OSI Systems Inc 2026 Q4 Earnings Call

Good afternoon, and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems, and I am here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 fourth quarter and year-end conference call. We are pleased that you can join us as we review our financial and our operational results. I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statement based on subsequent events, new information, or otherwise. We will also reference both GAAP and non-GAAP financial measures.

Applicable reconciliations are available in today's earnings release. I will begin with a high-level summary of our financial performance for the fourth quarter and the full fiscal year, and then turn the call over to Ajay for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and our outlook for fiscal 2027. Before I discuss our fourth quarter records, let me address the revenue results. Full-year revenues of $1.79 billion finished below our guidance range, and fourth quarter revenues of $484 million were down approximately 4% year-over-year. Importantly, these results were affected by the timing of approximately $50 million of planned Security division deliveries that moved beyond our June 30th fiscal year-end because of conflict-related delays and site access constraints in the Middle East. I want to emphasize that these expected revenues are deferred, not orders lost.

They remain firmly in our backlog and are expected to be delivered on a later schedule. Setting this aside, we were really pleased with the overall performance as multiple key performance metrics for Q4 and the full fiscal year were extremely strong. We closed fiscal 2026 with exceptional cash generation and strong profitability, driven by solid adjusted operating margin expansion. We delivered record fourth quarter operating cash flow of $182 million. We grew fourth quarter non-GAAP earnings per share by 17% to a record $3.78. We ended the year with a record backlog of approximately $1.9 billion. For the full year, revenues reached a record $1.79 billion, up 4% year-over-year. Adjusted earnings per share grew to a record $10.35, up 11% year-over-year.

Bookings were solid across the three divisions, and we finished the year with a record backlog and solid visibility as we enter fiscal 2027. We also have a significant opportunity pipeline, and we have recently secured several important program wins. Our cash conversion was outstanding, allowing us to strengthen the balance sheet while continuing to return capital to shareholders. During the fourth quarter, we repurchased approximately 565,000 shares at an average price of about $219 per share for a total of $123.6 million. Our board recently authorized an additional 1 million shares, leaving approximately 1.1 million shares available under our stock buyback program. Before diving more deeply into our financial results and discussing our outlook for fiscal 2027, I will turn the call over to AJ.

Thank you, Alan, and thank you to everyone for joining us today. I am pleased to be here to discuss our fourth quarter and full fiscal year 2026 results. Fiscal 2026 was a strong year for OSI Systems, capped by record annual revenues of $1.79 billion, record Q4 and annual non-GAAP earnings per share, and record Q4 and annual operating cash flow. That said, as Alan pointed out as well, we finished 2026 with revenues below expectations, mostly due to delays with the situation in the Middle East. Overall, I am proud of how our team has performed across the portfolio, delivering solid bookings that translated into a record backlog of approximately $1.9 billion, which gives us good visibility as we enter fiscal 2027.

While the Security division faced revenue headwinds in the quarter from the Middle East conflicts that have shifted the timing of certain deliveries, Optoelectronics delivered strong growth on broad-based demand, and Healthcare posted an improved quarter. The security-related deliveries that were pushed out remain in backlog and are expected to be completed in future quarters. Let's discuss our business in more detail, beginning with Security. With DHS reopening in April following the shutdown, we have seen procurement activity accelerate. Since the close of our fiscal year, CBP has awarded us two five-year IDIQ contracts, one with a ceiling of approximately $200 million for our relocatable Rapiscan passenger vehicle inspection systems, and a second with a ceiling of roughly $85 million for van-mounted mobile X-ray inspection systems. We have already received delivery orders under both these IDIQs, including a task order valued at about $21 million.

These IDIQs represent continued funding provided under one big, beautiful bill. We expect to see some revenues contribution from these awards later in fiscal 2027, but significant contributions are expected in fiscal 2028 and beyond as well. We have also made growing recurring revenue a priority across the Security division, and with the size of our installed base today, we expect that effort to translate into substantial service revenue growth in fiscal 2027. Recently, we entered into an agreement with LA28 to establish Rapiscan as an official supporter of Team USA and the official physical screening and security technology hardware and software solutions provider of the LA28 Olympic and Paralympic Games. This strategic partnership builds upon our security efforts at major recent events such as the FIFA World Cup, the Paris 2024 Summer Olympics, and the Milano Cortina 2026.

Few companies have a comparable track record at this scale, and our experience is a real advantage as we pursue future large venue and event security opportunities. We continue to see strong momentum in our radio frequency, also known as RF, business and homeland security defense business. Our over-the-horizon radar programs and involvement in multiple Golden Dome initiatives position us at the forefront of some of the nation's most significant defense priorities. Fiscal 2026 was an outstanding year for the RF business. During fiscal 2026, we were awarded an indefinitized contract action with a not-to-exceed value of approximately $235 million for the production and integration of a homeland defense over-the-horizon radar transmit subsystems, our largest RF award to date, and we continue to see follow-on opportunities related to this program.

We are also a participant in the SHIELD IDIQ, which supports much of the Golden Dome-related initiatives and gives us a vehicle to pursue additional programs as they are defined over the next few years. All that said, the current level of customer engagement across our RF portfolio is the highest we have seen for this product line. Turning to Optoelectronics and Manufacturing, which delivered another strong performance in fiscal 2026 as full-year revenues grew 9% to $451 million with strong margins. The bookings in Q4 reflected the strength and breadth of our end markets, and we expect these underlying trends to continue in fiscal 2027. Our ability to support customers with our highly engineered products, precision manufacturing, and global reach continues to differentiate us across the aerospace, defense, Healthcare, and industrial customer base.

Our vertically integrated model and global manufacturing footprint helps us continue to capture business as customers diversify supply chains, and our backlog gives us strong visibility heading into fiscal 2027. Finally, our Healthcare division delivered an improved fourth quarter as revenues grew approximately 5% year-over-year, and operating margin expanded to 10% from 1% compared to last year's Q4. These results reflected the operational improvements we've been implementing throughout the year. We remain focused on expanding our install base, supporting providers with innovative clinical solutions, and advancing the product development initiatives behind our next-generation patient monitoring platform. We are encouraged by the opportunities ahead. As we enter fiscal 2027, our record backlog, robust pipeline, and disciplined execution give us confidence for the coming years. As always, I would like to thank our employees, customers, and stockholders for the continued support and dedication.

With that, I will turn the call over to Alan to discuss our financial results and our fiscal 2027 guidance in more detail before we open the call for questions.

Thank you. Thank you, AJ.

Let's begin with our revenue performance by division. Revenues in each of our Opto and Healthcare divisions increased 5% year-over-year. In Security, revenues declined 7%, reflecting the impact of the conflict in the Middle East, which delayed certain deliveries beyond our fiscal year-end, along with the difficult comparison against higher Mexico program revenues in the prior year quarter. We closed the year with approximately $1.9 billion in backlog. Deliveries that shifted out of the quarter remained in backlog, while certain expected bookings in the affected region were deferred. As expected, we reported nearly $150 million lower fiscal 2026 revenues related to the Mexico security contracts compared to the prior year, which included about a $20 million adverse impact in Q4.