		172,624
Research and development		15,358		13,932		44,485		39,798
Impairment, restructuring and other charges (benefit), net		4,548		(285)		1,520		7,912
Total operating expenses		85,482		71,553		237,660		220,334
Income from operations		23,625		32,466		81,431		81,517
Interest and other expense, net		(4,706)		(4,167)		(14,286)		(12,589)
Income before income taxes		18,919		28,299		67,145		68,928
(Provision) benefit for income taxes		639		(9,526)		(5,858)		(20,773)
Net income	$	19,558	$	18,773	$	61,287	$	48,155
Earnings per share:
Basic	$	1.08	$	1.04	$	3.36	$	2.68
Diluted	$	1.06	$	1.03	$	3.28	$	2.63
Shares used in per share calculation:
Basic		18,182		17,969		18,251		17,981
Diluted		18,513		18,298		18,693		18,278

See accompanying notes to condensed consolidated financial statements.

4

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2021		2020		2021
Net income	$	19,558	$	18,773	$	61,287	$	48,155
Other comprehensive income (loss):
Foreign currency translation adjustment		(8,314)		(503)		(8,726)		7,219
Other		10		59		29		176
Other comprehensive income (loss)		(8,304)		(444)		(8,697)		7,395
Comprehensive income	$	11,254	$	18,329	$	52,590	$	55,550

See accompanying notes to condensed consolidated financial statements.

5

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except share data)

	Three Months Ended March 31, 2020
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—December 31, 2019	18,267,574	$	133,566	$	441,270	$	(17,120)	$	557,716
Exercise of stock options	1,041		80		—		—		80
Vesting of RSUs	1,671		—		—		—		—
Shares issued under employee stock purchase program	36,758		2,221		—		—		2,221
Stock-based compensation expense	—		5,837		—		—		5,837
Repurchase of common stock	(295,833)		(24,781)		—		—		(24,781)
Taxes paid related to net share settlement of equity awards	(586)		(51)		—		—		(51)
Net income	—		—		19,558		—		19,558
Other comprehensive loss	—		—		—		(8,304)		(8,304)
Balance—March 31, 2020	18,010,625	$	116,872	$	460,828	$	(25,424)	$	552,276

	Three Months Ended March 31, 2021
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—December 31, 2020	17,933,256	$	100,816	$	504,175	$	(17,355)	$	587,636
Exercise of stock options	9,703		624		—		—		624
Vesting of RSUs	6,519		—		—		—		—
Shares issued under employee stock purchase program	35,539		2,193		—		—		2,193
Stock-based compensation expense	—		7,565		—		—		7,565
Repurchase of common stock	(2,452)		(235)		—		—		(235)
Taxes paid related to net share settlement of equity awards	(2,358)		(219)		—		—		(219)
Net income	—		—		18,773		—		18,773
Other comprehensive loss	—		—		—		(444)		(444)
Balance—March 31, 2021	17,980,207	$	110,744	$	522,948	$	(17,799)	$	615,893

6

	Nine Months Ended March 31, 2020
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2019	18,167,020	$	168,913	$	399,541	$	(16,727)	$	551,727
Exercise of stock options	201,003		4,112		—		—		4,112
Vesting of RSUs	388,756		—		—		—		—
Shares issued under employee stock purchase program	71,595		4,286		—		—		4,286
Stock-based compensation expense	—		18,097		—		—		18,097
Repurchase of common stock	(562,707)		(51,775)		—		—		(51,775)
Taxes paid related to net share settlement of equity awards	(255,042)		(26,761)		—		—		(26,761)
Net income	—		—		61,287		—		61,287
Other comprehensive loss	—		—		—		(8,697)		(8,697)
Balance—March 31, 2020	18,010,625	$	116,872	$	460,828	$	(25,424)	$	552,276

	Nine Months Ended March 31, 2021
						Accumulated
	Common Stock					Other
	Number of			Retained		Comprehensive
	Shares	Amount		Earnings		Loss		Total
Balance—June 30, 2020	18,011,982	$	122,553	$	474,793	$	(25,194)	$	572,152
Exercise of stock options	87,235		1,187		—		—		1,187
Vesting of RSUs	310,939		—		—		—		—
Shares issued under employee stock purchase program	68,180		4,215		—		—		4,215
Stock-based compensation expense	—		19,386		—		—		19,386
Repurchase of common stock	(322,588)		(25,051)		—		—		(25,051)
Taxes paid related to net share settlement of equity awards	(175,541)		(11,546)		—		—		(11,546)
Net income	—		—		48,155		—		48,155
Other comprehensive income	—		—		—		7,395		7,395
Balance—March 31, 2021	17,980,207	$	110,744	$	522,948	$	(17,799)	$	615,893

7

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

	Nine Months Ended March 31,
	2020		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	61,287	$	48,155
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions:
Depreciation and amortization		37,807		31,433
Stock-based compensation expense		18,097		19,386
Provision for losses on accounts receivable		2,641		6,176
Deferred income taxes		(50)		(1,364)
Amortization of debt discount and issuance costs		6,984		7,277
Impairment charges		3,258		552
Other		137		(217)
Changes in operating assets and liabilities—net of business acquisitions:
Accounts receivable		(23,945)		6,714
Inventories		28,871		(43,162)
Prepaid expenses and other assets		(18,127)		(4,263)
Accounts payable		10,243		37,113
Accrued payroll and related expenses		(5,655)		363
Advances from customers		(9,846)		19,468
Other		(6,149)		3,422
Net cash provided by operating activities		105,553		131,053
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(16,062)		(11,155)
Purchases of certificates of deposit		—		(4,820)
Proceeds from maturities of certificates of deposit		—		2,690
Acquisition of business, net of cash acquired		(3,521)		(3,000)
Payments for intangible and other assets		(8,764)		(9,878)
Net cash used in investing activities		(28,347)		(26,163)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on bank lines of credit		7,000		(59,000)
Proceeds from long-term debt		592		413
Payments on long-term debt		(723)		(778)
Proceeds from exercise of stock options and employee stock purchase plan		8,398		5,402
Payments of contingent consideration		(5,265)		(854)
Repurchases of common stock		(51,775)		(25,051)
Taxes paid related to net share settlement of equity awards		(26,761)		(11,546)
Net cash used in financing activities		(68,534)		(91,414)
Effect of exchange rate changes on cash		(3,962)		2,887
Net change in cash and cash equivalents		4,710		16,363
Cash and cash equivalents—beginning of period		96,316		76,102
Cash and cash equivalents—end of period	$	101,026	$	92,465
Supplemental disclosure of cash flow information:
Cash paid, net during the period for:
Interest	$	6,773	$	5,721
Income taxes	$	16,141	$	8,074

See accompanying notes to condensed consolidated financial statements.

