Good day ladies and gentlemen, and welcome to the Second Quarter 2013 OSI Systems Earnings Conference Call. My name is Derik, and I will be your operator for today. At this time all participants are in a listen-only mode. We shall facilitate a Question-and-Answer session at the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Alan Edrick, Chief Financial Officer of OSI Systems. Please proceed.

Thank you very much. Good morning and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems. And I am here today with Deepak Chopra, our President and CEO; Ajay Mehra, President of our Security Division, Rapiscan Systems and Victor Sze, our General Counsel. Welcome to the OSI Systems second quarter fiscal 2013 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 will remain on our website for approximately two weeks. Earlier today, we issued a press release announcing our second quarter fiscal 2013 financial results. Before we discuss 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 new information, subsequent events, future results or otherwise. During today’s call, we…

Thank Alan and again good morning and welcome to the OSI Systems earnings conference call for the second quarter of fiscal 2013. We are now halfway through our fiscal year and are pleased with the strong results thus far. For the first half, we achieved revenue growth of 8% and leveraged the top line growth to strong earnings per share. We also made substantial progress on our Mexico turnkey program and continued to implement key operational initiatives in each division. In Q2, our revenues were 194 million a new company record at second quarter. We also delivered an operating margin of 11% excluding the impact of restructuring and other charges. Before discussing highlights for the quarter, I would like to update you on the status of our involvement in the TSAs, AIT, ATR program. First as you know Rapiscan Systems received a show cause letter from the TSA in November. We believe we have clarified all of the questions in the show cause letter to TSA. The final resolution of the show cause letter is subject to final disposition by the Department of Homeland Security and the company is currently working diligently to complete that process. We also recently reported that we have reached agreement with the TSA on the AIT-ATR contract. Rapiscan determined that the secure 1000 single post would not be ready to meet the next level of automatic threat recognition software ATR required by the congressionally mandated June 2013 deadline. Therefore we agreed to work with the TSA to redeploy these systems to other government agencies that already rely on the secure 1000 product line. As part of the agreement, the ATR development contract was terminated which allows us to stop the R&D spending on this program for which we saw a limited future beyond the TSA.…

Thank you, Deepak. Our focus on growth initiatives and operating improvements throughout the company has succeeded in delivering significant earnings growth. One $1 billion backlog and the ongoing progress of our multiyear turnkey screening services agreement in Mexico position us well for further growth in margin expansion. I will speak to our 2000 guidance shortly, but first let me review in more detail the financial results for the second quarter. Net revenues in Q2 of fiscal ‘13 were up 3% over Q2 last year on an overall basis. Revenues from our security division grew 3% in the second quarter. Heavy focus on the Mexico program, as well as delayed customer acceptance from December to January led to the push out on certain deliveries from Q2 to our second half. Our Opto division continued the double digit revenue growth momentum from the first quarter by delivering 16% external sales growth as a result of our continued success in broadening our customer profile. In our healthcare division, the revenues dipped by 5% in Q2, we continue to deliver double digit operating margins. As Deepak mentioned, we believe we will see stronger healthcare revenues in the future. The Q2 overall gross margin for the company was 36.1% up by a 110 basis points from the same quarter last year. This increase was mainly attributable to increased revenue from turnkey screening services provided by our security division which generally provide higher margins than product sales. This improvement more than offset the impact of reduced revenues in healthcare which historically generates the highest gross margin across our three divisions as well as the impact of the double digit revenue growth in Opto which typically carries the lowest gross margins among our divisions. We anticipate our margins will continue to improve as our revenue mix changes…

(Operator Instructions) And our first question is coming from the line of Tim Quillin from Stephens Inc.

Alan, would you happen to have a detailed backlog numbers in front of you both for the overall company and for the security business?

I do have it Tim, from an overall company perspective. Our overall backlog is important. The backlog is about a $1 billion. Last quarter from a rounding perspective, it rounded up to 1.1 billion and this quarter from a rounding perspective it rounds to about 1 billion. As you know, our business is shifting more towards security turnkey revenues. So looking at changes in the backlog in the same way as in the past becomes a little bit less meaning as we’re building up long term backlog and then we deliver against those long term rewards. Further as you know, certain of our contracts like Puerto Rico never even entered the backlog.

