OSI Systems, Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021. The source also includes unaudited fourth-quarter results for the quarter ended June 30, 2021; the filing is not a 2020 fiscal-year filing.
Business Context
OSI Systems designs and manufactures specialized electronic systems and components for security, healthcare, defense and aerospace markets. Its three divisions are Security, Healthcare, and Optoelectronics and Manufacturing.
- Security revenue represented 55% of fiscal 2021 consolidated revenue and includes inspection systems and turnkey screening services.
- Healthcare represented 19% and includes patient monitoring, diagnostic cardiology and connected care products.
- Optoelectronics and Manufacturing represented 26% of external revenue and includes optoelectronic components and contract manufacturing services.
Financial Performance
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net revenue | $1,146.9 million | $1,166.0 million | Down 1.6% |
| Gross profit | $419.9 million | $420.6 million | Down $0.7 million |
| Gross margin | 36.6% | 36.1% | Up 50 basis points |
| Income from operations | $115.4 million | $104.9 million | Up 10% |
| Operating margin | 10.1% | 9.0% | Improved |
| Net income | $74.0 million | $75.3 million | Down 1.6% |
| Diluted EPS | $4.03 | $4.05 | Down 0.5% |
| Cash flow from operations | $139.1 million | $129.2 million | Up $9.9 million |
Operating expense reductions, particularly lower travel, marketing and sales commission costs, supported the improvement in operating income. Net income was pressured by a higher effective tax rate of 24.9%, compared with 12.6% in fiscal 2020.
Segment and Quarterly Developments
- Security revenue declined 15% to $633.3 million. COVID-19 delayed aviation and cargo orders, deliveries, installations and acceptance testing. The expiration of a Mexico contract reduced revenue by approximately $60 million.
- Healthcare revenue increased 15% to $212.3 million, supported partly by increased demand for patient monitoring products during the pandemic.
- Optoelectronics and Manufacturing revenue increased 26% to $301.3 million, primarily from a $51 million increase in contract manufacturing revenue and an $11 million increase in optoelectronics sales.
- Fourth-quarter fiscal 2021 revenue was $332.2 million, compared with $277.0 million in the prior-year quarter. Fourth-quarter net income was $25.9 million, compared with $14.0 million.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $80.6 million at June 30, 2021, compared with $76.1 million at June 30, 2020.
- Fiscal 2021 operating cash flow was $139.1 million; capital expenditures were $15.8 million, acquisitions used $3.0 million, debt repayments totaled $59.3 million, and share repurchases and equity-award tax settlements used approximately $49.0 million.
- Total borrowings and long-term debt were $277.3 million, down from $327.0 million. The balance primarily consisted of $287.5 million principal amount of 1.25% convertible senior notes due September 2022.
- The $535 million revolving credit facility had no borrowings outstanding, $63.2 million of letters of credit outstanding and approximately $471.8 million available at year-end. The company was in compliance with its financial covenants.
- Approximately 71% of cash was held by foreign subsidiaries and subject to repatriation tax considerations. Management expects available cash, credit facilities and operating cash flow to meet requirements for at least the next 12 months.
Material Changes and Unusual Items
- Impairment, restructuring and other charges increased to $10.1 million from $6.5 million, including $7.2 million of exit costs related to an expired Mexico turnkey contract.
- Accounts receivable increased to $290.7 million, with the allowance for doubtful accounts increasing to $25.3 million from $17.6 million.
- Inventory increased to $294.2 million from $241.2 million, reflecting a significant working-capital use of cash and a key audit matter concerning inventory valuation.
- The company repurchased 452,005 shares during fiscal 2021 and had 2,547,995 shares remaining under its authorized repurchase program at June 30, 2021. No cash dividends have been paid since the 1997 initial public offering.
- The company expects to early adopt ASU 2020-06 on July 1, 2021. It expects an approximately $19 million increase to retained earnings, a $27 million reduction in previously recorded common stock and an approximately $10 million increase in the carrying amount of convertible notes.
Outlook, Risks and Contingencies
- Management did not provide quantitative fiscal 2022 revenue or earnings guidance in the supplied filing text.
- COVID-19 remains a material uncertainty, affecting customer demand, airline traffic, manufacturing capacity, supply chains, logistics, acceptance testing, collections and timing of revenue recognition.
- Backlog was $1.076 billion at June 30, 2021, up from $861 million. Approximately $377 million was not reasonably expected to be fulfilled in fiscal 2022; backlog is not necessarily indicative of future revenue.
- Major risks include government budget and procurement changes, contract cancellations or delays, customer acceptance requirements, supply-chain constraints, inflation in component and logistics costs, foreign-exchange movements, competition, regulatory compliance and medical-device approvals.
- The company is investigating historical soil and groundwater contamination beneath its Hawthorne facility. No liability was accrued because management considered an adverse outcome not probable and reasonably estimable, but an adverse resolution could be material.
- The company disclosed securities-related shareholder litigation, a pending appeal involving dismissed derivative actions, and SEC and DOJ investigations concerning trading in company securities and related operations and disclosures. Outcomes and potential losses could not be estimated.
- Potential acquisition-related contingent payments had a maximum remaining amount of $30.2 million at June 30, 2021; the recorded contingent consideration liability was $19.4 million.
Investor Verification Checklist
- Verify the fiscal-period distinction between the fiscal year ended June 30, 2021 and the fourth quarter ended June 30, 2021.
- Assess whether Security revenue and margins recover as aviation and cargo activity normalizes and whether the Mexico contract expiration creates a continuing comparison effect.
- Review inventory growth, inventory reserves and demand assumptions, given the $294.2 million inventory balance and the auditor’s critical audit matter.
- Evaluate liquidity and refinancing requirements for the $287.5 million convertible notes due in September 2022, including the expected ASU 2020-06 accounting effects.
- Monitor COVID-19, supply-chain, customer acceptance and cost-inflation impacts on backlog conversion and cash flow.
- Review developments in the SEC and DOJ investigations, shareholder litigation, environmental matter and contingent acquisition obligations.