8

OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded in accordance with SEC rules and regulations and GAAP applicable to interim unaudited financial statements. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited annual financial statements. In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 filed with the SEC. The results of operations for the three and nine months ended March 31, 2021 are not necessarily indicative of the operating results to be expected for the full 2021 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 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 0 dilutive effect of the Notes for the three and nine months ended March 31, 2020 and 2021.

9

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,
	2020		2021		2020		2021
Net income available to common stockholders	$	19,558	$	18,773	$	61,287	$	48,155
Weighted average shares outstanding—basic		18,182		17,969		18,251		17,981
Dilutive effect of equity awards		331		329		442		297
Weighted average shares outstanding—diluted		18,513		18,298		18,693		18,278
Basic earnings per share	$	1.08	$	1.04	$	3.36	$	2.68
Diluted earnings per share	$	1.06	$	1.03	$	3.28	$	2.63
Shares excluded from diluted earnings per share due to their anti-dilutive effect		145		51		100		64

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 $92.5 million at March 31, 2021. Of this amount, approximately 58% 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, Malaysia, Canada, Singapore and India and to a lesser extent in Puerto Rico 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 international financial institutions of high credit quality.

Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, insurance company contracts, accounts receivable, accounts payable, debt instruments and foreign currency forward contracts. The carrying values of financial instruments, other than long-term debt instruments, are representative of their fair values due to their short-term maturities. The carrying values of our long-term debt instruments are considered to approximate their fair values, as 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 March 31, 2021.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Level 1 category includes assets and liabilities measured at quoted prices in active markets for identical assets and liabilities. The Level 2 category includes assets and liabilities measured from observable inputs other than quoted market prices. The Level 3 category includes assets and liabilities for which valuation inputs are unobservable and significant to the fair value measurement. Our contingent payment obligations related to acquisitions, which are further discussed in Note 10 to the condensed consolidated financial statements, are in the Level 3 category for valuation purposes.

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

	June 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets :
Insurance company contracts	$	—	$	37,155	$	—	$	37,155	$	—	$	45,015	$	—	$	45,015
Liabilities:
Contingent consideration	$	—	$	—	$	13,867	$	13,867	$	—	$	—	$	19,337	$	19,337

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.

10

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 March 31, 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 three and nine months ended March 31, 2021 were not significant.  The fair value of our forward foreign exchange contracts is estimated using a standard valuation model and market-based observable inputs over the contractual term. Unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.  As of March 31, 2021, we held foreign currency forward contracts with notional amounts totaling $23.5 million. Unrealized gains and losses from the forward currency forward contracts as of March 31, 2021 were not significant. There were no derivative instruments as of June 30, 2020.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“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.

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.

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 did not have a significant impact on our consolidated financial statements. ASU 2020-04 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 future modifications to contracts, if any, is not expected to have a significant impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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 and a convertible preferred stock 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 are currently evaluating the potential impact of adoption of this guidance on our consolidated financial statements.

11

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.

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3. Balance Sheet Details

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

	June 30,		March 31,
Accounts receivable, net	2020		2021
Accounts receivable	$	287,488	$	281,970
Less allowance for doubtful accounts		(17,648)		(23,376)
Total	$	269,840	$	258,594

	June 30,		March 31,
Inventories	2020		2021
Raw materials	$	132,797	$	144,043
Work-in-process		50,023		68,853
Finished goods		58,406		70,627
Total	$	241,226	$	283,523

	June 30,		March 31,
Property and equipment, net	2020		2021
Land	$	16,516	$	16,345
Buildings, civil works and improvements		57,709		57,645
Leasehold improvements		9,052		8,654
Equipment, furniture and fixtures		149,310		156,006
Computer software		18,217		23,052
Computer software implementation in process		11,817		10,615
Construction in process		3,598		4,459
Total		266,219		276,776
Less accumulated depreciation and amortization		(138,283)		(151,299)
Property and equipment, net	$	127,936	$	125,477

Depreciation and amortization expense for property and equipment was $5.4 million and $5.5 million for the three months ended March 31, 2020 and 2021, respectively, and $15.9 million and $16.3 million for the nine months ended March 31, 2020 and 2021, respectively.

4. Goodwill and Intangible Assets

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

					Optoelectronics
					and
	Security		Healthcare		Manufacturing
	Division		Division		Division		Consolidated
Balance as of June 30, 2020	$	203,627	$	39,983	$	67,017	$	310,627
Goodwill acquired or adjusted during the period		1,905		3,244		—		5,149
Foreign currency translation adjustment		264		333		2,838		3,435
Balance as of March 31, 2021	$	205,796	$	43,560	$	69,855	$	319,211

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Intangible assets consisted of the following (in thousands):

		June 30, 2020						March 31, 2021
	Weighted	Gross						Gross
	Average	Carrying		Accumulated		Intangibles		Carrying		Accumulated		Intangibles
	Lives	Value		Amortization		Net		Value		Amortization		Net
Amortizable assets:
Software development costs	8 years	$	41,332	$	(16,295)	$	25,037	$	45,421	$	(14,817)	$	30,604
Patents	19 years		9,962		(2,584)		7,378		9,890		(2,790)		7,100
Developed technology	10 years		55,719		(19,556)		36,163		60,923		(24,352)		36,571
Customer relationships/backlog	7 years		64,128		(32,110)		32,018		62,577		(35,929)		26,648
Total amortizable assets			171,141		(70,545)		100,596		178,811		(77,888)		100,923
Non-amortizable assets:
In-process research and development			533		—		533		533		—		533
Trademarks			27,150		—		27,150		28,602		—		28,602
Total intangible assets		$	198,824	$	(70,545)	$	128,279	$	207,946	$	(77,888)	$	130,058

Amortization expense related to intangible assets was $4.9 million and $4.8 million for the three months ended March 31, 2020 and 2021, respectively. For the nine months ended March 31, 2020 and 2021, amortization expense related to intangible assets was $14.3 million and $15.1 million, respectively.

