OSI Systems, Inc. — Form 10-Q Summary
Business context and reporting period
OSI Systems designs and manufactures specialized electronic systems and components for security, healthcare, defense and aerospace markets. Its operating divisions are Security, Healthcare, and Optoelectronics and Manufacturing. This filing covers the quarter and six months ended December 31, 2021, representing fiscal Q2 2022, compared with the corresponding periods of fiscal 2021. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Net revenues | $276.7 million | $555.9 million |
| Gross profit | $99.8 million | $199.1 million |
| Gross margin | 36.1% | 35.8% |
| Income from operations | $29.1 million | $53.8 million |
| Operating margin | 10.5% | 9.7% |
| Net income | $19.8 million | $38.8 million |
| Diluted EPS | $1.09 | $2.13 |
| Cash flow from operations | Not separately provided | $3.4 million |
At December 31, 2021, cash and cash equivalents were $86.3 million, including approximately 72% held by foreign subsidiaries. Total assets were $1.44 billion and stockholders’ equity was $620.1 million. Inventory was $334.2 million, up from $294.2 million at June 30, 2021.
Debt included $81.6 million drawn under the revolving credit facility, $287.5 million principal amount of 1.25% convertible senior notes due September 1, 2022, and $59.6 million outstanding under foreign bank lines primarily supporting letters of credit. The company amended its senior secured facility in December 2021, increasing total availability to $750 million, including a $600 million revolver and a $150 million delayed-draw term loan. Revolving availability was $434.2 million and term-loan availability was $150 million at year-end; the company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.3% to $276.7 million; six-month revenue increased 4.7% to $555.9 million.
- Six-month Security revenue increased 6% to $295.4 million, while Healthcare revenue decreased 3% to $103.0 million. Optoelectronics and Manufacturing revenue increased 9% to $157.5 million, including intersegment revenue.
- Quarterly gross margin declined from 37.0% to 36.1%; six-month gross margin declined from 37.3% to 35.8%. Management attributed the decline to unfavorable mix, lower Healthcare revenue, and higher component, freight, travel and other manufacturing costs.
- Quarterly operating income decreased from $32.4 million to $29.1 million, while six-month operating income increased from $49.1 million to $53.8 million.
- Quarterly net income declined modestly from $20.0 million to $19.8 million, while six-month net income increased from $29.4 million to $38.8 million. The six-month improvement benefited from lower interest expense and lower restructuring charges.
- Cash flow from operations fell sharply to $3.4 million from $89.5 million, principally due to inventory growth and unfavorable working-capital changes.
- The company repurchased 481,296 shares for $45.3 million during the six months and repurchased 312,790 shares during the quarter. Approximately 2.1 million shares remained authorized for repurchase at December 31, 2021.
- The company early adopted ASU 2020-06 for convertible debt, increasing retained earnings by approximately $19 million, reducing common stock by approximately $27 million, and increasing the convertible-notes balance by approximately $10 million. This materially reduced non-cash interest expense.
Outlook, risks, contingencies and unusual items
Management stated that cash, credit facilities and expected operating cash flow should be sufficient for operational needs over the next 12 months and the foreseeable future. The filing does not provide specific revenue or earnings guidance.
- COVID-19 continues to affect customer demand, manufacturing operations, supply chains, logistics and the timing of customer acceptance and revenue recognition. Security aviation and cargo orders have experienced delays, while Healthcare demand benefits have moderated from earlier pandemic periods.
- Global shortages of electronic components, higher raw-material and freight costs, longer lead times, foreign-exchange movements, government spending and trade policies may pressure margins and delivery schedules.
- Six-month restructuring and other charges were $3.3 million, primarily $2.7 million of legal costs and $0.7 million of employee termination costs. The prior-year period included approximately $7.2 million of exit costs related to an expired Mexico turnkey contract.
- The company accrued a $12.5 million settlement related to consolidated shareholder litigation concerning allegations involving compliance with the Foreign Corrupt Practices Act. It also recorded a corresponding $12.5 million insurance-recovery asset; any shortfall in recovery would be expensed.
- The company continues to investigate historical soil and groundwater contamination at its Hawthorne, California facility. No environmental liability was accrued because management concluded an unfavorable outcome was not probable and reasonably estimable, although an adverse resolution could be material.
- Remaining performance obligations were approximately $357.0 million at December 31, 2021, with approximately 49% expected to be recognized over the following 12 months.
- Potential future acquisition-related contingent payments had a maximum remaining amount of $28.7 million, while the recorded contingent consideration liability was $14.1 million.
Important facts for investors to verify
- Whether supply-chain constraints, freight costs and product mix continue to reduce gross margins.
- The company’s ability to generate operating cash flow as inventory and other working-capital requirements remain elevated.
- Funding or refinancing of the $287.5 million convertible notes due September 1, 2022.
- The timing and amount of insurance recovery related to the $12.5 million litigation settlement.
- Progress toward recovery in Healthcare patient-monitoring revenue and execution of Security division orders, particularly aviation and cargo programs.
- Potential effects of COVID-19, government procurement changes, export controls, foreign-exchange movements and environmental or other legal contingencies.