Good day, ladies and gentlemen, and welcome to the Q1 2014 OSI Systems Earnings Conference Call. My name is Jackie, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Alan Edrick, Chief Financial Officer of OSI. Please proceed.

Thank you. Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I am here today with Deepak Chopra, our President and CEO. Welcome to the OSI Systems First Quarter Fiscal 2014 Conference Call. We'd like to extend a special welcome to anyone who is a first-time participant on our conference call. Please note that this presentation is being webcast and is expected to remain on our website located at www.osi-systems.com for approximately 2 weeks. Earlier today, we issued a press release announcing our first quarter fiscal '14 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 during this call that may be deemed to be forward-looking statements under the act, including statements regarding the expected performance of the company's operating divisions, future investments, long-term growth and the expected level of capital expenditures, as well as the company's overall financial and operational performance. The company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from these forward-looking statements. 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 conference call, we may refer to both GAAP and to non-GAAP financial measures of the company's operating and financial results.…

Thank you, Alan, and again, good morning, and welcome to the OSI Systems earnings conference call for the first quarter of fiscal 2014. As Alan mentioned, we had a great first quarter where we delivered overall revenue growth of 14%, led by significant growth in our Security and Optoelectronics divisions. The strong results at the onset of this fiscal year puts us in a very good position to build upon this momentum for the remainder of the year. Reviewing the highlights for the quarter, starting with our Security division. Rapiscan Systems, where revenues increased 17% to $97 million, with bookings of approximately $112 million. There were several accomplishments in the quarter that are worth noting. First, the turnkey security services business built on the momentum of Puerto Rico and Mexico. We announced a 15-year agreement with the government of Albania to provide turnkey security screening services throughout the country. We expect it will contribute positively in our fiscal '15 and beyond. Our turnkey security opportunity pipeline continues to expand, and we are increasingly confident in our ability to significantly grow this business. Our Mexico turnkey services operation is performing well, and we expect to be nearly, if not completely, ramped up by the end of the fiscal year. In cargo equipment sales, our international pipeline continues to be robust. As we've discussed in the past, most cargo equipment customers could potentially be a turnkey services customer. With a broad equipment portfolio and diverse service options for our customers, we have a great level of confidence about the overall growth prospects in this segment. As mentioned in the previous conference calls, we are working on multiple turnkey opportunities internationally. RTT, our checked baggage, continues to be evaluated by the TSA for the inspection of checked baggage at airports and look forward…

Thank you, Deepak. Our continued focus on driving higher margin growth initiatives and operating improvements has succeeded in delivering significant earnings. I'll speak to our fiscal '14 guidance shortly, but first, let me review in more detail the financial results for the first quarter of this fiscal year. Our net revenues in the quarter, the first quarter of fiscal '14, increased 14% versus Q1 last year. Sales from our Security division increased 17% over the same quarter last year as revenues from our Mexico turnkey contract replaced last year's significant contribution in Q1 from the London Olympics. Our Opto division continued its strong top line momentum with 25% year-over-year sales growth as a result of continued success in broadening our customer base, both organically and by way of acquisition. Opto division's organic sales in the quarter was approximately 12% over the first quarter in the previous fiscal year. The strength in our Security and Opto offset the disappointing revenues in the Healthcare division, which as Deepak described, are down 11% from the same period in the previous fiscal year. The Q1 gross margin of 32.9% was slightly below the same quarter last year. This reflects the change in the revenue mix where our highest gross margin division, Healthcare, saw sales contraction, and there was significant sales growth in our lowest gross margin division, Opto. The combination of these 2 factors places pressure on the overall consolidated gross margin. Moving to OpEx. We leveraged the strong sales growth as Q1 SG&A as a percentage of sales decreased 1.5% year-over-year, though in absolute dollars, these expenses increased $2.3 million to support the 14% sales growth. All of our divisions continue to work to increase efficiencies and manage the cost structure. We continue to invest significant resources in R&D to enhance our security…

[Operator Instructions] And your first question comes from the line of Jeff Martin with Roth Capital Partners.

