OSI Systems (NASDAQ:OSIS) reported record fiscal 2026 revenue, earnings and operating cash flow, while fourth-quarter sales fell short of expectations after conflict-related delays in the Middle East pushed roughly $50 million of planned Security division deliveries beyond the company’s June 30 fiscal year-end.
Chief Financial Officer Alan Edrick said the delayed revenue represented deferred deliveries rather than lost orders. The affected projects remain in backlog and are expected to be completed on a later schedule, he said.
Backlog reaches record level
The company ended fiscal 2026 with approximately $1.9 billion in backlog, its highest level to date. Edrick said full-year book-to-bill was “a little bit north of one,” while fourth-quarter book-to-bill was just below one. He described bookings as particularly strong in Optoelectronics and solid in Security and Healthcare.
President and CEO Ajay Mehra said demand remained strong across the company’s portfolio despite near-term disruptions in the Middle East. He said the Security division faced delivery headwinds during the quarter, while Optoelectronics posted broad-based growth and Healthcare improved.
“The security-related deliveries that were pushed out remain in backlog and are expected to be completed in future quarters,” Mehra said.
Management said the delayed deliveries were primarily to customers in the Middle East. Edrick said that, after the third-quarter report, the company had expected a significant portion of those orders to be delivered in the fourth quarter. OSI now expects a substantial portion, though not all, to be delivered in the second half of fiscal 2027.
Security awards and defense opportunities
Since the fiscal year-end, U.S. Customs and Border Protection has awarded OSI two five-year indefinite-delivery, indefinite-quantity contracts. One has a ceiling of approximately $200 million for relocatable Rapiscan passenger vehicle inspection systems, while the other has a ceiling of roughly $85 million for van-mounted mobile X-ray inspection systems.
The company has received delivery orders under both contracts, including a task order valued at about $21 million. Mehra said OSI is the sole awardee under both IDIQ contracts. Management expects a portion of the orders already in hand to contribute to fiscal 2027 revenue, but said the larger contribution is expected in fiscal 2028 and beyond.
Edrick noted that the ceiling values of the IDIQ contracts do not immediately enter backlog. Instead, firm delivery or task orders are added to backlog as they are received.
In the company’s radio-frequency business, OSI previously received an indefinitized contract action with a not-to-exceed value of approximately $235 million for production and integration of homeland defense over-the-horizon radar transmit subsystems. Edrick said roughly 80% of that award entered backlog in the fiscal third quarter and will be delivered over the next couple of years.
Mehra said OSI also participates in the SHIELD IDIQ vehicle supporting Golden Dome-related initiatives. He described customer engagement in the RF portfolio as the highest the company has seen for that product line and said the business is expected to experience strong growth into fiscal 2028.
Margins, cash flow and shareholder returns
Fourth-quarter non-GAAP operating margin expanded 200 basis points to 17.7%. Security adjusted operating margin increased to 20.8% from 20.4%, while Optoelectronics margin rose to 14.7% from 13.6%. Healthcare adjusted operating margin increased to 10% from 1% in the prior-year quarter, supported by higher revenue and operating leverage.
Optoelectronics and Manufacturing generated 9% full-year revenue growth to $451 million, according to Mehra. Edrick said the business has been attracting a stronger customer profile and that management intends to pair fiscal 2027 revenue growth with further operating-margin expansion, though quarterly results may vary with product and customer mix.
Service revenue rose 13% for the full year to $441 million. While total service revenue was relatively flat in the fourth quarter, Edrick said Security service revenue increased 9% year over year excluding installation activity tied to Mexico contracts in the prior-year period. OSI expects strong double-digit service revenue growth in fiscal 2027.
Operating cash flow reached a record $182 million in the fourth quarter and $276 million for the year, helped by collections across the business. The company collected $159 million from its largest Mexico customer during the fourth quarter, reducing that customer’s accounts receivable balance to $190 million from $345 million at the end of the third quarter.
OSI ended the year with $360 million in cash, compared with $106 million a year earlier, and no borrowings under its lines of credit. During fiscal 2026, the company repurchased and retired 1.1 million shares. In the fourth quarter alone, it repurchased about 565,000 shares for $123.6 million, or an average of roughly $219 per share. The board authorized an additional 1 million shares for repurchase, leaving about 1.1 million shares available under the program.
Fiscal 2027 outlook
OSI forecast fiscal 2027 revenue of $1.875 billion to $1.93 billion, representing growth of 5% to 8.1%, and non-GAAP diluted EPS of $11.13 to $11.49, representing growth of 7.5% to 11%.
Management said the outlook incorporates a conservative approach to Middle East deliveries and future orders amid the conflict. It also includes only a portion of the CBP delivery orders already received rather than the full ceiling value of the agency’s IDIQ awards.
The company expects fiscal 2027 growth to be strongest in the second half. Edrick also said OSI expects strong operating and free cash flow during the year and anticipates free cash flow could exceed 100% of net income.
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.