Right. I think in the first quarter backlog at the end of the first quarter was 1.053 billion, what was it at the end of December?

We had a book to bill ratio of a little bit less than one. So, it’s still over 1 billion, while I don’t have the precise number in front of me, it rounds down to 1 billion. As you said the 1.053 billion was just over 1.050 billion so it rounded up to 1.1 now it’s little bit under that, so rounds down to 1.0.

Okay. And on the security backlog I thought we had discussed that last quarter, I thought the security backlog including Mexico was something like 943 million, at the end of September. Do you happen to know what that number is or what the book to bill was on the security side?

Yes, it’s slightly down for the reasons that Deepak mentioned. Our book to bill in security was a little bit under one as would be expected in this environment. So, it’s a little bit down, but meaningfully down.

And so what at this point, what do you see in the pipeline right now? And Deepak, you had mentioned potential orders for RTT for instance. But what other things do you see in the pipeline that might suggest that those security bookings could pick up in the back half of your fiscal year.

Tim, as I mentioned, there is ongoing growing pipeline in the security business especially internationally. As I mentioned, the three areas which are very strong are cargo pipeline continues to show very robust demand, definitely there is some push outs left and right, you’ve seen what’s happened in Middle East, you’ve seen what’s happened in Europe, it is definitely a little bit of what I would call a little uncertainty but the pipeline is super strong, that’s cargo. Then you look at the RTT product line. As you know that the machines in Europe are getting pretty old. There is a huge demand for a replacement but we’ve said it before that again because of the turmoil in the European sector, there had been some push outs, airports are trying to push as much as they can to the future, but it’s a requirement and we are well placed into it and that pipeline I mentioned in my speech it’s more than couple of hundred million dollars and we think that it’s a great prospect for us and we are focused onto it, we’re working with multiple airports, and we are quite confident that we will book, we might not be able to ship it but we will book before our fiscal year is over. The third area which we find it very exciting though it has a longer cycle, is the turnkey business, which primarily goes hand in hand with cargo customers, but there are other opportunities even in the non-cargo area that we are looking at. We are in active discussions; we have even taken some customers to our presence sides we are talking. But these kind of turnkey businesses they come in and not in a straight line and it takes some time to get them and we are very, very, very positive and boisterous about that growth business and frankly that’s what one of the reasons we have accelerated our Mexico launch.

Right and so you sound very confident in terms of getting orders in Europe for RTT, within the fiscal year, you didn’t really set a timeline on additional turnkey opportunities and kind of mention a long sale cycle or is the timing of conversion of some of those discussions just still very uncertain right now?

Well, you know the thing is it’s not a question of uncertain as we have said to you this business it takes a longer cycle and we have also said any cargo potential sale of any significant amount can also turn into a turnkey business, so it’s not a question of it is that it is a timing of this quarter or next quarter, we continue to work on it, we work parallel, it’s a concurrent parallel sales effort between a sale and a turnkey business and then the fourth item that we have said and we have said it, definitely that you’ve seen from your other companies you follow, US still the budget has passed is continuing to have that thing but we are actively talking to people in that pipeline too, so we have is, a very broad area in which we participated.

Right, okay and just one last question, and I'll turn it over to others, but on the Mexico contract, is there anything you can, you started revenue you're pretty far along on this, can you give us some sense of what the overall capital expenditures are going to be? And then what is the level of expense going to be? How many employees are going to be working on the contract? What is this, now that you have a kind of better sense, you're further into it, what is this contract going to look like?

You know from a cap ex perspective what we said in the past is that we are anticipating it to be somewhere in that $175 million range, plus or minus and we still expect to be in that general range. For confidential purposes, you know just like in Puerto Rico, we're unable to say the number of employees, suffice it to say that there'll be a significant number of employees. But as we move forward we expect the Mexico program to generate significant revenue for us both in Q3 and Q4 and at a profit for each quarter.

Your next question is coming from the line of Brian Ruttenbur, CRT capital

First of all D&A, how much was depreciation and amortization in the quarter.

Brian, it was about 5.9 million,

5.9, perfect. Healthcare, what percentage of your healthcare is international? I think I recall it being around 20% is that right?

