Market Overview

OSI Systems Reports Fiscal 2018 Fourth Quarter and Full Year Financial Results

Share:
  • Record Q4 Revenues of $287 Million (14% year-over-year increase)
  • Record Fiscal 2018 Revenues of $1.089 Billion (13% year-over-year
    increase)
  • Q4 Earnings Per Diluted Share
    • GAAP EPS of $0.27
    • Non-GAAP EPS of $1.02
  • Backlog of $976 Million (32% year-over-year increase)
  • FY 2019 Guidance
    • Sales Guidance of $1.125 Billion - $1.165 Billion
    • Non-GAAP Diluted EPS Guidance of $3.80 - $4.00

OSI Systems, Inc. (the "Company" or "OSI Systems") (NASDAQ:OSIS) today
announced financial results for the fourth quarter and fiscal year ended
June 30, 2018.

Deepak Chopra, OSI Systems' Chairman and Chief Executive Officer, said,
"We are pleased to announce a strong finish to fiscal 2018 highlighted
by impressive sales and bookings in the Security division. We are proud
to have surpassed $1 billion in annual sales for the first time in our
history. We enter fiscal 2019 with a strong backlog, an enhanced
leadership team, and heightened focus on our core strengths."

The Company reported revenues of $287 million for the fourth quarter of
fiscal 2018, an increase of 14% from the $252 million reported for the
fourth quarter of fiscal 2017. Net income for the fourth quarter of
fiscal 2018 was $5.1 million, or $0.27 per diluted share, compared to
net income of $1.5 million, or $0.08 per diluted share, for the fourth
quarter of fiscal 2017. Non-GAAP net income for the fourth quarter of
fiscal 2018 was $19.1 million, or $1.02 per diluted share, compared to
non-GAAP net income for the fourth quarter of fiscal 2017 of $19.9
million, or $1.02 per diluted share.

For the fiscal year ended June 30, 2018, the Company reported revenues
of $1.089 billion, an increase of 13% over revenues in the prior fiscal
year. Net loss for fiscal 2018 was $29.1 million, or $(1.57) per diluted
share, compared to net income of $21.1 million, or $1.07 per diluted
share, in the prior fiscal year. Non-GAAP net income for the fiscal year
ended June 30, 2018 was $69.5 million, or $3.61 per diluted share,
compared to non-GAAP net income of $58.8 million, or $2.99 per diluted
share, for the 2017 fiscal year.

During the three months ended June 30, 2018, the Company's book-to-bill
ratio for equipment and related services (non-turnkey) was approximately
1.3. As of June 30, 2018, the Company's backlog was $976 million,
compared to $738 million as of June 30, 2017. For the three months and
fiscal year ended June 30, 2018, cash flow from operations was $17
million and $133 million, respectively, as compared to $11 million and
$63 million for the three months and fiscal year ended June 30, 2017.

Mr. Chopra stated, "Our Security division finished the year with strong
revenues and backlog. Fourth quarter revenues in the division increased
26% to a record $185 million. Excluding $17.5 million of revenues from
the trace detection business that we acquired in July 2017, fourth
quarter sales in our Security division increased 14% over sales in the
same prior-year fiscal period. During the quarter, we won several
notable orders with overall Security division bookings of $198 million."

Mr. Chopra further commented, "Our Optoelectronics and Manufacturing
division continued the steady performance seen throughout fiscal 2018.
Fourth quarter sales increased 9% on a year-over-year basis. However,
one of our businesses within this division incurred an operating loss in
the quarter contributing to an overall year-over-year reduction in
operating income. We have taken steps to address the operational issues
and expect improved performance in fiscal 2019."

Mr. Chopra continued, "Fourth quarter sales in our Healthcare division
decreased 11% as compared to the prior fiscal year. Although we are
disappointed with the second half results of our Healthcare division, we
are encouraged by the direction under new leadership. We are increasing
focus on patient monitoring, diagnostic cardiology, and supplies and
accessories and leveraging our market positions in the U.S. and Europe,
while de-emphasizing our anesthesia products that lack scale. We
anticipate these actions should lead to increased margins in this
division."

