Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 OSI Systems Earnings Conference Call. My name is Lisa, 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, sir.

Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems; and I'm here today with Deepak Chopra, our President and CEO; and Victor Sze, our General Counsel. Welcome to the OSI Systems Fourth 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 2 weeks. Earlier today, we issued a press release announcing our fourth quarter fiscal '13 financial 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 and expectations, as well as certain responses by company officers to questions posed about future financial and 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 quarterly report on Form 10-Q and other prior and future 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 conference call, we may refer to both GAAP and…

Thank you, Alan, and again, welcome to the OSI Systems earnings conference call. As Alan discussed, in the fourth quarter, we delivered higher profitability on slightly lower revenues when compared to the prior year quarter. Q4 2013 was a tough revenue comp quarter in Security and Healthcare, primarily due to a large systems integration security contract and the fact that our Healthcare division had a record quarter in Q4 2012. Overall, revenues for the year were $802 million, 1% higher than fiscal 2012, and we entered fiscal 2014 with good momentum, strong backlog and a robust growing pipeline of opportunities. Throughout the year, we invested in each of our divisions to strengthen their foundations for profitable growth. We look forward to the opportunities in 2014 as we continue to leverage our performance and position in each core market with an expanded solution offering. Let's spend some time to discuss each business in more detail, starting with our Security division Rapiscan, where revenues were $372 million for the full fiscal year, about 5% lower than prior year, with an operating margin exceeding 13%. The strong profitability resulted from a favorable product mix towards higher-margin products and services. Basically, higher revenues from turnkey services and equipment, which largely replaced a large systems integration Army contract, which Alan has mentioned earlier. Excluding this contract, Rapiscan achieved 23% growth from the prior fiscal year and finished the year with a strong, healthy backlog. Going over some of the highlights in Security. During the fourth quarter, we received European ECAC approval for the large tunnel Real Time Tomography 110 screening system for all baggage. The newly improved RTT 110 and the earlier approved RTT 80 can screen bags significantly faster than the CT systems currently installed at airports. Airports that rely on ECAC-certified systems worldwide…

Thank you, Deepak. Our continued focus on driving higher-margin growth initiatives and operating improvements throughout the company has succeeded in delivering significant earnings. As we start our fiscal '14, we are excited about the prospects for both revenue and earnings growth. I'll speak more to our guidance shortly. But first, let me review in more detail the financial results for the fourth quarter. Net revenues in the quarter were down 3% versus Q4 last year. Revenues from our Security division decreased 18% in the fourth quarter, primarily due to the impact of the U.S. Army integration contract I mentioned earlier. Excluding the prior year impact on revenues from this program, Security division had robust sales growth. Our Opto division continued its strong top line momentum, with 24% sales growth for the quarter as a result of continuing success in broadening our customer base. And finally, though our Healthcare division revenues dipped by 2% in Q4 year-over-year, it was up 41% sequentially, as we mentioned earlier. The fourth quarter gross margin of 38.2% was very encouraging, up by a significant 380 basis points from the same quarter last year. This increase was mainly driven by our better mix of revenue in our Security division, including increased turnkey security sales. The margin expansion is particularly noteworthy since our lowest gross margin division, Opto, experienced significant sales growth, which places pressure on the overall company gross margin. Moving to OpEx. Q4 SG&A saw only a modest increase over the prior year despite the ramp up in Mexico and additional bad debt expense. All divisions have done an admirable job increasing efficiencies and managing the cost structure. We continue to invest significant resources in R&D to enhance our Security and Healthcare product offerings. Our R&D spending as a percentage of revenues was 5.6% in…

[Operator Instructions] Your first question comes from the line of Brian Ruttenbur with CRT Capital.

The questions I have, can you give us an update on FMS? Where we are? And then maybe talk about Mexico. Are you 80% done with Mexico? And when you will you be 100% done?

Brian, regarding your question of FMS, you know that we are very careful if and when there's anything active going on. We refrain from talking about any specifics. All we can say is we continue to work with both sides, the Iraqi government and U.S., and we are feeling good about it, and that's about it.

And Brian, it's Alan. With respect to Mexico, yes, we have made substantial progress. At year end, we were roughly 3/4 of the way through being fully ramped up. And we believe that during fiscal '14, we'll be -- we should be 100% ramped up or very, very close thereto.

Okay. So by third or fourth quarter, you should be near 100% in recognizing near 100% revenue. It will be a year or 2 before you're hitting peak margins in Mexico?

I think the margins throughout fiscal '14 should be very strong for us, and we'll be close to that rate.

Okay. And then just one other question. On the TSA testing, has that kicked back in? Or did it ever stop on the RTT? And what's the status of that?

An answer to your question, it never stopped. We continue to work with TSA, not only just with the check baggage program RTT but also with the checkpoint. We are still hopeful, we are in test cert [ph]. We are still hopeful that we get through by the end of calendar year. But like I said, this is a long process, and we continue to work with them. It never stopped.