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

2021 (remaining 3 months)	$	4,660
2022		17,152
2023		17,377
2024		16,705
2025		13,986
Thereafter		31,043
Total	$	100,923

Software development costs for software products incurred before establishing technological feasibility are charged to operations. Software development costs incurred after establishing technological feasibility are capitalized on a product-by-product basis until the product is available for general release to customers at which time amortization begins. Annual amortization, charged to cost of goods sold, is the amount computed using the ratio that current revenues for a product bear to the total current and anticipated future revenues for that product. In the event that future revenues are not estimable, such costs are amortized on a straight-line basis over the remaining estimated economic life of the product. Amortizable assets that have not yet begun to be amortized are included in Thereafter in the table above. For the three months ended March 31, 2020 and 2021, we capitalized software development costs in the amounts of $4.5 million and $2.6 million, respectively. For the nine months ended March 31, 2020 and 2021, we capitalized software development costs in the amounts of $7.7 million and $9.1 million, respectively.

5. Contract Assets and Liabilities

We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 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.

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Contract assets and liabilities were as follows (in thousands):

	June 30,		March 31,
Contract Assets:	2020		2021		$ Change		% Change
Unbilled revenue	$	43,011	$	46,866	$	3,855	9	%

Contract Liabilities:
Advances from customers	$	28,155	$	48,132	$	19,977	71	%
Deferred revenue—current		32,863		37,075		4,212	13	%
Deferred revenue—long-term		13,214		13,470		256	2	%

Contract assets increased during the nine months ended March 31, 2021 primarily due to satisfaction of performance obligations for aviation, cargo and vehicle inspection customers in our Security division which have not yet been billed. The increase in contract liabilities was primarily due to receipt of upfront deposits from customers in our Security division.

Remaining Performance Obligations. Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period. As of March 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $322.8 million. We expect to recognize revenue on approximately 67% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter. During the nine months ended March 31, 2021, we recognized revenue of $45.0 million from contract liabilities existing at the beginning of the period.

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

6. Leases

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2021		2020		2021
Operating lease cost	$	2,525	$	2,216	$	7,771	$	7,120
Variable lease cost		237		280		551		723
Short-term lease cost		350		258		745		649
	$	3,112	$	2,754	$	9,067	$	8,492

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

	Balance Sheet Category	June 30, 2020		March 31, 2021
Operating lease ROU assets, net	Other assets	$	27,936	$	23,856
Operating lease liabilities, current portion	Other accrued expenses and current liabilities	$	8,537	$	7,646
Operating lease liabilities, long-term	Other long-term liabilities		19,713		16,742
Total operating lease liabilities		$	28,250	$	24,388
Weighted average remaining lease term					4.2 years
Weighted average discount rate					4.2 %

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

	Nine Months Ended March 31,
	2020		2021
Cash paid for operating lease liabilities	$	7,664	$	7,773
ROU assets obtained in exchange for new lease obligations		3,718		1,810

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

	March 31, 2021
Less than one year	$	8,475
1 – 2 years		5,929
2 – 3 years		4,866
3 – 4 years		3,215
4 – 5 years		2,060
Thereafter		2,421
		26,966
Less: imputed interest		(2,578)
Total lease liabilities	$	24,388

7. Impairment, Restructuring and Other Charges

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

During the three months ended March 31, 2021, we recognized a total net benefit of ($0.3) million which included a net benefit of ($0.7) million for reimbursements from our insurance carriers for covered legal charges. We also incurred charges of $0.2 million for employee terminations and $0.2 million for facility closure and operational efficiency activities.

During the nine months ended March 31, 2021, we incurred a total net expense of $7.9 million which included $7.2 million for exit activities associated with an expired turnkey contract in Mexico. Such exit costs 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 facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities.  We also recognized a net benefit of ($1.2) million for reimbursements from our insurance carriers for covered legal charges.

During the three and nine  months ended March 31, 2020, we abandoned a non-core product line in our Healthcare division which resulted in the write-off of assets, including intangible and fixed assets, totaling $3.3 million as we determined that these assets had no value and were permanently impaired. In addition, we continued to recover certain legal costs related to class action litigation and government investigations through insurance reimbursement. We also incurred additional legal fees related to these matters as well as restructuring charges by the divisions as noted in the tables below. This resulted in a net expense of $4.5 million and $1.5 million during the three and nine months ended March 31, 2020, respectively.

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

	Three Months Ended March 31, 2020
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Impairment charges	$	—	$	3,258	$	—	$	—	$	3,258
Acquisition-related costs		107		—		41		155		303
Employee termination costs		328		466		259		50		1,103
Facility closures/consolidation		30		—		—		—		30
Legal costs (recoveries), net		—		—		—		(146)		(146)
Total expensed	$	465	$	3,724	$	300	$	59	$	4,548

	Three Months Ended March 31, 2021
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Acquisition-related costs	$	22	$	—	$	—	$	—	$	22
Employee termination costs		213		—		—		—		213
Facility closures/consolidation costs (benefit)		166		—		—		—		166
Legal costs (recoveries), net		—		—		—		(686)		(686)
Total expensed (benefit), net	$	401	$	—	$	—	$	(686)	$	(285)

	Nine Months Ended March 31, 2020
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Impairment charges	$	—	$	3,258	$	—	$	—	$	3,258
Acquisition-related costs		107		—		41		155		303
Employee termination costs		734		466		277		119		1,596
Facility closures/consolidation		30		—		—		—		30
Legal costs (recoveries), net		—		—		—		(3,667)		(3,667)
Total expensed	$	871	$	3,724	$	318	$	(3,393)	$	1,520

	Nine Months Ended March 31, 2021
					Optoelectronics and
			Healthcare		Manufacturing
	Security Division		Division		Division		Corporate		Total
Impairment charges	$	552	$	—	$	—	$	—	$	552
Acquisition-related costs		250		27		—		—		277
Employee termination costs		4,010		—		146		—		4,156
Mexico transaction costs		2,691		—		—		—		2,691
Facility closures/consolidation costs		1,420		—		—		—		1,420
Legal costs (recoveries), net		—		—		—		(1,184)		(1,184)
Total expensed (benefit), net	$	8,923	$	27	$	146	$	(1,184)	$	7,912

The accrued liability for restructuring and other charges is included in other accrued expenses and current liabilities in the condensed consolidated balance sheet. The changes in the accrued liability for restructuring and other charges for the nine-month period ended March 31, 2021 were as follows (in thousands):