Brian, it's a little bit higher than that. Generally speaking it’s about two thirds tends to be US one third international broadly speaking.

So was it all just Western Europe that the slowdown was in the quarter?

Majority of that was in Western Europe.

Is that because of the economy, is that because your product offering? Can you get any more specific? Did everybody see a slowdown in the industry, your competitors?

It's definitely not the product line, it's the turmoil in Europe, and we think that it's going to get better. As a matter of fact we've seen signs it’s going to get better in the second half. UK for example as the year end and their spending is going to go up. We looking at the second half healthcare to have a growth compared to a year ago.

Okay and what kind of growth are you looking for in the second half in healthcare?

Well Brian we don’t provide guidance by division but we are in a single digit growth in healthcare in the second half of the year.

And then on the RTT certification, you have already been certified for a while now in Europe. Can you talk about any potential sales that you are getting or hence for sales on the RTT?

Brian as you know the things we are working on, for competitive reasons we never talk frankly till we book, suffice to say, there are many-many airports both, big, big numbers and 1Z and 2Z, half a dozens, all over Europe and in middle East and in the CIS countries. So the pipeline continues to be strong and like I said there is a replacement cycle coming due and it’s like pushing from one quarter to the quarter, it’s going to happen, if you ask our competitors they will tell you the same thing. They have to replace that whole machines and there are about 1500 machines just in Europe.

So do you expect an award sometime this year from Europe, this colander year?

We are counting on it, our sales funnel shows that we will book, not be able to maybe ship but book in second half in RTD.

Okay good and then last question on the slowdown in the US security business. Was that related to anything with the TFA or was that related to border patrol? Where was the slowdown, was there a specific agency that you saw the slowdown?

The number one, we can categorically say there is no impact of the US business except for the AITD booking but we believe that everybody sort of playing too close to the chest in US till the budget is done, it’s all over that area, so no specific agency or so. But we are very much focused in to it as you know that we have complete office in Washington, we are up to speed and everything that is going on in Washington in our product line.

Your next question is coming from the line of Josephine Millward of Benchmark Company.

Deepak and Alan, you had very strong growth in the second half of last year from the big army order. Now, and this year you have Puerto and Mexico ramping up. Do you still think we can see up digit growth in security in the second half and how do you get comfortable based on what we, because you have a very tough comp in the second half?

Our guidance for fiscal 2013 in the second half and the comparisons year-over-year of course imbed the fact that we do have very comps associated with the army orders in last year and you’re exactly right in that the Mexico and Puerto Rico are both coming on strong and of course are the higher operating margin than we saw with the army order. We don’t give guidance on a divisional perspectives, so we won’t talk about the growth rates reach division but overall, our overall guidance factored in the difficult comps related to the army orders and we feel very, very good about our guidance.

Can you give us a sense of in terms of percentages of completion on Mexico by the end of say March and year end and if you anticipate the project to be fully operational something in fiscal year ’14.

Yes, we’re making substantial progress in our Mexico program and we expect to see significant revenues in the second half of fiscal ’13. We do expect that if not fully operational, very, very newly fully operational in fiscal ’14 as you suggest. So, we’re heading down right path.

Okay. But do you think you guys will be 30 to 40% complete in terms of operational by the end of your fiscal year or can you give us a little bit of rough sense or 15% just so we have a feel of how does project is progressing?

Yes, our customer is very sensitive to the information we provide overall in the program but just to give you a greater comfort feeling, by the end of our fiscal year, we do think we will have made significant progress which allows us to make significant revenues in fiscal ’13 and as we head in to fiscal ’14 will be in a very, very strong shape.

Okay. I had a follow up on RTT. You seem to have higher confidence on getting RTT certificated in the U.S. What’s changed because I know TSA doesn’t give you much feedback during the certification process? Is there anything new? I think the tone has really changed on you know getting certified this year which certainly very good news, I just like to get more color.

Josephine, basically as you know that program is an evolving guest protocol. As we learn more we get more confident and obviously with our success and certification in Europe we feel more positive about the technology and you know we’ve been going through this process for some time as I mentioned before and we are late, but it happens. Some people have taken eight and nine attempts, but you’re absolutely right, our tone has changed to be more positive that we will get the certification in this calendar year.