Your next question comes from the line of Tim Quillin with Stephens Inc.

So the -- I'm not sure I heard you right in terms of the turnkey pipeline, but did you mention domestic and when you're talking about that pipeline?

Tim, we have said all along that we continue to look at all opportunities. And it's true, we are actively pursuing both domestic and international.

Okay. Now would that -- so I think that's a little bit of a new wrinkle from my perspective, anyway. So would the domestic opportunities be federal or some other entity?

Well, Tim, for competitive reasons, I think I will rather not say it, except that we continue to look at all opportunities, and we are working with the customers. And one of the things we've always said, every large sale of cargo can be converted into a turnkey thing. So as we get more traction with Puerto Rico and Mexico and more and more people get comfortable with it, we think that there's also domestic need. I'm not going to go any further or which side of the domestic business.

Okay. And is it accurate to say at this point that your turnkey pipeline in terms of the number of opportunities is bigger than it was 3 months ago?

Absolutely true. We are getting a lot of traction. And as we expected, with the success of Puerto Rico and Mexico, they are live sites. People are more comfortable and references a good point. And definitely, our pipeline is quite strong. We have increased our sales penetration and people in -- just for the services business worldwide.

And what's your comfort level in winning an additional turnkey contract before the end of the calendar year?

Well, we are very optimistic, let's say, and we continue to work on it. But again, Tim, these are some of the things that we have a policy that we don't want to talk much detail until the eagle has landed.

Right. No, that's fair. That's fair. And when I look at your guidance for fiscal '14, are you including anything in the guidance from an additional turnkey when -- or from equipment orders from the government of Iraq?

Tim, this is Alan. So our guidance incorporates a number of factors. Of course, a new turnkey win always takes into account that there'll be a significant time lag for ramping up the revenues, so there wouldn't be any significant revenues embedded in our guidance for fiscal '14 associated with the new turnkey win. That would most likely impact us to a much greater extent in fiscal 2015, similar for FMS.

Right. Any update on the RTT pipeline in Europe, what your expectations are for order flow for that product?

We continue to work, as we had mentioned in the last conference call, Tim. Whenever you are not the incumbent, there's lots of concern the way customers look at it. We said in the last conference call that we have won multiple orders in that part of the world. We are happy to announce that we've already won additional orders internationally, and we continue to pursue many, many other opportunities. Regarding the shipping, just like Alan mentioned on the FMS and on any turnkey, it's not a simple book and ship. It takes a little time, so we are expecting some revenue latter part of -- on this year. But it's a real ramp-up in our opinion, contribution will be next year.

Okay. And then just finally and I'll step back in the queue. But can you give us an update on what you're seeing in terms of demand for the Arkon anesthesia delivery system?

Very well received. Again, new product. We are testing the customers, got rave reviews wherever we have shown it. And again, it's going to be a slow start, and we think that it's going to really make us a player in the anesthesia industry, but it'll take some time to get there. But it definitely has started in this fiscal year. Alan, you want to add something?

I think that captures it well. We've seen a modest amount of revenues thus far through the end of fiscal '13. And I expect we'll see a modest amount of revenues in the first half of fiscal '14, picking up steam from there.

Your next question comes from the line of Jeff Martin with Roth Capital Partners.

Could you give us a sense in terms of your guidance on what kind of relative assumptions, whether they're modest or nonexistent, in terms of RTT in your fiscal '14 guidance and then also for FMS?

Sure, I'll take that, Jeff. Within our guidance, as you know, we've won some orders on RTT so that is embedded in our guidance and maybe a small increment from there. But as Deepak mentioned, it is really primarily -- though we'll expect to see some nice bookings in fiscal '14, we think that the revenues would follow in fiscal '15. FMS, we think the biggest proportion of the revenues would also likely be in fiscal '15 if we were so fortunate as to win that contract.

Okay. But nothing embedded in the guidance on that?

Nothing significant.

Okay. And then could you touch on the bad debt reserve for Opto? Is that something you typically have a certain degree of? Is that tied to some credit issues at a customer? What caused that? It seems somewhat material.

Yes. We have a pretty good track record of having a very, very low bad debt write-offs or expense, if you will. We had 1 particular customer, and really 2 customers, but 1 of a bigger nature that frankly just sort of went belly up in the fourth quarter. We started seeing signs of it in the third quarter, and there were some reserves taken there as well. But the fourth quarter really became a challenge for them. So we believe it was -- in accordance with GAAP, it was most appropriate to expense the receivable that we had on our books. They didn't represent a significant amount of revenues in fiscal '13 so as we look forward, it's not of a material impact to us going forward.

Okay. And then could you characterize or quantify the annual cost savings from the restructuring and lease termination activities that have happened in Q4 and expect to happen in Q1 of '14?

Yes. We're very excited about our new facility for our Healthcare division, and we think that will result in $2 million plus of annual pretax cost savings to the company from fiscal '14 forward.

And you had some off of some smaller restructuring charges for Opto and Security. Does that have an annualized savings tied to that as well?