			Facility
	Employee		Closure/
	Termination		Consolidation		Acquisition-		Legal Costs and
	Costs		Cost		Related Costs		Settlements		Total
Balance as of June 30, 2020	$	545	$	201	$	—	$	1,882	$	2,628
Restructuring and other charges (benefit), net		4,156		1,420		277		(1,184)		4,669
Payments, adjustments and reimbursements, net		(4,570)		(1,501)		(277)		748		(5,600)
Balance as of March 31, 2021	$	131	$	120	$	0	$	1,446	$	1,697

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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 March 31, 2021 (which margin can range from 1.0% to 1.75% based on our consolidated net leverage ratio as defined in the credit facility). The LIBOR index is expected to be 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 March 31, 2021 (which fee can range from 0.10% to 0.25% based on our consolidated net leverage ratio as defined in the credit facility). Our borrowings under the credit agreement are guaranteed by certain of our U.S.-based subsidiaries and are secured by substantially all of our assets and substantially all the assets of certain of our subsidiaries. The credit facility contains various representations and warranties, affirmative, negative and financial covenants and events of default. As of March 31, 2021, there were no borrowings outstanding under the revolving credit facility and $66.7 million outstanding under the letters of credit sub facility. The amount available to borrow under the credit facility as of March 31, 2021 was $468.3 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 and therefore, borrowings under the credit facility are included in current liabilities. As of March 31, 2021, we were in compliance with all covenants under this credit facility.

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

In February 2017, we issued $287.5 million of the Notes in a private offering. The Notes are governed by an indenture dated February 22, 2017. The maturity for the payment of principal is September 1, 2022. The Notes bear interest at the rate of 1.25% and are payable in cash semiannually in arrears on each March 1 and September 1.

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. The debt discount is amortized over the remaining contractual term to maturity of the Notes using an effective interest rate of 4.5%. The debt issuance cost is amortized on a straight-line basis, which approximates the effective interest method, over the life of the Notes. Total interest expense recognized for the three and nine months ended March 31, 2021 related to the Notes was $3.3 million and $10.0 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $2.2 million and $6.4 million of debt discount amortization and $0.3 million and $0.9 million of amortization of debt issuance costs. For the three and nine months ended March 31, 2020, total interest expense was $3.3 million and $9.7 million, respectively, which consisted of $0.9 million and $2.7 million of contractual interest expense, $2.1 million and $6.1 million of debt discount amortization and $0.3 million and $0.9 million of amortization of debt issuance costs.

Other Borrowings

Several of our foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies and U.S. dollars, primarily for the issuance of letters-of-credit. As of March 31, 2021, $63.0 million was outstanding under these letter-of-credit facilities. As of March 31, 2021, the total amount available under these credit facilities was $12.9 million.

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

	June 30,		March 31,
	2020		2021
1.25% convertible notes due September 1, 2022:
Principal amount	$	287,500	$	287,500
Unamortized discount		(19,075)		(12,680)
Unamortized debt issuance costs		(2,547)		(1,665)
		265,878		273,155
Other long-term debt		2,120		1,767
		267,998		274,922
Less current portion of long-term debt		(926)		(925)
Long-term portion of debt	$	267,072	$	273,997

9. Stockholders’ Equity

Stock-based Compensation

As of March 31, 2021, we maintained the Amended and Restated 2012 Incentive Award Plan (the "2012 Plan ") and the Amended and Restated 2006 Equity Participation Plan ("2006 Plan") as stock-based employee compensation plans. NaN 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):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2021		2020		2021
Cost of goods sold	$	189	$	199	$	517	$	571
Selling, general and administrative		5,520		7,223		17,153		18,391
Research and development		128		143		427		424
Stock-based compensation expense	$	5,837	$	7,565	$	18,097	$	19,386

As of March 31, 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 $20.7 million for restricted stock units (“RSUs”). We expect to recognize these costs over a weighted average period of 2.1 years with respect to the stock options and 1.9 years for grants of RSUs.

The following summarizes stock option activity during the nine months ended March 31, 2021:

		Weighted
		Average		Weighted-Average	Aggregate
	Number of	Exercise		Remaining Contractual	Intrinsic Value
	Options	Price		Term	(in thousands)
Outstanding at June 30, 2020	326,304	$	44.41
Granted	22,171		82.17
Exercised	(87,235)		34.44
Expired or forfeited	(2,710)		78.71
Outstanding at March 31, 2021	258,530		50.65	2.8 years	$	11,818
Exercisable at March 31, 2021	222,512		45.03	1.8 years		11,387

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The following summarizes RSU award activity during the nine months ended March 31, 2021:

		Weighted-
		Average
	Shares	Fair Value
Nonvested at June 30, 2020	423,590	$	88.68
Granted	337,778		80.32
Vested	(310,939)		86.20
Forfeited	(8,244)		84.47
Nonvested at March 31, 2021	442,185	$	84.12

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 March 31, 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 81,621 and 136,242 performance-based RSUs during the nine months ended March 31, 2020 and 2021, respectively. These performance based RSU awards are contingent on the achievement of certain performance metrics. The payout related to these awards can range from 0 to 400% of the original number of shares or units awarded. Compensation cost associated with these performance based RSUs are recognized based on the estimated number of shares that we ultimately expect will vest. If the estimated number of shares to vest is revised in the future, then stock based compensation expense will be adjusted accordingly.

Stock Repurchase Program

In 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. This program does not expire unless our Board of Directors acts to terminate the program. The timing and actual numbers of shares purchased depends on a variety of factors, including stock price, general business and market conditions and other investment opportunities. Repurchases may be made from time to time under the program through open-market purchases or privately-negotiated transactions at our discretion. Upon repurchase, the shares are restored to the status of authorized but unissued shares and we record them in our consolidated financial statements as a reduction in the number of shares of common stock issued and outstanding.

During the nine months ended March 31, 2021, we repurchased 322,588 shares of our common stock.

Dividends

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

10. Commitments and Contingencies

Acquisition-Related Contingent Obligations

Under the terms and conditions of the purchase agreements associated with certain acquisitions, we may be obligated to make additional payments based on the achievement of certain sales or profitability milestones through the acquired operations.  For agreements that contain contingent consideration caps, the remaining maximum amount of such potential future payments is $30.2 million as of March 31, 2021.

We account for such contingent payments for acquisitions which occurred through the end of fiscal year 2009 as additions to the purchase price of the acquired business. We made contingent payments relating to such acquisitions of $0.2 million and $1.5 million, respectively, during the three and nine months ended March 31, 2020 and $0.2 million and $0.9 million, respectively, during the three and nine months ended March 31, 2021.

