Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2012 OSI Systems Earnings Conference Call. My name is Fab, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Alan Edrick, Chief Financial Officer. Please proceed.

Thank you. Hello,, and greetings from London, where we are the exclusive security detection provider for the Olympic Games. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. I'm here today with Deepak Chopra, our President and CEO; Ajay Amira, President of our Security division, Rapiscan Systems; and Victor Sze, our General Counsel. Welcome to the OSI Systems Fourth Quarter and Year End Fiscal Year 2012 Conference Call. We'd like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please note that this presentation is being webcast and is expected to remain on our website for approximately 2 weeks. Earlier today, we issued a press release announcing our fourth quarter and 2012 fiscal year-end results. Before we discuss our financial and operational highlights, I'd like to read the following statement. In connection with this conference call, the company wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements under the Act. Such forward-looking statements could include general or specific comments by company officers on this call about future company performance, as well as certain responses by company officers to questions posed about future operating matters. The company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from any forward-looking statements made by the company or its officers. These factors include the risk factors set forth in the company's last annual report on Form 10-K and other SEC filings. Any forward-looking statements made on this call speak only as of the date of this call, and the company undertakes no obligation to revise or to update any forward-looking statements, whether as a result of…

Thank you, Alan. And again, welcome to OSI Systems' earning conference call from the fourth quarter and full year fiscal 2012. And for you people, I just want to let you know London weather is fantastic. It's bright sunshine and it's great to be here. As Alan discussed, our results in the fourth quarter were quite impressive as revenues increased 28% over prior year, prior quarter. Revenues for the year were $793 million, a -- 21% higher than fiscal 2011. The strong growth in revenues throughout the fiscal year led to operating margin expansion while we continued our significant investment in R&D to advance our technology leadership and expand our sales and service network in our core markets globally. Based on non-GAAP measures, our fiscal 2012 diluted EPS was $2.51, which increased by 36% over the prior year. We're excited about the future as we would continue to leverage our performance and focus on market share growth in our core markets and make our presence felt in new markets with innovative solution offerings. I would like to spend some time to discuss each of our business segments in more detail. Let's start with our Security division, Rapiscan, where revenues increased 33% in fiscal 2012 to approximately $392 million with a year-end backlog of over $900 million, a level almost 5x the amount with which we entered fiscal 2012. This dramatic growth in the backlog is no small part as a result of the multi-year turnkey services contract from Mexico's tax and customs authority that we announced in Q3 and which we will talk about more later. The financial crisis in Europe and continued turmoil in the Middle East both pushed some of the expected orders until fiscal '13. We are very confident that we haven't lost any and look to…

Thank you, Deepak. Our ongoing focus on growth initiatives and operating improvements throughout the company has succeeded in delivering significant sales earnings growth. Strong momentum across each of our divisions, coupled with our $1.1 billion backlog, positions us well for further strong top line growth and margin expansion. I will speak to our fiscal '13 guidance shortly. But first, let me review in more detail the financial results for the fourth quarter of fiscal '12. As mentioned previously, net sales in our fourth quarter were up 28% on an overall basis. Our Security division grew 50% in the fourth quarter and 33% for the fiscal year. This strong Rapiscan revenue growth was seen across many product lines and spearheaded by delivery of the Entry Control Point inspection systems from the U.S. Army contract,, won in the first quarter of fiscal '12 that Deepak mentioned earlier. Based on customer requests, we accelerated production and successfully delivered nearly the entire contract this past fiscal year. Our Healthcare division continued the momentum that began earlier in fiscal '12, reporting outstanding 18% top line growth in Q4. This growth was driven by strong performance in the U.S. We leveraged our infrastructure to increase operating income by over 50%, demonstrating that our focus on improving operating efficiencies, coupled with high contribution margins, are producing significant results. This brought our Healthcare division's operating margin to over 15%, a new record operating margin. Given numerous product releases, the upcoming launch of Arkon, our new anesthesia machine, and penetration into new GPO and IdM relationships, we believe that the future is very bright for our Healthcare division. And finally, external sales in our Optoelectronics division increased by 2% in the fourth quarter on an -- and 13% on an external basis for all of fiscal '12. The Q4…

[Operator Instructions] And your first question will come from the line of Brian Ruttenbur with CRT Capital.