Mr. Chopra concluded, "During fiscal 2018, we repurchased $63 million of
common stock as part of our share repurchase program, returning value to
our shareholders, and now have approximately 851,000 shares available
for future repurchases. Going forward, we will continue to focus on
creating long-term shareholder value by pursuing various growth
initiatives, targeting strategic acquisitions, and exiting non-core
lines of business."

As a result of the enactment of the Tax Cuts and Jobs Act (the "Tax
Act") in December 2017, the Company recognized a charge of $55 million
during the fiscal year ended June 30, 2018. The charge includes
management's estimate of the tax on accumulated overseas profits and the
revaluation of deferred tax assets and liabilities. The changes included
in the Tax Act are broad and complex. The final impacts of the Tax Act
may differ materially from the amounts estimated due to, among other
things, changes in interpretation of the Tax Act, any legislative action
that may be taken to address questions arising due to the Tax Act and
any changes in accounting standards for income taxes or related
interpretations in response to the Tax Act. The Company currently
anticipates finalizing and recording any resulting adjustments by the
end of the 2018 calendar year.

The effective tax rate for fiscal 2018 was 179.0% primarily as a result
of the Tax Act. Excluding discrete items and the impact of the Tax Act,
the effective tax rate would have been approximately 27% for fiscal
2018. For the fourth quarter of fiscal 2018, the effective tax rate was
10.7%. Excluding discrete items and the impact of the Tax Act, the
fourth quarter effective tax rate would have been approximately 19.7%.

Fiscal Year 2019 Outlook

For fiscal year 2019, the Company anticipates revenues in the range of
$1.125 billion to $1.165 billion, and non-GAAP earnings per diluted
share in the range of $3.80 to $4.00. Actual sales and non-GAAP diluted
earnings per share could vary from this guidance due to factors
discussed under "Forward-Looking Statements" or other factors.

The Company's fiscal 2019 diluted earnings per share guidance is
provided on a non-GAAP basis only. The Company does not provide a
reconciliation of non-GAAP diluted EPS guidance to GAAP diluted EPS (the
most directly comparable GAAP measure) on a forward-looking basis
because the Company is unable to provide a meaningful or accurate
compilation of reconciling items and certain information is not
available. This is due to the inherent difficulty, high variability, and
complexity in accurately forecasting the timing and amount of various
items that would be excluded from GAAP diluted EPS, including, for
example, acquisition costs and other non-recurring items that have not
yet occurred, are out of the Company's control or cannot be reasonably
predicted. For the same reasons, the Company is unable to address the
probable significance of unavailable information. The amount of these
deductions may be material and, therefore, could result in GAAP diluted
EPS, the corresponding GAAP financial measure, being materially less
than projected non-GAAP diluted EPS.

Presentation of Non-GAAP Financial Measures

This earnings release includes a presentation of non-GAAP net income,
non-GAAP diluted earnings per share, non-GAAP operating income (loss) by
segment and non-GAAP operating margin, all of which are non-GAAP
financial measures. The presentation of these non-GAAP figures for the
three and twelve months ended June 30, 2017 and 2018 is provided to
allow for the comparison of the underlying performance of the Company,
net of impairment, restructuring and other charges (including certain
legal costs), amortization of intangible assets acquired through
business acquisitions, non-cash interest expense related to convertible
debt and gain from the disposition of a business, and their associated
tax effects, and the impact from discrete income tax items, including
charges resulting from the Tax Act. Management believes that these
non-GAAP financial measures provide (i) additional insight into the
ongoing operations of the Company, (ii) meaningful supplemental
information regarding the Company's results (excluding amounts
management does not view as reflective of ongoing operating results) for
purposes of planning, forecasting, and assessing the performance of the
Company's businesses, (iii) a meaningful comparison of results of
current periods against results of past periods and (iv) financial
results that are comparable to those of peer companies. Non-GAAP
financial measures should not be assessed in isolation or as a
substitute for measures of financial performance prepared in accordance
with GAAP. These non-GAAP measures may not be the same as similar
measures used by other companies due to possible differences in method
and in the items or events being adjusted.

Reconciliations of GAAP to non-GAAP financial information are provided
in the accompanying tables. The financial results calculated in
accordance with GAAP and reconciliations from those financial results
should be carefully evaluated.