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For acquisitions completed after fiscal 2009, pursuant to Financial Accounting Standard 141R, which was codified into ASC 805, the estimated fair value of these obligations is recorded as a liability at the time of the acquisition with subsequent revisions recorded in Selling, general and administrative expense in the consolidated financial statements. The estimated fair value measurements of contingent earnout obligations are primarily based on unobservable inputs, which may include projected revenues, gross margins, operating income and the estimated probability of achieving the earnouts.

These projections and probabilities are used to estimate future contingent earnout payments, which are discounted back to present value to compute contingent earnout liabilities. The following table provides a roll-forward from June 30, 2020 to March 31, 2021 of the contingent consideration liability, which is included in other accrued expenses and current liabilities and other long-term liabilities in our consolidated balance sheets (in thousands):

Beginning fair value, June 30, 2020	$	13,867
Addition of contingent earnout obligations		7,304
Foreign currency translation adjustment		523
Changes in fair value for contingent earnout obligations		(2,357)
Payments on contingent earnout obligations		—
Ending fair value, March 31, 2021	$	19,337

Environmental Contingencies

We are subject to various environmental laws. Our practice is to conduct environmental investigations at our manufacturing facilities in North America, Asia-Pacific and Europe, and, to the extent practicable, on all new properties in order to identify, as of the date of such investigation, potential areas of environmental concern related to past and present activities or from nearby operations. In certain cases, we have conducted further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate by independent environmental consultants.

We continue to investigate contamination of the soil and groundwater beneath the Hawthorne, California facility that resulted from unspecified on-and off-site releases occurring prior to our occupancy. We believe the releases are of a historical nature and not uncommon to the region in general. We continue to take voluntary actions, in cooperation with the local governing agency, to fully investigate the site and 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 are possible, they are not considered by our management to be probable and reasonably estimable. If one or more of these environmental matters are resolved in a manner adverse to us, the impact on our business, financial condition, results of operations and cash flow could be material.

Indemnifications and Certain Employment-Related Contingencies

In the normal course of business, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from breaches of representations, warranties or covenants, or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our directors and certain of our officers. It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. We have not recorded any liability for costs related to contingent indemnification obligations as of March 31, 2021.

On December 31, 2017, we and Deepak Chopra, our Chief Executive Officer, entered into an amendment to Mr. Chopra's employment agreement that, among other things, provides for a $13.5 million bonus payment to Mr. Chopra on or within 45 days of January 1, 2024 contingent upon Mr. Chopra's continued employment with us through that date, subject to accelerated payout terms in the event of Mr. Chopra's death or disability. The bonus is recorded in the financial statements over the remaining term of the employment agreement and is included in other long-term liabilities.

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Product Warranties

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

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

	Nine Months Ended March 31,
	2020		2021
Balance at beginning of period	$	21,724	$	20,825
Additions and adjustments		6,105		3,759
Reductions for warranty repair costs		(6,557)		(4,975)
Balance at end of period	$	21,272	$	19,609

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. 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. At this early stage of the litigations, 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.

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11. Income Taxes

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

The effective tax rates for the three months ended March 31, 2021 and 2020 were 33.7% and (3.4)%, respectively. During the three months ended March 31, 2021, we recognized a net discrete tax expense of $2.2 million for return-to-provision true-up adjustments of $2.4 million, offset by a discrete tax benefit of ($0.2) million for equity-based compensation under ASU 2016-09. During the three months ended March 31, 2020, we recognized a discrete tax benefit of $5.1 million for a return to provision true-up adjustment.  

The effective tax rate for the nine months ended March 31, 2021 and 2020 was 30.1% and 8.7%, respectively. During the nine months ended March 31, 2021, we recognized a net discrete tax expense of $2.3 million for return-to-provision true-up adjustments of $2.8 million, offset by a ($0.5) million tax benefit from equity-based compensation under ASU 2016-09. During the nine months ended March 31, 2020, we recognized a discrete tax benefit of $12.0 million for equity-based compensation under ASU 2016-09 of $6.8 million and a return to provision true-up adjustment of $5.2 million.

12. Segment Information

We have determined that we operate in 3 identifiable industry segments: (a) security and inspection systems (Security division), (b) medical monitoring and diagnostic cardiology systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division). We also have a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses; expenses related to stock issuances and legal, audit and other professional service fees not allocated to industry segments. Both the Security and Healthcare divisions comprise primarily end-product businesses, whereas the Optoelectronics and Manufacturing division primarily supplies components and subsystems to external OEM customers, as well as to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values. All other accounting policies of the segments are the same as described in Note 1, Basis of Presentation.

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2021		2020		2021
Revenues (1) —by Segment:
Security division	$	187,076	$	151,409	$	578,477	$	431,420
Healthcare division		45,662		54,023		127,862		160,421
Optoelectronics and Manufacturing division, including intersegment revenues		70,240		90,278		216,684		257,713
Intersegment revenues elimination		(10,095)		(11,923)		(33,946)		(34,850)
Total	$	292,883	$	283,787	$	889,077	$	814,704
Income (loss) from operations —by Segment:
Security division	$	24,525	$	23,969	$	73,405	$	52,651
Healthcare division		1,682		7,333		5,793		25,640
Optoelectronics and Manufacturing division		7,309		10,484		25,096		29,638
Corporate		(10,161)		(9,078)		(23,578)		(25,895)
Intersegment eliminations		270		(242)		715		(517)
Total	$	23,625	$	32,466	$	81,431	$	81,517

	June 30,		March 31,
	2020		2021
Assets (2) —by Segment:
Security division	$	758,054	$	751,008
Healthcare division		208,857		211,226
Optoelectronics and Manufacturing division		232,408		275,976
Corporate		109,178		126,157
Eliminations (3)		(39,956)		(38,407)
Total	$	1,268,541	$	1,325,960

(1)For each of the three and nine month periods ended March 31, 2020 and March 31, 2021, 0 customer accounted for greater than 10% of total net revenues.

(2)NaN customer accounted for 13% of accounts receivable, net as of June 30, 2020. A different customer accounted for 10% of accounts receivable, net as of March 31, 2021.

(3)Eliminations in assets reflect the amount of inter-segment profits in inventory and inter-segment ROU assets under ASC 842 as of the balance sheet date. Such inter-segment profit will be realized when inventory is shipped to the external customers of the Security and Healthcare divisions.