Yes. The additional restructuring charges that we had, most notably in Security, will also result in probably a 7-figure cost savings for us going forward as well.

[Operator Instructions] Your next question comes from the line of Yair Reiner from Oppenheimer. William Lee - Oppenheimer & Co. Inc., Research Division: This is Will for Yair. So if we're going -- thinking about the RTT product, I understand that Smiths was able to get their machines certified first from the TSA. Does that create any wrinkles to your certification process? And are you still targeting certification by end of this calendar year?

This is Deepak here. It has no bearing on our process of certification. At any time, at TSA, they have multiple units being tested. And we think that the long term, there is no problem in us versus Smiths has already got certification. The business climate is very healthy. And when the procurement decisions are made, it's made mostly on multiple vendors. William Lee - Oppenheimer & Co. Inc., Research Division: Right, right. And in terms of timing, are you still targeting something at the end of this year? Or I guess, has there been any indications that, that timing may be shifted to the right a little bit? Or is it still the same?

It's very difficult to pin it down. We continue to work with it. We perform what we know today. We continue to feel very good about it, that we will complete the certification process. And by the way, it's multiple steps. Smiths is now into the next step of what is called the OTE, Operational Test Readiness. We go from pre-cert to the next stop, and we feel good about it, but it can slip. I mean, unfortunately, this is one of those things. We've been talking about it for some time. It's a blind test. And people take multiple iterations to do it. We feel good about it and continue to work diligently with TSA. William Lee - Oppenheimer & Co. Inc., Research Division: Right. And one last thing. Can you just remind me how much revenues was from the Army system integration contract in the first quarter of this year? Was anything meaningful?

This is Alan. No, it was not meaningful. Really, the bulk of that $98 million contract was shipped in fiscal '12, so the amount in Q1 of fiscal '13 was relatively very small.

Your next question is a follow-up from the line of Tim Quillin with Stephens, Inc.

These are mostly detail questions. And so Alan, do you have in front of you the more precise backlog number? I know you said $1 billion in the press release.

Yes. It rounded up to $1 billion, Tim. It was in the upper 9s.

And do you have a number for the Security backlog? Or can you give us some sense of what Security bookings were in the quarter?

Security bookings in the quarter were about $74 million, and the backlog was about $800 million.

So $74 million, a pretty sizable number, given where the U.S. government order flow was. Do you have any early read on bookings expectations for the September quarter?

Well, Tim, as you know that everybody from the past historically looks at that as a government year end big booking kind of a thing. We have -- we are working with some year end monies. But I won't call it that our expectation is as high as previous year's. But our booking prediction for the rest of the world is quite strong.

Yes. It seems like things are going well outside of the U.S.

Just to add on to your question, we are very, very happy with the Q4 backlog -- the bookings. That is very, very healthy, especially with what's going on and what you have seen from the other companies in our space. And that's basically our strength is very global, very geographic and a very broad product line.

Absolutely. Do you have CapEx -- specific CapEx plans for 2014? And/or how much capital expenditures are left for the Mexico project?

Sure, Tim, this is Alan. We don't provide a guidance on the CapEx line item. But what we would say is that the bulk of the spending on Mexico was behind us in -- by the end of June. There is still some more spending to go, but the large majority of that is behind us. So as we look at fiscal '14, while we have some more Mexico, we have our normal business. And then, of course, we would hope to get a new turnkey business, which will factor into that as well.

Got it. Do you have, Alan, in front of you what depreciation and amortization was for the fourth quarter?

$9.6 million.

And stock compensation expense?

1 second. $4.9 million.

And then in terms of the depreciation and amortization for 2014, obviously, a lot of that will be determined by the way you depreciate equipment in Mexico. And I wasn't -- I'm not exactly clear how the accelerated depreciation might factor into that. But maybe if you can give us just a sense of how, first of all, what -- how we should think about depreciation and amortization for fiscal '14 and how you're depreciating equipment for Mexico and how the acceleration plays into that?

Sure, Tim, it's Alan. Yes, we would expect the depreciation and amortization for fiscal '14 to be substantially higher than fiscal '13, given the ramp-up in Mexico. We tend to depreciate Mexico over the term of the contract. The accelerated depreciation has no bearing whatsoever on how we book depreciation. That is purely a tax concept, so it's what we file on our tax returns, but not what you see as depreciation in accordance with GAAP. So you sort of take that off the table. It won't impact the way you're thinking about it. But we have not been a company that, historically, has talked about EBITDA as D&A is something that is significantly ramping up. And when you start to take a look at EBITDA, we are expecting significant, significant growth in fiscal '14.

There are no additional questions at this time.

This is Deepak here. I would like to thank everyone for joining our call and want to, again, thank all the stockholders, thank our employees, thank customers. It's been a good finish to a year where we had some challenges, and we look forward to speaking with you again on our next call, and we are very excited about our future with new products, old divisions, old portal and continuing penetration into our turnkey businesses and RTT. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.