The question I have is around the -- your capacity for additional Mexico-Puerto Rico-type business. Can you tell me, do you think that you could win something in the next 90 days? And do you have the capacity to ramp something on the build-operate-train platform? And if it's not the next 90 days, then when? Let me start off with that question.

This is Ajay, Brian. I think from the capacity standpoint, we have a couple of different facilities not just here in the U.K. but also in the U.S. And if we had to react to some orders very fast, we have done that in the past, and we are structured to do that going forward. Whether it's in the next 90 days or 180 days or whenever, I think I'll defer on the timing, but I will say we are working on a lot of different possibilities.

Brian, just to add on to that. Deepak here. The question was asked last conference call also. We are very confident about capacity. We have excess capacity, and we have a very flexible manufacturing. And as you know, in this space, we are the only vertically integrated company in manufacturing, so we have the resources to galvanize any kind of great opportunity that we get.

Yes. I guess my question was not phrased correctly by me. I'm not concerned about you able to make x amount of equipment. My concern is turning your company into basically a services company and be able to ramp 500 or 1,000 -- train 500 or 1,000 personnel all at once and ramp in a large country. I didn't know what you're doing and putting in place in order to do that. I know that you had a relatively small crew that was in Puerto Rico. You've increased the size of that crew in Mexico, but that's a lot of personnel to manage and ramp. So can you address that? Maybe that's stated more clearly.

Well, Brian, obviously that's a great problem to have. You said it. If we were able to manage from Puerto Rico to Mexico, we are confident that we have the infrastructure and management and leadership and foresight that if any of those programs come in, we'll be able to manage it. Regarding [indiscernible] the company over, you know we are a broad technology platform company. Our whole strategy and structure is based on that. Our culture is that. And we plan to grow all businesses. Whether it's sales, in Security or services, Healthcare, Opto, we want to handle all the growth.

Okay. And then the last question, are you prepared to talk about profitability yet from Puerto Rico or from Mexico?

I think maybe Alan, you can answer that. We've said it before. Puerto Rico -- Alan can maybe add more, but Puerto Rico is already profitable. We are very satisfied with our results. And it's a little bit too early, but we maintain that Mexico will be in the same line as the Mexico and more profitable than our standard sale process. Alan?

Sure. Brian, just to add on to what Deepak said, yes, the Puerto Rico project has gone exceptionally well for us. And as you know, we don't give out specifics in terms of profitability on the Puerto Rico project, and we don't anticipate doing so on the Mexico project. It will become evident in the numbers over time. But we're very, very pleased at the type of returns that we have seen are consistent with what we internally modeled, and we'd be happy to take on more of these projects as we win them going forward.

Your next question will come from the line of Tim Quillin with Stephens Incorporated.

Do you have, Alan, the specific Security backlog or what bookings were in the quarter?

Sure, Tim. Bookings for us in the quarter were a little south of $60 million. So they were solid and expected to accelerate as we move forward. The overall Security backlog was north of $900 million. So it's very, very strong as we move into fiscal 2013.

Okay. And I think you had talked maybe about some things in the pipeline moving out a little bit. And so what is the expected contour or shape of bookings over the next couple of quarters? Do you expect kind of a typical seasonally strong bookings quarter in the September quarter?

Ajay, you want to answer that?

Yes, I mean, I think September quarter, especially with the U.S. Government, has always been strong for us. We expect that trend to continue. It's always hard to predict what quarter-by-quarter is going to look like because of certain orders getting pushed out. But we feel very good right now overall, looking in the next few months, on what the pipeline and what the potential is for the -- for fiscal 2013.

Just to add onto it, Tim. What I meant -- what I've said was our international pipeline, especially in cargo, looks very, very healthy and strong.