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

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

This management’s discussion and analysis of financial condition as of March 31, 2021 and results of operations for the three and nine months ended March 31, 2021 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 filed with the SEC.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to our current expectations, beliefs, and projections concerning matters that are not historical facts. Words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” “should,” “will,” “would,” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve uncertainties, risks, assumptions and contingencies, many of which are outside our control. Assumptions upon which our forward-looking statements are based could prove to be inaccurate, and actual results may differ materially from those expressed in or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (including Part I, Item 1, “Business,” Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and other documents filed by us from time to time with the SEC. Such factors, of course, do not include all factors that might affect our business and financial condition.  We could be exposed to a variety of negative consequences as a result of delays related to the award of domestic and international contracts; failure to secure the renewal of key customer contracts; delays in customer programs; delays in revenue recognition related to the timing of customer acceptance; unanticipated impacts of sequestration and other U.S. Government budget control provisions; 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; 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; and other risks and uncertainties, including but not limited to those detailed herein and from time to time in our other SEC filings, which could have a material and adverse impact on our business, financial condition and results of operation. All forward-looking statements contained in this report are qualified in their entirety by this statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation other than as may be required under securities laws to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

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

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Security Division. Through our Security division, we provide security screening products and services globally, as well as turnkey security screening solutions. These products and services are used to inspect baggage, parcels, cargo, people, vehicles and other objects for weapons, explosives, drugs, radioactive and nuclear materials and other contraband. Revenues from our Security division accounted for 65% and 53% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.  We were impacted by the COVID-19 pandemic as discussed in the “Trends and Uncertainties-Coronavirus Pandemic” section below.

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and connected care systems and related supplies and accessories globally for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the hospital and provide information, through wired and wireless networks, to physicians and nurses who may be at the patient’s bedside, in another area of the hospital or even outside the hospital. Revenues from our Healthcare division accounted for 14% and 20% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and flex circuits and provide electronics manufacturing services globally for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, telecommunications, office automation, computer peripherals, industrial automation and consumer products. We provide our optoelectronic devices and electronics manufacturing services to OEM customers and to our own Security and Healthcare divisions. Revenues from external customers in our Optoelectronics and Manufacturing division accounted for 21% and 27% of our total consolidated revenues for the nine months ended March 31, 2020 and 2021, respectively.

Trends and Uncertainties

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

Coronavirus Pandemic. The coronavirus disease 2019 (“COVID-19”) pandemic 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 service revenues were adversely impacted as a result of the pandemic. During the first nine months of fiscal 2021, bookings accelerated, but as many of our customers in our Security division are being 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 could 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.

Global Economic Considerations.  In addition to the COVID-19 pandemic, 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.

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Healthcare Considerations. As described above, our Healthcare division has experienced 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 during the balance of fiscal 2021 and subsequent periods. The pandemic may also impact our ability to manufacture products 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 whereby airports using explosive detection systems for hold baggage screening must meet Standard 3 has been changed to March 2024, with certain larger airports required to meet earlier installation dates. Our Security division’s real time tomography (RTT) product has passed the ECAC explosive detection system Standard 3 threat detection requirement.

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

Results of Operations for the Three Months Ended March 31, 2020 (Q3 2020) Compared to the Three Months Ended March 31, 2021 (Q3 2021) (amounts in millions)

Net Revenues

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

	Q3		% of		Q3		% of
	2020		Net Revenues		2021		Net Revenues		$ Change		% Change
Security	$	187.1	64	%	$	151.4	53	%	$	(35.7)	(19)	%
Healthcare		45.7	16			54.0	19			8.3	18
Optoelectronics and Manufacturing		60.1	20			78.4	28			18.3	30
Total net revenues	$	292.9	100	%	$	283.8	100	%	$	(9.1)	(3)	%

Revenues for the Security division during the three months ended March 31, 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 cargo business revenues decreased by $17.4 million. We also experienced a decrease in revenues of $15.8 million associated with the expiration of a contract in Mexico in June 2020.

Revenues for the Healthcare division during the three months ended March 31, 2021 increased year-over-year due to higher sales of $8.3 million attributable to patient monitoring systems and cardiology equipment and related service revenue.

Revenues for the Optoelectronics and Manufacturing division during the three months ended March 31, 2021 increased year-over-year as a result of higher revenue of $14.6 million from our contract manufacturing business and $3.6 million from our optoelectronics business.

Gross Profit

	Q3		% of		Q3		% of
	2020		Net Revenues		2021		Net Revenues
Gross profit	$	109.1	37.3	%	$	104.0	36.7	%

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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. The overall decrease in gross profit resulted from decreased revenues in the Security division, mitigated by higher sales in our Healthcare and Optoelectronics and Manufacturing divisions. There were no significant changes in overall manufacturing-related costs.  Gross profit as a percentage of net revenues during the three months ended March 31, 2021 decreased on a year-over-year basis due to (i) a reduced gross margin within the Optoelectronics and Manufacturing division due to a less favorable sales mix, and (ii) an increase in Optoelectronics and Manufacturing revenues as a percentage of total net revenues, which inherently carries the lowest gross margin of each of the divisions. This was somewhat offset by an improved gross margin in our Healthcare division as a result of the benefit of economies of scale associated with increased sales, combined with operating efficiencies.

Operating Expenses

	Q3		% of		Q3		% of
	2020		Net Revenues		2021		Net Revenues		$ Change		% Change
Selling, general and administrative	$	65.6	22.4	%	$	57.9	20.4	%	$	(7.7)	(11.7)	%
Research and development		15.4	5.2			13.9	4.9			(1.5)	(9.3)
Impairment, restructuring and other charges (benefit), net		4.5	1.6			(0.3)	(0.1)			(4.8)	(106.3)
Total operating expenses	$	85.5	29.2	%	$	71.5	25.2	%	$	(14.0)	(16.3)	%

Selling, general and administrative. Our significant selling, general and administrative (SG&A) expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, and depreciation and amortization expense. SG&A expense for the three months ended March 31, 2021 decreased as compared to the same prior-year period due to reduced travel and entertainment and marketing expenses of $2.0 million and $2.1 million, respectively, resulting from the COVID-19 pandemic, lower employee compensation of $1.3 million, decreased third-party sales commissions of $1.5 million, and a reduction in the provision for bad debt of $1.0 million.