Conference Call Information

The Company will host a conference call and simultaneous webcast over
the Internet beginning at 1:30pm PT (4:30pm ET) today to discuss its
results for the fourth quarter of fiscal 2018 and the full 2018 fiscal
year. To listen, please visit the Investor Relations section of the OSI
Systems website, http://investors.osi-systems.com/index.cfm
and follow the link that will be posted on the front page. A replay of
the webcast will be available shortly after the conclusion of the
conference call until September 6, 2018. The replay can either be
accessed through the Company's website, www.osi-systems.com,
or via telephonic replay by calling 1-855-859-2056 and entering the
conference call identification number ‘3678868' when prompted for the
replay code.

About OSI Systems

OSI Systems is a vertically integrated designer and manufacturer of
specialized electronic systems and components for critical applications
in the homeland security, healthcare, defense and aerospace industries.
The Company combines more than 40 years of electronics engineering and
manufacturing experience with offices and production facilities in more
than a dozen countries to implement a strategy of expansion into
selective end-product markets. For more information on OSI Systems or
its subsidiary companies, visit www.osi-systems.com.
News Filter: OSIS-E

Forward-Looking Statements

This press release 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. Forward-looking statements
relate to the Company's current expectations, beliefs and projections
concerning matters that are not historical facts.
Forward-looking
statements are not guarantees of future performance and involve
uncertainties, risks, assumptions and contingencies, many of which are
outside the Company's control and which may cause actual results to
differ materially from those described in or implied by any
forward-looking statement. Forward-looking statements include, but are
not limited to, information provided regarding expected revenues,
earnings and growth in fiscal 2019. In addition, the Company 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 and budgetary, procurement and trade
policies adverse to the Company's businesses; global economic
uncertainty; impact of volatility in oil prices; unfavorable currency
exchange rate fluctuations;;
effect of changes in tax legislation;
market acceptance of the Company's new and existing technologies,
products and services; the Company's ability to win new business and
convert 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 the Company's ongoing
investigations and compliance reviews; contract and regulatory
compliance matters, and actions, if brought, resulting 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 the Company's Securities and Exchange
Commission filings, which could have a material and adverse impact on
the Company's business, financial condition, and results of operations.
For additional information on these and other factors that could cause
the Company's future results to differ materially from those in any
forward-looking statements, see the section titled "Risk Factors" in the
Company's most recently filed Annual Report on Form 10-K and other risks
described therein and in documents subsequently filed by the Company
from time to time with the Securities and Exchange Commission. Undue
reliance should not be placed on forward-looking statements, which are
based on currently available information and speak only as of the date
on which they are made.
The Company assumes no obligation to
update any forward-looking statement made in this press release that
becomes untrue because of subsequent events, new information, or
otherwise, except to the extent it is required to do so in connection
with requirements under federal securities laws.

   
OSI SYSTEMS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 
Three Months Ended

June 30,

Fiscal Year Ended

June 30,

  2017       2018     2017       2018  
Net revenues:
Products $ 167,555 $ 203,397 $ 655,840 $ 732,927
Services   84,847     83,929     305,111     356,359  
Total net revenues 252,402 287,326 960,951 1,089,286
Cost of goods sold:
Products 117,793 141,420 466,293 504,483
Services   47,818     44,740     171,157     193,151  
Total cost of goods sold   165,611     186,160     637,450     697,634  
Gross profit 86,791 101,166 323,501 391,652
Operating expenses:
Selling, general and administrative 48,032 64,001 192,560 239,592
Research and development 11,140 15,067 50,951 61,189

Impairment, restructuring and other charges, net

  24,813     11,474     46,698     34,963  
Total operating expenses   83,985     90,542     290,209     335,744  
Income from operations 2,806 10,624 33,292 55,908
Interest expense, net (3,913 ) (4,976 ) (9,629 ) (19,293 )
Other income, net   -     78     2,088     239  
Income (loss) before income taxes (1,107 ) 5,726 25,751 36,854
Provision for (benefit from) income taxes   (2,654 )   612     4,675     65,981  
Net income (loss) $ 1,547   $ 5,114   $ 21,076   $ (29,127 )
 