Right, right. And how about on the U.S. Government side? I mean, I guess first of all, if you could -- if you're able to tell us what percent of the Security revenue U.S. Government customers represents, and how -- what the outlook is there given the federal budget tightness?

Yes, I don't have the breakdown. But as far as what's going on with the budget, what's going to happen with the defense side of things, really the programs that we're dealing with are not significantly, if at all, enacted. So we feel very good about it going forward. I think what you're going to see is the U.S. budget, as we've anticipated, is going to go more and more into the services than the acquisition side of things. But the ones we're working on actively really should not be affected significantly.

Okay. And on the Army integration contract, I guess that you're through the majority of that. Is that -- are you 60% through? 70% through? Kind of how much of that project is already behind you?

Yes, Tim, this is Alan. We're higher than that. We're nearly complete with that. We would -- it's -- about -- under 10% of it to go in fiscal '13.

Under -- less than 10% of it to go in fiscal '13?

That's correct.

Good. And then are there other specific pipeline opportunities under that $248 million IDIQ?

There are a lot of different pipeline opportunities that we are looking at. Specifically what they are, I'm not going to go through for competitive reasons. But we think that this program really represents for Rapiscan an opportunity to really look at other areas where we can look at integration of products as we go forward.

Tim, just to add on to what Ajay said. In general, we're looking at a lot of other programs in the Army side and similar kinds, and we continue to look at it. And this has been a very good stepping stone for us to prove our capability to the customer.

Right. And then in terms of the Mexico start-up costs, went from roughly $0.05 in the -- in fiscal third quarter up to $0.15 in the fourth quarter. Maybe you can talk about the factors on that and what you expect in terms of start-up costs in first quarter and second quarter of fiscal '13?

Yes, Tim, this is Alan. We really view it as a good sign. As those costs escalate, that means we're making tremendous progress in the overall program. And we'll continue to see our costs escalate overall as we bring more people on to the infrastructure, as we train people and make all other necessary preparations in order to go live with the sites. We would anticipate continued start-up costs as we enter fiscal 2013. And our guidance for the overall fiscal year earnings per share, the $2.75 to $2.95, is inclusive of those start-up costs as we believe the program overall is going to be profitable for us this year. So we do not separately exclude the start-up costs from our guidance.

And I guess the start-up costs or the extent of the start-up costs are going to depend on when -- the timing of when you go live or when you start revenue. And should we expect that or think about that happening in fiscal 3Q?

Yes, Tim, well, we don't want to go into any real specifics. We did say on our last conference call that we expect a significant revenue in the second half of the fiscal year. So we'll kind of leave it at that for now.

Okay. And then finally, on the Healthcare side. Growth obviously accelerating in the back half of fiscal '12. Just the press released order flow that you saw in the fourth quarter was a sign that there was some momentum happening there. The -- Spacelabs clearly taking some market share. But if I look at your guidance, it doesn't necessarily seem to imply that, that acceleration continues into fiscal '13. And so what's your outlook there?

Sure, Tim. This is Alan. Of course, we provide guidance on an overall basis, not by -- specifically by each division. That being said, we're highly optimistic on a very, very strong year for Spacelabs. You're right, our guidance does not project 18%-type growth like we reported this past quarter, but the comps become higher and higher. We do anticipate that Spacelabs is going to have another very, very strong year in 2013, and we're looking forward to delivering on that.

Keep in mind, it's Deepak here, that we said in the last couple of conference calls that we have the strongest pipeline on new product introduction. We had been well received. Arkon and Anastasia is going to capture some. So we believe that 2013 will be as strong as the 2012, obviously, like Alan said. You can't take one quarter and sort of multiply going forward, but we definitely look at that 2013 will be a significantly better year than 2012 in Healthcare.

Your next question will come from the line of Josephine Millward with The Benchmark Company.

Can you guys give us a sense of what growth rates you're assuming in your guidance for each segment? Because your guidance roughly implies double-digit growth for Security and roughly mid-single-digit growth for the other segments. Is that correct?

This is Alan. Yes, we don't give guidance for each specific division. We give it on an overall company-wide basis at 10% to 12%. So you're probably in the ballpark.

