Business Context and Reporting Period
OSI Systems, Inc. designs and manufactures specialized electronic systems and components for security and inspection, healthcare, defense, aerospace, and other critical applications. Its operating divisions are Security, Healthcare, and Optoelectronics and Manufacturing.
This unaudited Form 10-Q covers the three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the three months ended September 30, 2020, the first quarter of fiscal 2021.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net revenues | $279.3 million | $254.9 million | 10% |
| Gross profit | $99.3 million | $95.8 million | 4% |
| Gross margin | 35.6% | 37.6% | Down 2.0 percentage points |
| Income from operations | $24.7 million | $16.7 million | 48% |
| Operating margin | 8.8% | 6.5% | Up 2.3 percentage points |
| Net income | $19.1 million | $9.3 million | 104% |
| Diluted EPS | $1.04 | $0.51 | 104% |
| Cash from operations | $(11.0) million | $53.8 million | Decrease of $64.9 million |
Security revenue increased 11% to $149.5 million, Healthcare revenue decreased 2% to $50.6 million, and Optoelectronics and Manufacturing revenue increased 15% to $79.2 million from external customers. No customer represented more than 10% of consolidated revenue.
Cash and cash equivalents were $54.7 million at September 30, 2021, down from $80.6 million at June 30, 2021. Approximately 83% of cash was held by foreign subsidiaries and was subject to repatriation tax considerations.
Total inventory increased to $320.7 million from $294.2 million at June 30, 2021. Accounts receivable was $292.0 million, compared with $290.7 million at fiscal year-end.
Net cash used in investing activities was $7.8 million, including $3.5 million of capital expenditures and $4.3 million for intangible and other assets. Net cash used in financing activities was $7.2 million, including $16.2 million of share repurchases and $18.6 million of taxes paid related to net share settlement of equity awards.
Debt and Liquidity
The company had $26.0 million outstanding under its $535 million revolving credit facility, $79.4 million of outstanding letters of credit, and $429.6 million of remaining borrowing availability at September 30, 2021. The company was in compliance with its financial covenants.
The $287.5 million principal amount of 1.25% convertible senior notes matures on September 1, 2022. Following early adoption of ASU 2020-06, $286.2 million was presented as debt before issuance costs, with $286.95 million classified as current debt. The notes were not convertible as of September 30, 2021 under the applicable stock-price conditions.
Management stated that available cash, credit facilities, and expected operating cash flows should be sufficient to meet operational cash needs for the next 12 months and the foreseeable future. The company does not currently pay cash dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by recovery in Security product revenue and higher contract manufacturing and optoelectronics revenue.
- Gross margin declined because Optoelectronics and Manufacturing represented a larger share of revenue, while Security and Optoelectronics margins were affected by sales mix and higher component, freight, and travel costs.
- Operating expenses declined 6% to $74.7 million. SG&A declined due primarily to a lower provision for accounts receivable losses, partly offset by higher compensation and travel costs. R&D increased 22% to $14.8 million.
- Impairment, restructuring, and other charges fell to $2.5 million from $8.4 million. The prior-year period included approximately $6.9 million of non-recurring charges related to exiting a Mexico turnkey contract; the current period included $2.2 million of net legal charges and $0.3 million of employee termination costs.
- Interest and other expense declined to $2.0 million from $4.2 million, primarily because ASU 2020-06 eliminated convertible-debt discount amortization and because revolving-facility borrowings were lower on average.
- The effective tax rate declined to 15.9% from 25.3%, including a $2.1 million discrete tax benefit related to stock-based compensation compared with $0.3 million in the prior-year period.
- Operating cash flow changed from $53.8 million provided to $11.0 million used, primarily because of inventory growth, lower accounts receivable collections, and other working-capital changes.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Remaining performance obligations were approximately $414.1 million at September 30, 2021; approximately 34% was expected to be recognized over the following 12 months.
- COVID-19 continued to create risks relating to supply-chain disruption, manufacturing restrictions, customer order and delivery delays, site acceptance testing, service scheduling, and revenue-recognition timing. Security aviation and cargo programs remained particularly affected, while prior-period pandemic demand benefited portions of Healthcare.
- Global component, raw-material, freight, and logistics costs were elevated. Management indicated that inability to offset these costs through pricing or other actions could adversely affect results.
- The company faces exposure to government procurement and trade policies, foreign exchange movements, regulatory and export-control compliance, customer contract renewals, and global economic conditions.
- The company accrued a $12.5 million settlement related to securities litigation and recorded a corresponding $12.5 million insurance-recovery asset. Any shortfall in insurance recovery would result in an expense.
- Environmental investigations continue at the Hawthorne, California facility. No environmental liability was accrued because an unfavorable outcome was not considered probable and reasonably estimable; an adverse resolution could nevertheless be material.
- Potential future acquisition-related contingent payments had a maximum remaining amount of $32.4 million for agreements with payment caps. The recorded contingent consideration liability was $17.0 million at September 30, 2021.
- The company repurchased 168,506 shares during the quarter for approximately $16.2 million, leaving approximately 2.38 million shares authorized for repurchase under the program.
- The filing states that there were no material changes to the risk factors in the fiscal 2021 Form 10-K and no significant off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the significant decline in operating cash flow and increase in inventory reflect temporary working-capital timing or a more persistent supply-chain and demand issue.
- The company’s ability to refinance, repay, or otherwise settle the $287.5 million convertible notes due September 2022.
- Progress toward recovery of Security aviation and cargo programs and the effect of the delayed EU explosive-detection compliance timetable.
- Whether elevated component, freight, and logistics costs continue to pressure gross margins.
- The timing and collectability of the $12.5 million insurance recovery related to the securities litigation settlement.
- The financial impact of environmental matters, pending litigation, acquisition-related earnouts, and other contingencies that are not currently accrued.