Diluted earnings (loss) per share $ 0.08   $ 0.27   $ 1.07   $ (1.57 )
Weighted average shares outstanding – diluted   19,479     18,680     19,689     18,592  
 
 
UNAUDITED SEGMENT INFORMATION

(in thousands)

   
Three Months Ended

June 30,

Fiscal Year Ended

June 30,

  2017       2018     2017       2018  
Revenues – by Segment:
Security division $ 147,160 $ 185,217 $ 555,197 $ 690,001
Healthcare division 53,607 47,594 200,034 189,387
Optoelectronics and Manufacturing division (including intersegment
revenues)
60,236 65,461 236,100 254,485
Intersegment revenues eliminations   (8,601 )   (10,946 )   (30,380 )   (44,587 )
Total $ 252,402   $ 287,326   $ 960,951   $ 1,089,286  
 
Operating income (loss) – by Segment:
Security division $ (1,511 ) $ 17,914 $ 35,256 $ 84,106
Healthcare division 4,151 (7,634 ) 2,624 (14,609 )
Optoelectronics and Manufacturing division 7,643 5,800 23,792 22,024
Corporate (7,477 ) (6,429 ) (29,359 ) (35,030 )
Intersegment eliminations   -     973     979     (583 )
Total $ 2,806   $ 10,624   $ 33,292   $ 55,908  
 
 

OSI SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
   
June 30, 2017 June 30, 2018
Assets
 
Cash and cash equivalents $ 169,650 $ 84,814
Accounts receivable, net 206,526 210,744
Inventories 248,510 313,552
Other current assets   28,314   41,587
Total current assets 653,000 650,697
Goodwill 242,129 292,213
Intangible assets 118,450 142,001
Other non-current assets   216,508   170,780
Total Assets $ 1,230,087 $ 1,255,691
 
Liabilities and Stockholders' Equity
 
Bank lines of credit $ 103,000 $ 113,000
Current portion of long-term debt 2,396 2,262
Accounts payable and accrued expenses 137,559 194,815
Other current liabilities   103,179   133,245
Total current liabilities 346,134 443,322
Long-term debt 241,750 248,980
Deferred income taxes 20,681 15,002
Other long-term liabilities   52,309   58,951
Total liabilities 660,874 766,255
Total stockholders' equity   569,213   489,436
Total Liabilities and Stockholders' Equity $ 1,230,087 $ 1,255,691
 
 

RECONCILIATION OF GAAP TO NON-GAAP
NET INCOME AND EARNINGS PER SHARE

(in thousands, except earnings per share data)

   
Three Months Ended

June 30,

Fiscal Year Ended

June 30,

2017     2018   2017     2018  
Net income   EPS Net income   EPS Net income   EPS

Net income
(loss)

  EPS
GAAP basis $ 1,547 $ 0.08 $ 5,114 $ 0.27 $ 21,076 $ 1.07 $ (29,127 ) $ (1.57 )
Impairment, restructuring and other charges 24,813 1.27 11,474 0.61 46,698 2.37 34,963 1.88
Amortization of acquired intangible assets1 2,357 0.12 4,643 0.25 8,382 0.43 15,713 0.85
Non-cash interest expense 1,771 0.09 1,912 0.10 2,477 0.13 7,470 0.40
Gain from disposition of business - - - - (2,110 ) (0.11 ) - -
Tax effect of above adjustments (8,161 ) (0.42 ) (3,555 ) (0.19 ) (15,305 ) (0.78 ) (15,610 ) (0.84 )
Discrete tax items (2,433 ) (0.12 ) (517 ) (0.02 ) (2,433 ) (0.12 ) 56,087 3.02
Impact of diluted shares 2   -     -     -     -     -     -     -     (0.13 )
Non-GAAP basis $ 19,894   $ 1.02   $ 19,071   $ 1.02   $ 58,785   $ 2.99   $ 69,496   $ 3.61  
 

1

  Amortization is based in part on the preliminary fair value of the
acquired intangibles and is subject to change as purchase accounting
is finalized.