Okay, that's helpful. And you guys recently received EU certification for liquid explosive detection. Now -- at the checkpoint. And I understand both the U.S. and European governments plan to lift their liquid restriction at checkpoints sometime next year. Can you help us think about the timing and size of this market opportunity and talk about the competitive landscape?

Josephine, this is Ajay. If you look at what's been going on, one of the most inconvenient things for the traveling public really is to have to take out and not being able to take out their liquids or not being able to carry liquids at all. I think the U.S. Government as well as the EU, they've been working together. The anticipated date that I've heard that they would like to have liquids lift so passengers can carry them on is sometime in April 2014, though it might happen a little sooner than that. So what this represents for us is a certification where in the EU, we're able to, say, have our scanners, they're able to leave their liquids and take their liquids on with them and not having to leave them at home. Obviously, we're the only -- one of the only companies that has this capability and is certified not just by Europe, but, obviously, TSA uses our machines as well. So the opportunity, I think, is in upgrades in the U.S. as well as new machines as the airports will obviously want the passengers to leave -- to take liquids with them. So time will tell, but it's really every single airport is our target.

That's great. And I just wanted to get an update on Mexico. Has there been any changes with the new administration or the new President? And if you could -- based on your program ramping faster than anticipated, do you think there's room for expansion in this program to other areas?

Well, this is Deepak here now. We see no change. And short of that -- any future expansion or something, we would just like to right now make -- say no comment.

[Operator Instructions] Your next question will come from the line of Yair Reiner with Oppenheimer & Company.

First question. Can you quantify for us the type of headwind you're looking for next year in terms of not having the Army contract in the same scale and also not having the London Olympics? How much of a headwind is that going to be in terms of revenue?

Well, I think firstly, the London Olympics is in this fiscal year for us. And the Army contract was a great learning experience for us. It's opened up other avenues. We think that we're going to see growth in the cargo market. We think we're going to see growth through our conventional products. And I think we're going to get some other integration contracts as we go forward. So I look at it as a positive, that we've been able to deliver and show that as a showpiece. And all parts of the business, we are seeing potential growth.

This is Alan. Just to add on to that. Our 10% to 12% revenue growth guidance factors that in. Factor the fact in that we had some significant revenues that took place related to the Army contract in 2012 that won't necessarily repeat at the same scale potentially in 2013.

Understood. And then, Alan, you had, I think, a total of $4.4 million in start-up costs for SAP. $2.7 million were allocated, I guess, to the segment. Where is the other $1.7 million?

It would go into interest expense. So when we look at -- when we report segment, we go down to operating income level. So the rest is in interest expense associated with letters of credit and other performance bonds that are necessary in contracts of this size.

Got it. And then on Spacelabs, you're getting ready to kind of launch marketing Arkon. What are the incremental expenses going to be around that? And then when do you expect to get real feedback from the market that's going to give you confidence, kind of incontrovertible, about how that -- what the potential is for that product?

Well, this is Deepak here. I've said in my speech that the launch is officially in Q2. We expect revenue in Q3, Q4. Regarding the launch expenses and stuff, it's insignificant. Outside of the market, I think we've had some discussion. We've talked about it. The anesthesia market in the United States is about a $450 million to $500 million business. Obviously, we are starting from 0. We are very excited about it. The product is very well received. We've had some good feedback, and we plan to -- for the next couple of years, as a percentage growth from where we're starting with, we expect to do quite well.

And just one final question. Any update on the expected timing of the certification for RTT in the U.S.?

Ajay?

I'm not going to go through specifics, but we are actively working with them. We just got the certification in Europe, and we're working very closely with TSA.

There are no further questions in the queue. I would now like to turn the call back over to Mr. Deepak Chopra for closing comments.

I would like to thank everyone for joining on the call. Especially, I want to thank all the employees and the customers who are very important to us. This has been a great year, and we look forward to speaking with you again for the first quarter call. And I want to emphasize that we are very excited about all the product segments and expect to have a great fiscal 2013. Thank you.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.