OSI Systems Q3 Earnings Call Highlights

Key Points

• OSI Systems reported record fiscal Q3 results with $453 million in revenue, $2.60 non-GAAP EPS, a 1.3 book-to-bill ratio and an all-time high backlog of about $1.9 billion.
• The Security segment is transitioning from Mexico product sales to services—Mexico revenue fell to $11 million from $69 million, but excluding Mexico Security revenue grew 25% year-over-year; OSI is gaining RF momentum, reporting a record $38 million in RF revenue and winning a not-to-exceed ~$235 million UCA for an Over-the-Horizon Radar project while participating in the $151 billion SHIELD IDIQ.
• On cash and guidance, OSI collected roughly $74 million from its largest Mexico customer after quarter-end, finished Q3 with $345 million in cash and net leverage ~2.2, and maintained fiscal 2026 revenue and EPS guidance despite potential near-term timing impacts from the DHS shutdown and Middle East conflicts.

OSI Systems NASDAQ: OSIS reported fiscal 2026 third-quarter results that management said set company records across several metrics, despite what Chief Financial Officer Alan Edrick described as the “most challenging year-over-year comparison” of the fiscal year. The comparison was influenced largely by the company’s Mexico security contracts shifting from significant product sales to long-term service and support revenue.

Quarter highlights: revenue, EPS, bookings and backlog

Edrick said OSI Systems delivered fiscal Q3 revenue of $453 million, a record for the third quarter, and non-GAAP earnings per diluted share of $2.60, also a fiscal Q3 record. He added that bookings produced a 1.3 book-to-bill ratio, driven by both the Security and Optoelectronics and Manufacturing businesses, resulting in a record backlog.

President and CEO Ajay Mehra put the ending backlog at approximately $1.9 billion, calling it “the highest in the company’s history.” Management emphasized execution going into fiscal Q4 and into fiscal 2027, supported by backlog visibility and a pipeline of opportunities.

Security: Mexico transition, international growth, and RF momentum

Security division revenue was $319 million in the quarter, which Edrick said was driven by higher service revenues, increased contribution from the company’s RF business, and higher aviation product revenues. He noted that revenue from the large Mexico security contracts fell to $11 million in fiscal Q3 2026 from $69 million in the prior-year quarter.

Excluding Mexico contract revenue in both periods, Edrick said Security revenue grew 25% year-over-year. In response to an analyst question, Edrick said the growth has been “mostly…internationally” so far, with contributions from service revenue, aviation revenue, and RF revenue. He added that with the end of the Department of Homeland Security shutdown, the company expects U.S. activity to “pick up steam significantly” as it enters fiscal 2027.

Mehra said Security bookings in the quarter included a sizable Homeland Defense award structured as an Undefinitized Contract Action (UCA), with a not-to-exceed value of approximately $235 million, for “the production and integration of Homeland Defense Over-the-Horizon Radar Transmit Subsystem.” He said OSI is gaining traction with RF-engineered solutions and positioned that capability as relevant to “Golden Dome,” a U.S. initiative to create an integrated missile defense system. Mehra also referenced OSI’s participation in the $151 billion SHIELD IDIQ announced the prior quarter.

During Q&A, Mehra confirmed the UCA award “came in at the end of March.” Edrick said the company’s press release timing reflected internal sequencing and approval processes.

Optoelectronics & Manufacturing: record quarter and a notable medical award

OSI’s Optoelectronics and Manufacturing division posted another strong quarter. Edrick reported Opto sales (including intercompany) rose 10% year-over-year to $111 million, a fiscal Q3 record for the segment, driven by growth across a diversified product and customer base.

Mehra highlighted a $40 million award received in March for electronic subassemblies from a medical OEM, describing it as significant in a division where most orders are under $5 million. He said customers continue to value OSI’s vertically integrated model and global manufacturing footprint as they diversify supply chains and launch new products. Mehra listed manufacturing operations across Malaysia, Indonesia, India, Canada, Mexico, the U.K., and the U.S. and said the division’s backlog remains at record levels, supporting long-term visibility across aerospace, defense, medical, industrial, and other end markets.

Healthcare: order timing pressures in the U.S.

Mehra said the Healthcare division was “adversely impacted by order timing,” most notably in the U.S., leading to lower sales and profitability, though he noted growth in the EMEA region. He emphasized that Healthcare products generally carry OSI’s highest contribution margins, meaning incremental revenue can have an outsized profitability impact.

Edrick said Healthcare’s adjusted operating margin was “negligible due to the sales level,” and he added the company expects margin recovery as Healthcare performance improves.

Margins, cash flow, balance sheet and guidance

On profitability, Edrick said fiscal Q3 gross margin was 33%, slightly below the prior-year quarter, as a less favorable product mix offset higher service margin contributions. SG&A expense was $71.5 million, down 2% year-over-year and 15.8% of sales, while R&D expense increased to $19.5 million (4.3% of revenue) as OSI continued investing in innovation. Edrick also said combined SG&A and R&D as a percentage of sales has decreased annually for each of the past eight years.

On a non-GAAP basis, Edrick reported an adjusted operating margin of 14%. Security’s adjusted operating margin expanded to 18.3% from 18.1% a year earlier, which he attributed to higher-margin service revenue and reduced operating expenses, partially offset by Opto margin compression and weak Healthcare profitability. Opto adjusted operating margin declined to 13.5% from 14.0% due to mix.

Cash flow was a focus given Mexico receivables. Edrick said OSI generated $14 million in operating cash flow in Q3 despite limited collections on the largest Mexico receivable during the quarter. Shortly after quarter-end, he said the company collected approximately $74 million from its largest Mexico customer, which he called “a strong start to Q4 cash flow.” In Q&A, he said the payment reduced the Mexico receivable balance and that there remains “ample” opportunity for significant cash flow as collections continue over coming months and quarters.

Additional balance sheet details included:

• $345 million in cash at quarter-end
• Net leverage of approximately 2.2 under the company’s credit agreement
• Capital expenditures of $8 million in Q3 and depreciation and amortization of $9.5 million

Edrick said days sales outstanding increased 7% from fiscal Q2, but the company expects DSO to decline by fiscal year-end. He added that operating cash flow for the first nine months of fiscal 2026 was “just shy” of the amount generated in all of fiscal 2025.

OSI maintained its fiscal 2026 guidance for revenue and non-GAAP EPS. Edrick said the recent DHS shutdown and conflicts in the Middle East affected short-term bookings and “could impact near-term Q4 revenues,” though he characterized these as timing-related dynamics and noted potential opportunity when conditions normalize. Mehra said certain Middle East programs have been delayed by logistics constraints, travel restrictions, and heightened security protocols, and he cautioned that prolonged conflict could affect order timing and project completion. In the U.S., Mehra said procurement activity was delayed by the DHS shutdown but expressed hope for normalization in the “next few weeks, maybe some months.”

During Q&A, OSI also disclosed that the RF business generated about $38 million of revenue in the quarter, which Edrick said was a record and represented a significantly higher run rate than at acquisition roughly 18 months earlier. Mehra said the company has been ramping RF production capabilities and operating in a new facility to improve turnaround speed for government customers.

About OSI Systems NASDAQ: OSIS

OSI Systems, Inc NASDAQ: OSIS is a publicly traded technology company founded in 1987 and headquartered in Hawthorne, California. The company designs, develops and manufactures advanced security and inspection systems, optoelectronic devices and medical imaging equipment. Over its history, OSI Systems has grown its product offerings through internal research and development as well as strategic acquisitions, expanding its capabilities in mission-critical sensing and inspection technologies.

OSI Systems operates three primary business segments.

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