2

For the fiscal year ended June 30, 2018, the weighted average
diluted shares used to calculate EPS on a GAAP basis exclude
potential common shares (stock options and restricted stock units)
due to their antidilutive effect resulting from the Company's
reported net loss. For the fiscal year ended June 30, 2018, the
weighted average diluted shares used to calculate EPS on a non-GAAP
basis were approximately 19,274,000 shares.
 
RECONCILIATION OF GAAP TO NON-GAAP
OPERATING INCOME (LOSS) AND OPERATING MARGIN BY SEGMENT

(in thousands, except percentages)

 
Three Months Ended June 30, 2017
  Security Division   Healthcare Division  

Optoelectronics and
Manufacturing Division

  Corporate / Elimination   Total
  % of   % of   % of   % of

Sales

Sales

Sales

Sales

GAAP basis – operating income (loss) $ (1,511 ) (1.0 )% $ 4,151 7.8 % $ 7,643 12.7 % $ (7,477 ) $ 2,806 1.1 %
Impairment, restructuring and other charges 21,849 14.9 % 967 1.8 % 473 0.8 % 1,524 24,813 9.8 %
Amortization of acquired intangible assets   1,980   1.3 %   14   0.0 %   364 0.6 %   -     2,358 1.0 %
Non-GAAP basis– operating income (loss) $ 22,318   15.2 % $ 5,132   9.6 % $ 8,480 14.1 % $ (5,953 ) $ 29,977 11.9 %
 

 

Three Months Ended June 30, 2018
Security Division Healthcare Division

Optoelectronics and
Manufacturing Division

Corporate / Elimination Total

% of

% of

% of

% of

Sales

Sales

Sales

Sales

GAAP basis – operating income (loss) $ 17,914 9.7 % $ (7,634 ) -16.0 % $ 5,800 8.9 % $ (5,456 ) $ 10,624 3.7 %
Impairment, restructuring and other charges, net 1,766 0.9 % 9,439 19.8 % 222 0.3 % 47 11,474 4.0 %
Amortization of acquired intangible assets   3,697   2.0 %   -   - %   946 1.4 %   -     4,643 1.6 %
Non-GAAP basis– operating income (loss) $ 23,377   12.6 % $ 1,805   3.8 % $ 6,968 10.6 % $ (5,409 ) $ 26,741 9.3 %
 
 

RECONCILIATION OF GAAP TO NON-GAAP
OPERATING INCOME (LOSS) AND OPERATING MARGIN BY SEGMENT

(in thousands, except percentages)

 
Fiscal Year Ended June 30, 2017
  Security Division   Healthcare Division  

Optoelectronics and
Manufacturing Division

  Corporate / Elimination   Total
 

% of

 

% of

 

% of

 

% of

Sales

Sales

Sales

Sales

GAAP basis – operating income (loss) $ 35,256 6.3 % $ 2,624 1.3 % $ 23,792 10.1 % $ (28,380 ) $ 33,292 3.5 %
Impairment, restructuring and other charges 36,979 6.7 % 3,315 1.7 % 1,026 0.4 % 5,378 46,698 4.8 %
Amortization of acquired intangible assets   6,558 1.2 %   373   0.2 %   1,451 0.6 %   -     8,382 0.9 %
Non-GAAP basis– operating income (loss) $ 78,793 14.2 % $ 6,312   3.2 % $ 26,269 11.1 % $ (23,002 ) $ 88,372 9.2 %
 

 

Fiscal Year Ended June 30, 2018
Security Division Healthcare Division

Optoelectronics and
Manufacturing Division

Corporate / Elimination Total

% of

% of

% of

% of

Sales

Sales

Sales

Sales

GAAP basis – operating income (loss) $ 84,106 12.2 % $ (14,609 ) -7.7 % $ 22,024 8.7 % $ (35,613 ) $ 55,908 5.1 %
Impairment, restructuring and other charges, net 3,893 0.6 % 24,168 12.8 % 1,712 0.6 % 5,190 34,963 3.2 %
Amortization of acquired intangible assets   13,140 1.9 %   29   0.0 %   2,544 1.0 %   -     15,713 1.5 %
Non-GAAP basis– operating income (loss) $ 101,139 14.7 % $ 9,588   5.1 % $ 26,280 10.3 % $ (30,423 ) $ 106,584 9.8 %

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