Research and development. Research and development (R&D) expenses include research related to new product development and product enhancements. The decrease in R&D expenses during the three months ended March 31, 2021 from the same prior-year period reflected lower materials and supplies consumed in research activities of $1.0 million and a decrease in travel expenses of $0.3 million resulting from 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. The net benefit in the three months ended March 31, 2021 consisted of ($0.7) million benefit for net reimbursements from our insurance carriers for covered legal charges, a $0.2 million charge for employee terminations from operational efficiency activities, and a $0.2 million charge for facility closure and operational efficiency activities. The net expense in the three months ended March 31, 2020 included $3.3 million from impairment of assets in our Healthcare division for the exit of a product line, $1.1 million of employee termination and facility closure costs, and $0.1 million of other net costs.

Interest and other expense, net. For the three months ended March 31, 2021, interest and other expense, net was $4.2 million as compared to $4.7 million in the comparable prior-year period. This decrease was driven most significantly by lower average levels of borrowing under our revolving credit facility as well as lower average interest rates during the three months ended March 31, 2021 compared to the same period in the prior year. Interest expense included $2.2 million of non-cash interest expense primarily related to the Notes during each of the three months ended March 31, 2021 and 2020 (see Note 8 to the condensed consolidated financial statements for further discussion).

Income taxes. The effective tax rate for a particular period varies depending on a number of factors, including (i) the mix of income earned in various tax jurisdictions, each of which applies a unique range of income tax rates and income tax credits, (ii) changes in previously established valuation allowances for deferred tax assets (changes are based upon our current analysis of the likelihood that these deferred tax assets will be realized), (iii) the level of non-deductible expenses, (iv) certain tax elections (v) tax holidays granted to certain of our international subsidiaries and (vi) discrete tax items. For the three months ended March 31, 2021, we recognized a provision for income taxes of $9.5 million compared to a benefit for income taxes of $(0.6) million for the comparable prior-year period. The effective tax rates for the three months ended March 31, 2021 and 2020 were 33.7% and (3.4)%, respectively. During the three months ended March 31, 2021, we recognized a net discrete tax expense of $2.2 million for return-to-provision true-up adjustments of $2.4 million, offset by a discrete tax benefit of ($0.2) million for equity-based compensation under ASU 2016-09. During the three months ended March 31, 2020, we recognized a discrete tax benefit of ($5.1) million for a return-to-provision true-up adjustment.

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Results of Operations for the Nine Months Ended March 31, 2020 (YTD Q3 2020) Compared to the Nine Months Ended March 31, 2021 (YTD Q3 2021) (amounts in millions)

Net Revenues

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

	YTD Q3		% of		YTD Q3		% of
	2020		Net Revenues		2021		Net Revenues		$ Change		% Change
Security	$	578.5	65	%	$	431.4	53	%	$	(147.1)	(25)	%
Healthcare		127.9	14			160.4	20			32.5	25
Optoelectronics and Manufacturing		182.7	21			222.9	27			40.2	22
Total net revenues	$	889.1	100	%	$	814.7	100	%	$	(74.4)	(8)	%

Revenues for the Security division during the nine months ended March 31, 2021 decreased on a year-over-year basis due to the continued impact of 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 cargo business revenues decreased by $67 million and advanced security screening business revenues decreased by $34 million. We also experienced a decrease in revenues of approximately $50 million associated with the expiration of a contract in Mexico in June 2020.

Revenues for the Healthcare division during the nine months ended March 31, 2021 increased year-over-year due to increased sales of patient monitoring systems, cardiology equipment and related supplies and accessories totaling approximately $32 million.

Revenues for the Optoelectronics and Manufacturing division during the nine months ended March 31, 2021 increased year-over year  as a result of an increase in revenue in our contract manufacturing business of approximately $32 million coupled with an increase in sales of approximately $8 million in our optoelectronics business, which includes a $7 million increase in revenues from a small business acquired in February 2020.

Gross Profit

	YTD Q3		% of		YTD Q3		% of
	2020		Net Revenues		2021		Net Revenues
Gross profit	$	319.1	35.9	%	$	301.9	37.1	%

The overall decrease in gross profit was driven by the decrease in revenues for the Security division which was somewhat mitigated by higher sales in our Healthcare and Optoelectronics and Manufacturing divisions. There were no significant changes in manufacturing-related costs. Gross profit as a percentage of net revenues during the nine months ended March 31, 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 service 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

	YTD Q3		% of		YTD Q3		% of
	2020		Net Revenues		2021		Net Revenues		$ Change		% Change
Selling, general and administrative	$	191.7	21.6	%	$	172.6	21.2	%	$	(19.1)	(9.9)	%
Research and development		44.5	5.0			39.8	4.9			(4.7)	(10.5)
Impairment, restructuring and other charges (benefit), net		1.5	0.1			7.9	0.9			6.4	420.5
Total operating expenses	$	237.7	26.7	%	$	220.3	27.0	%	$	(17.4)	(7.3)	%

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Selling, general and administrative. SG&A expense for the nine months ended March 31, 2021 decreased as compared to the same prior-year period due to reduced travel and entertainment and marketing expenses of $6.8 million and $3.4 million, respectively, due to the COVID-19 pandemic, decreased third-party sales commissions of $6.5 million, and reduced employee compensation expense of $4.8 million resulting from implementation of cost containment measures.  These decreases were offset by an increase in the provision for loss on accounts receivable of $3.5 million.  

Research and development. The decrease in R&D expense during the nine months ended March 31, 2021 from the same prior-year period reflected lower employee compensation expenses of $1.9 million, a decrease in materials and supplies consumed in research activities of $1.8 million, and reduced travel expenses of $1.0 million due to the COVID-19 pandemic.

Impairment, restructuring and other charges (benefit). During the nine months ended March 31, 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  facility closure costs for operational efficiency activities and $0.3 million for acquisition-related activities. This was offset by a net benefit of ($1.2) million for reimbursements from our insurance carriers for covered legal charges. During the nine months ended March 31, 2020, we incurred impairment, restructuring and other charges, net of $3.3 million related to the exit of a product line in our Healthcare division, $1.6 million of employee termination and facility closure costs, and $0.3 million of acquisition costs, which were offset by a net recovery of $3.7 million for certain legal costs through insurance reimbursements.

