Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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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 September 30, 2025 and results of operations for the three months ended September 30, 2025 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, 2025 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 our expectations are disclosed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 (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; government shutdown; delays in revenue recognition related to the timing of customer acceptance; the impact of potential information technology, cybersecurity or data security breaches; changes in domestic and foreign government spending, budgetary, procurement, and trade policies adverse to our businesses; the impact of the Russia-Ukraine conflict or conflicts in the Middle East, including the potential for broad economic disruption; global economic uncertainty, including the impact of tariffs; material delays and cancellations of orders or deliveries thereon, supply chain disruptions, plant closures, or other adverse impacts on our ability to execute business plans; unfavorable currency exchange rate fluctuations; unfavorable interest rate fluctuations; effect of changes in tax legislation, guidance and interpretations; 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; 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 factors described in our other SEC filings. All forward-looking statements contained in this report are qualified in their entirety by this section. Moreover, we operate in a very competitive and rapidly changing environment, and 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. 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) 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; and (c) Healthcare, providing patient monitoring, cardiology and remote monitoring, and connected care systems and associated accessories.

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 66% of our total consolidated revenues for the three months ended September 30, 2024 and 2025, 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 also 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 24% and 23% of our total consolidated revenues for the three months ended September 30, 2024 and 2025, respectively.

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, cardiology and remote monitoring, and connected care systems 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 11% of our total consolidated revenues for each of the three months ended September 30, 2024 and 2025.

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.

Global Economic Considerations.Our products and services are sold in numerous countries worldwide, with a large percentage of our sales generated outside the United States. Therefore, we are exposed to and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. There is uncertainty surrounding macroeconomic factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, rising interest rates, and labor shortages. Increasing diplomatic and trade friction between the U.S. and China has also created significant uncertainty in the global economy. These global macroeconomic factors, coupled with political unrest internationally and the volatile U.S. political climate, have created uncertainty and impacted demand for certain of our products and services. Conflicts in Gaza and nearby regions have created political and economic uncertainty in the Middle East. Also, the continued conflict between Russia and Ukraine and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. While the impact of these factors remains uncertain, we will continue to evaluate the extent to which these factors will impact our business, financial condition or results of operations. We do not know how long this uncertainty will continue. These factors could have a material adverse effect on our business, results of operations and financial condition.

Global Trade.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 other countries. Tariffs and trade restrictions and retaliatory measures by such other countries could result in revenue reductions for the Company or cost increases on material used in our products. We are taking measures to contain costs to reduce the impact of tariffs and to date, such measures have helped reduce our exposure to these conditions. 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, financial condition, results of operations and cash flows.

Healthcare Considerations.Certain hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs and higher interest rates make access to credit more expensive. To the extent macroeconomic conditions remain challenging, it is likely that hospitals' spend on capital equipment will be adversely impacted.

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.

U.S. Federal Government Shutdown.In October 2025, the U.S. federal government entered a partial shutdown due to a lapse in appropriations. As of the date of this filing, the shutdown remains ongoing and has resulted in the suspension or delay of certain government operations and services, including those of certain federal agencies with which we interact. A prolonged shutdown could delay the issuance of government contracts or the processing of existing contracts, particularly in our Security division, issuances of export licenses, shipments, deliveries and payments of invoices. We are actively monitoring the situation and assessing potential impacts on our operations, financial condition, and results of operations. At this time, we are unable to predict the duration of the shutdown or its full impact on our business.

Russia-Ukraine and Israel-Hamas Conflicts.The invasion of Ukraine by Russia and the sanctions imposed in response to this conflict as well as the Israel-Hamas conflict have increased global economic and political uncertainty. This has the potential to indirectly disrupt our supply chain and access to certain resources. While we have not experienced material adverse impacts to date resulting from these conflicts, we have certain research and development activities within Ukraine for our Healthcare division which have been somewhat impacted. The conflicts also have increased the threat of malicious cyber-activity from other countries and other actors.

Currency Exchange Rates.On a year-over-year basis, currency exchange rates positively impacted reported sales by approximately 0.4% for the three months ended September 30, 2025 compared to the three months ended September 30, 2024, primarily due to the weakening of the U.S. dollar against other foreign currencies in 2025. Any strengthening of the U.S. dollar against foreign currencies would adversely impact our sales for the remainder of the fiscal year, and any weakening of the U.S. dollar against foreign currencies would positively impact our sales for the remainder of the fiscal year.

Results of Operations for the Three Months Ended September 30, 2024 (Q1 Fiscal 2025) Compared to the Three Months Ended September 30, 2025 (Q1 Fiscal 2026) (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.

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Revenues for the Security division during Q1 fiscal 2026 increased year-over-year due to increases in product and service revenues of approximately $9.6 million and $20.4 million, respectively. The increase in product revenues was primarily driven by the acquired business further described in Note 2 to the condensed consolidated financial statements. The increase in service revenue was due primarily to an increase in the installed base of products.

Revenues for the Optoelectronics and Manufacturing division during Q1 fiscal 2026 increased year-over-year as a result of an increase in revenues in our contract manufacturing business.

Revenues for the Healthcare division during Q1 fiscal 2026 increased year-over-year primarily due to an increase in patient monitoring and cardiology product sales.

Gross Profit

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Gross profit is impacted by sales volume and changes in overall manufacturing-related costs, such as raw materials and component costs, warranty expense, provision for inventory, freight, and logistics. Gross profit increased approximately $1.7 million in Q1 fiscal 2026 as compared to the prior year driven by the increase in sales. Gross profit as a percentage of net revenues decreased primarily due to the product revenue mix in our Security division partially offset by an increase in service revenues which typically carry a higher gross margin than product sales.