Great and in Europe, can you remind us of your current marketing shift for check baggage multi-view x-ray because I seem to remember it’s about 5%, you have some pretty well entrenched competitors there. Remind us why you know you think you’re well positioned in Europe?

Josephine, number one is the RTT due to our present installed base is two different products.

But I understand, certainly going to replace the x-ray products in Europe, so if you can give us a sense of your footprint in Europe right now?

Well, we don’t have a footprint in the check baggage as you said, but it’s a different product. Answer to your question about why do we feel confident? We still maintain that we have the best price to performance and ownership of any product that exists there without RTT solution in the check baggage mode. So we feel very confident that as the airport, as the customers start looking at especially price versus service cost over the years, we think that we have the best solution and I think what’s going to happen is that when they make their decision and side by side comparison, we will come out on top and we continue to believe that we will get a significant share of that market and on the other hand Rapiscan has a great reputation for service and support because we happened to be at the airport with the checkpoint machines anyway. So even though we are not being incumbent it’s a new technology, its new product and ultimately it’s going to be the ownership cost.

By the way Deepak I see Rapiscan machines everywhere in France, it’s very impressive because it’s very difficult to sell to the French.

Thank you.

Your next question is from the line of Jeff Martin, Roth Capital Partners.

Alan, could you quantify the magnitude of the delay customer acceptance for Rapiscan in the quarter?

Sure Jeff, it was on the magnitude of around $10 million that pushed from Q2 to Q3 associated with that.

And has that product been shipped at this point?

It has.

Okay, and then could you characterize the budget driven delays in the US assuming we get a budget defined here pretty soon. How does that all of a sudden open up the market again?

Well, there's no specific numbers but just a general feeling in Washington, till the budget gets decided everybody just playing close to their chest or whatever they want to buy, so I'm sure when you talk to your other companies you follow you'll get the same answer, so it's a watch and see game.

Okay, and then shifting that to Puerto Rico, did you see quite a ramp in transaction revenue there, since it is a per scan model? Did you see volumes pick up much there and where is that in terms of running at capacity today?

Yes we did see some nice year over year growth in Puerto Rico which was partially attributable to the gross margin expansion that you saw overall for the company. We continue to be nearly fully operational there with one more site to go, so we're running at let's call 85% or so of our projected run rate.

So the increase in volume is year over year, apples to apples.

It is, as you may recall we didn't have all the sites up and operational besides the one in Q2 of last year. So we have more sites operating this year compared to Q2 last year.

Okay, and then am I interpreting your commentary around gross margins that you expect gross margins to continue to expand from here or are we at a level, can I use for modeling for the next couple of quarters in Q2?

Our expectation is that there's always changes in the revenue mix that can impact it but overall with turnkey becoming a bigger portion of it, both Puerto Rico and Mexico that we would anticipate margins can continue to make some further progress.

And then with healthcare, if healthcare comes back a bit, that should help as well right?

Yes, healthcare has the strongest gross margins in our company, so as healthcare sales move up stronger it helps the overall margins.

Okay and then last question what's your remaining stock provision at this point?

Today, we still have about 550,000 shares authorized under our stock buyback program.

Your next question is coming from the line of Yair Reiner from Oppenheimer.

So, I just want to revisit the question about healthcare, if the third of the business is in Europe, it looks like that business might have been off 25% may be 30% in the quarter, I guess my question is what happened to change that market all of a sudden in the December quarter, obviously you know Europe has been a challenging market for some time.

The first thing is, what Alan said was one third is at international business, not Europe but just to clarify Europe business is less than one third. Because we do have business in Latin America, we do have business Asia Pac. Regarding your second question, what happened is, there is definitely a turmoil and there is a credit crunch in Europe so that if the hospitals want to buy a new replacement monitors or whatever, they can delay it and that’s what happened in some other countries. In UK, we are very positive that with the elections normally, just like in US, at the yearend, they have more money left to buy so we think that January, February, March, UK will start buying more and I won’t say that is stable with the relative stability in the Europe than it was in October, November, December, our pipeline and our forecast is that Europe will bounce back.