Other Income and Expenses

Interest and other expense, net. For the nine months ended March 31, 2021, interest and other expense, net was $12.6 million as compared to $14.3 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 nine months ended March 31, 2021 compared to the same period in the prior year. Interest expense included $6.7 million and $6.6 million of non-cash interest expense during the nine months ended March 31, 2021 and 2020, respectively, mainly related to the Notes (see Note 8 to the condensed consolidated financial statements for further discussion).

Income taxes. For the nine months ended March 31, 2021 and 2020, we recognized a provision for income taxes of $20.8 million and $5.9 million, respectively. The effective tax rate for the nine months ended March 31, 2021 and 2020 was 30.1% and 8.7%, respectively. During the nine months ended March 31, 2021, we recognized a net discrete tax expense of $2.3 million for return-to-provision true-up adjustments of $2.8 million, offset by a ($0.5) million tax benefit from equity-based compensation under ASU 2016-09. During the nine months ended March 31, 2020, we recognized a discrete tax benefit of $12.0 million for equity-based compensation under ASU 2016-09 of $6.8 million and a return to provision true-up adjustment of $5.2 million.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit facilities. Cash and cash equivalents totaled $92.5 million at March 31, 2021, an increase of $16.4 million, or 21.5%, from $76.1 million at June 30, 2020. We currently anticipate that our available funds, credit facilities and cash flow from operations will be sufficient to meet our operational cash needs for the next 12 months and the foreseeable future. In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S. subsidiaries, will be sufficient to satisfy our obligations in the U.S.

We have a five-year revolving credit facility that allows us to borrow up to $535 million. As of March 31, 2021, there were no borrowings outstanding under the revolving credit facility and letters of credit outstanding totaled $66.7 million.

Cash Provided by Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, adjusted for non-cash items, and working capital fluctuations impact cash flows. During the nine months ended March 31, 2021, we generated cash from operations of $131.1 million compared to $105.6 million in the same prior-year period. This increase was driven by favorable changes in net working capital.

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Cash Used in Investing Activities. Net cash used in investing activities was $26.2 million for the nine months ended March 31, 2021 as compared to $28.3 million in the same prior-year period. During the nine months ended March 31 2021, we used cash of $3.0 million for the acquisition of a business. Capital expenditures in the nine month period ended March 31, 2021 were $11.2 million compared to $16.1 million in the same prior-year period. Expenditures for intangible and other assets in the nine month period ended March 31, 2021 were $9.9 million compared to $8.8 million in the same prior-year period.  Purchases of certificates of deposit in the nine month period ended March 31, 2021 were $4.8 million while there were none in the same prior-year period.

Cash Used in Financing Activities. Net cash used in financing activities was $91.4 million during the nine months ended March 31, 2021, compared to $68.5 million during the same prior-year period. The significant changes in cash used in financing activities relate to (i) net repayments of borrowings on bank lines of credit totaling $59.0 million in the nine month period ended March 31, 2021 compared to net borrowings of $7.0 million in the same prior-year period and (ii) $36.6 million used for share repurchases and taxes paid related to the net share settlement of equity awards in the nine month period ended March 31, 2021 compared to $78.5 million for the same prior-year period.

Borrowings

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

Cash Held by Foreign Subsidiaries

Our cash and cash equivalents totaled $92.5 million at March 31, 2021. Of this amount, approximately 58% 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, Malaysia, Canada, Singapore and India and to a lesser extent in Puerto Rico and Albania among other countries. We intend to permanently reinvest certain earnings from foreign operations, and we currently do not anticipate that we will need this cash in foreign countries to fund our U.S. operations. In the event we repatriate cash from certain foreign operations and if taxes have not previously been withheld on the related earnings, we would provide for withholding taxes at the time we change our intention with regard to the reinvestment of those earnings.

Issuer Purchases of Equity Securities

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

					Maximum number (or
					approximate dollar
					value) of
				Total number of	shares (or
				shares (or units)	units)
				purchased as	that may
	Total number of	Average price		part of publicly	yet be purchased
	shares (or units)	paid per share (or		announced plans or	under the plans or
	Purchased	unit)		Programs	programs (1)
January 1 to January 31, 2021	—	$	—	—	2,679,864
February 1 to February 28, 2021	—		—	—	2,679,864
March 1 to March 31, 2021	2,452		95.74	2,452	2,677,412
	2,452			2,452

(1) In April 2020, the Board of Directors authorized a share repurchase program of up to 1,000,000 shares of common stock. In August 2020, the Board of Directors increased the maximum number of shares to 3,000,000 shares authorized under the stock repurchase program.  Upon repurchase, the shares are restored to the status of authorized but unissued shares, and we record them as a reduction in the number of shares of common stock issued and outstanding in our consolidated financial statements.

Contractual Obligations

During the nine months ended March 31, 2021, there were no material changes outside the ordinary course of business to the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

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Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. There have been no material changes in our exposure to market risk during the nine months ended March 31, 2021 from that described in the Annual Report.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third 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.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The material legal proceedings in which we are involved are discussed in Note 10, “Commitments and Contingencies,” of the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.

ITEM 1A. RISK FACTORS

The discussion of our business, financial condition and results of operations in this Quarterly Report on Form 10-Q for the period ended March 31, 2021 should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on August 21, 2020, which describe various risks and uncertainties that could materially affect our business, financial condition and results of operations in the future. There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. Further, COVID-19 and its impact on the global health and economic environment, as well as reactions to resurgences of COVID-19 or other future pandemics, could also amplify the other risk factors described in our Annual Report on Form 10-K and thus materially affect our business, financial condition and results of operations.

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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

On April 28, 2021, our Compensation Committee approved an amendment to our long-term incentive program as applicable to our Chief Executive Officer to extend the program to include fiscal years 2022 and 2023 and to increase for the current and all remaining performance periods the potential additional shares that our Chief Executive Officer can earn under the compound annual operating income growth metric in accordance with the chart below. Ninety percent of any additional shares earned under the program will vest on the date such shares are granted, and ten percent will vest on the one-year anniversary of the date such shares are granted.

Operating Income Metric
			Potential
			Additional Shares
CAGR EBIT			as % of Initial
Growth			Grant
	9.5	%	70	%
	10.0	%	80	%
	10.5	%	90	%
	11.0	%	100	%

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ITEM 6. EXHIBITS

Exhibit Number	Description
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase
104	Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Hawthorne, State of California on the 30^th day of April 2021.

OSI SYSTEMS, INC.
By:	/s/ Deepak Chopra
	Deepak Chopra
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Alan Edrick
	Alan Edrick
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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