Operating Expenses

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Selling, general and administrative. Our significant selling, general and administrative ("SG&A") expenses include employee compensation, sales commissions, travel, professional services, marketing expenses, foreign currency translation, and depreciation and amortization expense. SG&A expense for Q1 fiscal 2026 was $5.2 million lower than in the same prior-year period primarily due to favorable foreign currency exchange rates offset by an increase in employee compensation and provision for losses on accounts receivable.

Research and development. Research and development ("R&D") expenses include research related to new product development and product enhancements. R&D expenses increased $2.6 million in Q1 fiscal 2026 as compared to Q1 fiscal 2025 driven by increased compensation costs to support new product development initiatives primarily in our Security and Healthcare divisions.

Restructuring and other charges.Restructuring and other charges generally consist of costs relating to reductions in our workforce, facilities consolidation, costs related to acquisition activity, and other non-recurring charges. During Q1 fiscal 2026, we recognized $2.7 million in restructuring and other charges, which included $2.4 million primarily for other non-recurring charges in the Security and Healthcare divisions and $0.3 million for employee terminations. During Q1 fiscal 2025, we recognized $1.2 million in restructuring and other charges, which included $0.6 million in employee terminations, $0.2 million for facility closure costs for operational efficiency activities, and $0.4 million in acquisition related costs.

Interest and Other Expense, Net

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Interest and other expense, net. Interest and other expense, net was $7.4 million for each of Q1 fiscal 2026 and 2025. While we generated interest expense savings from lower average levels of borrowings and lower average interest rates in Q1 fiscal 2026 compared to the same prior year period, these savings were offset by a lower benefit from the interest rate swap in Q1 fiscal 2026 compared to the same prior year period.

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 Q1 fiscal 2026 and 2025, we recognized a provision for income taxes of $5.1 million and $5.0 million, respectively. The effective tax rates for Q1 fiscal 2026 and 2025 were 19.9% and 21.9%, respectively. During Q1 fiscal 2026 and 2025, we recognized a net discrete tax benefit of $0.9 million and $0.5 million, respectively, related to equity-based compensation under ASU 2016-09.

Liquidity and Capital Resources

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Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations and our credit facilities. Cash and cash equivalents totaled $124.4 million at September 30, 2025 compared to $106.4 million at June 30, 2025. 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 beyond that. In addition, we anticipate that cash generated from operations, without repatriating earnings from our non-U.S. subsidiaries, and our credit facilities will be sufficient to satisfy our obligations in the U.S.

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In July 2025 we amended and extended our revolving credit facility to mature in July 2030, to increase the limit from $600 million to $725 million and replaced the $128.1 million term loan with a $100.0 million term loan. The sub-limit for letters of credit was increased from $300 million to $350 million, which includes up to $300 million for borrowings in certain foreign currencies. As of September 30, 2025, there was $98.8 million outstanding under the term loan, $252.1 million outstanding under our revolving credit facility and $95.4 million of outstanding letters of credit. As of September 30, 2025, the total amount available under our revolving credit facility was $377.5 million. See Note 8 to the consolidated financial statements for further discussion.

Cash Provided by (Used in) 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 Q1 fiscal 2026, we generated cash flow from operations of $17.1 million compared to cash used in operations of $37.2 million in the comparable prior-year period. The net change in cash flows from operating activities was due primarily to higher net income in Q1 fiscal 2026 compared to the same period last year, a net decrease in accounts receivable and net increases in accounts payable and advances from customers, partially offset by a net increase in inventories and other changes in net working capital.

Cash Used in Investing Activities. Net cash used in investing activities was $10.9 million for Q1 fiscal 2026 as compared to $87.5 million in the same prior-year period. The decrease in cash used in investing activities was primarily due to the acquisition of a business in Q1 fiscal 2025 compared to none in Q1 fiscal 2026. Capital expenditures in Q1 fiscal 2026 were $7.0 million compared to $7.7 million in the same prior-year period.

Cash Provided by Financing Activities. Net cash provided by financing activities was $12.2 million during Q1 fiscal 2026, compared to $113.8 million during the same prior-year period. The decrease in cash flows from financing activities was primarily due to lower net proceeds from bank borrowings and long-term debt which included proceeds from issuance of the 2029 Notes in the prior year period. There were no repurchases of common shares during Q1 fiscal 2026 compared to repurchases of common shares for an aggregate of $80.4 million in the same prior period. Taxes paid related to net share settlement of equity awards was $34.4 million during Q1 fiscal 2026 compared to $21.3 million in the same prior-year period.

Borrowings

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

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Cash Held by Foreign Subsidiaries

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Our cash and cash equivalents totaled $124.4 million at September 30, 2025. Of this amount, approximately 64% was held by our foreign subsidiaries and subject to repatriation tax considerations. These foreign funds were held primarily by our subsidiaries in India, United Kingdom, Singapore, and Canada and to a lesser extent Malaysia, Australia, and Indonesia 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.

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Issuer Purchases of Equity Securities

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We did not repurchase any shares of common stock during the first quarter of fiscal year 2026.

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Contractual Obligations

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During the first quarter of fiscal year 2026, other than the reduction of our term loan in July 2025, 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, 2025. See Notes 1, 6, 8 and 10 to the condensed consolidated financial statements for additional information regarding our contractual obligations.

Recent Accounting Pronouncements

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From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our Consolidated Financial Statements upon adoption. See Note 1 for further discussion. There were no new pronouncements adopted in the first quarter of fiscal year 2026.

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