I guess, I think we are aware of the credit crunch in Europe but we understand the economy is weak but if you look at the things sequentially, I don’t think anyone of us got the sense that Europe all of a sudden tumbled off a cliff in the last three months if anything. Things seems to have stabilized. So what again changed in the last calendar quarter of 2012 to change the trajectory of the business?

Well not number one, we've always said in our conference calls that Europe has been challenging but if you really look at but the either thing I said was only US was up for the quarter, we think that the US could have been up even more if the elections were not there, if this was not an unusual year even in US because during October, November, December even in US, some customers froze to wait for the elections so though it is up, it could have been up more. So, if you combine that what we were forecasting and some of the prospect in Europe, it had an impact on Europe. On the other hand, if you really look at it, we talk about Europe; Middle East has had lot of (inaudible) too. So if you really look at it, the best way to look at it is our 33%, one third of business that Alan mentioned, defiantly had some push but that push has nothing to do with competiveness, has nothing to do with products. We believe that second half is bounce back.

Okay. And then just one quick question on RTT, in your original guidance you didn’t anticipate booking any revenue from that during this fiscal, is that correct?

That’s true.

The next question is from the line of Tim Quillin from Stephens.

But first did you book any revenue from the Mexico contract in the second quarter?

Tim, we did book some revenue in second quarter, we had also book some revenue in the first quarter as well.

Right, I saw that. And what is the nature of the revenue that you booked in the first and second quarter.

This is related to our overall screening services program. As you know we generally don’t go into breaking out the piper revenues by program.

Okay. What I mean was it up side that it was already up in generating revenue or just compensation for the build out of the program?

There were multiple factors that contributed to the overall revenue recognition related to the program and the nice progress that we’re making.

Okay. Second question is, I know this is varies quite a bit from quarter to quarter but what percent of the security segment revenue comes from the U.S government?

Good question Tim and you’re right it does change from quarter to quarter. I mean there will be certain quarters where it’s significant percentage; there will be certain quarters where it’s a very insignificant percentage. It really, really varies based on the type of orders that we have in our backlog and what we’re shipping at that point in time. The second quarter for fiscal ’13 had a low percentage of revenues from U.S government customers.

Okay. But in terms of your future planning and thinking about growth would you assume that 20% of revenue would come from the U.S government?

We look it on a program by program basis and over different period times so we can’t quantify and assign different percentages because it really does vary from a quarter to quarter and year to year basis.

Okay. And then in terms of Arkon the anesthesia delivery product. Do you have a sense now of when you might start to see first revenue there?

Yeah, begin marketing that product this month actually so our expectation as well we’ll see revenues for it in the second half of this fiscal year you know could be this quarter or next quarter. As Deepak alluded to earlier, we expect the revenue contribution in fiscal 13 to be modest but going forward we have a very, very high hopes for the product for fiscal 14 and 15, and the reason we expect to be more modest in fiscal 13 is that as hospitals begin buying this product, they usually try it out, they buy one or two and test it out for a few months, and then come bulk purchase thereafter so we’re really excited about their product, we think it has a great, great potential for us.

Okay and then lastly and maybe a little philosophically but you’ve been growing earnings you know 20% plus here I guess probably really 25% plus over the several years, you’ve got this major contract with Mexico that’s starting to ramp up should be significantly bigger in fiscal 14 than fiscal 13. Would you think about a continuation you know that contract supporting a continuation of 25% earnings growth are being additive to that type of earnings growth rate, thank you?

Yeah, it’s him as Alan get us as you know we provide earnings guidance for our current fiscal year but not on a long term basis. Our plan is to continue to growth both the top line and bottom line on a significant basis, we look to leverage our top line growth to a much a faster earnings growth and as you mentioned we’ve been successful in doing that over the past many years here. The Mexico program is a very nice program for us both form a top line perspective and as we have said before it has a higher operating margin contribution in our corporate averages which will help us to sustain even faster earnings growth rate than our sales rate and a significant delta, so we’re very, very excited about their program and think from a long term perspective will be able to continue growth our earnings at a very, very healthy rate.

At this time, you have no further questions, thank you. I would like to turn the call back over to Mr. Deepak Chopra for any closing remark.

Ladies and gentleman, now thanks once again for attending our conference call. We are looking forward to a terrific second half of the year and speaking with you all once again next quarter, thank you.

Ladies and gentleman that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.