You mentioned a couple of acquisitions on the Opto side. Could you give us an idea of the total consideration, the cash consideration and the revenue run rate of that? And if it was multiple acquisitions, that would be helpful as well.

Sure, Jeff. This is Alan. Yes, it was a couple of different acquisitions that we completed during the first quarter. The total consideration was about $9 million in cash plus earn-out payments should they had certain metrics over time. The contribution from these couple of acquisitions was roughly $6 million for the quarter. That actually includes a little bit of an acquisition that was done late last year as well. So we expect that this will contribute nicely to our fiscal year, and as we integrate these acquisitions, it'll help with the bottom line and the margins as well.

Okay. And then I see Rapiscan has been awarded a checkpoint x-ray systems contract from TSA. Congratulations on that, by the way. Good to see TSA's confidence in you. Is this currently in your Rapiscan backlog?

That's true, Jeff.

Okay, great. And then could you give us an idea of your relative assumptions for healthcare and government spending in your current guidance versus your initial guidance? I would imagine, with some added uncertainty, you've taken a little bit more of a conservative stance on those 2 areas?

Sure, Jeff. This is Alan. As you know, our guidance is overall by the company, not by division. But your assumptions are generally correct. Given some of the softness that we experienced in Q1 with respect to our Healthcare division, though we're very optimistic about growth for the fiscal year for Healthcare, we believe it's most prudent at this time to remain a little bit cautious, to have some conservatism built into our overall guidance with respect to Healthcare. The strength in our Security and Opto divisions are certainly covering that. But we don't believe it will be prudent to be aggressive in any sort of guidance related to Healthcare at this point in time.

Jeff, this is Deepak. Just to add on to what Alan said, I did say in my conference call, we saw a lot of push-outs because of the uncertainty in Washington, and the good news is that we have not lost any orders. So we believe that remaining year, though cautious, and we are quite optimistic about as we get more comfortable with Washington and the launch of the new products.

Okay. And then, Alan, what was the stock comp number in the quarter?

It was a little over $5 million.

Okay. So then I'm coming up with an adjusted EBITDA number of about $33.2 million. Is that in line with what you guys calculate it to be?

That would be, Jeff, yes.

And your next question comes from the line of Brian Ruttenbur with CRT Capital.

So the question I have is on -- a couple. First of all, on the medical or Spacelabs weakness in the quarter, do you expect that to rebound on a seasonal basis like in the December period and the June period? And why was it seasonally weaker than normal? Was that all just government? Is that what you had stated earlier? Or was there any other factors going on?

Well, two-pronged answers. On your -- seasonal issue as you know, Q1 has always been the weakest in revenue. Q2 is stronger, December quarter, because of a lot of buying. Q3 becomes softer, and the Q4, obviously, is the strongest. The answer to your other question is definitely there was what I would call push to the north or to the forward, whichever way you want to look at it. We believe that as people settle down on whatever happened and the ObamaCare goes in effect, more people, more patients are going to come in. Hospitals have to get to that. We are hearing that things will get better, and we are very much confident about getting more business in the second half and also in the Q2. Keep in mind, in addition to that, as Alan has said, we moved the factory. It's all up and running. And Arkon, which is a new introduction to the anesthesia product line, we have now started ramping up manufacturing. We see a lot of positive demand in that, and we believe that those 2 factors will carry for a robust growth in the balance of the year.

In terms of future orders and catalyst coming up, can you give us some kind of update on what's going on with FMS Iraq and then maybe just the timing of certification in the U.S.? Is that still moving along or did that all get stymied because of the shutdown?

Well, I'll begin answering to your question in various parts. On the FMS, we are still very hopeful. We continue to work with both governments, Iraq and U.S. But as you know, we don't comment anything more until we get something. So we continue to work diligently and feel good about it. Regarding the certification, definitely with the shutdown in Washington, it pushed everything again to the right. We continue to be optimistic and continue to work with TSA. And we are still hoping, give or take a couple of months, that this end of this year is what the guidance we have been giving to The Street, that it all happen. On the same subject, not talking about TSA, we won certification in ECAC of both sizes of our machines. We are aggressively marketing it. We've had some -- we've had success. I mentioned in the conference call, we are looking at optimistically booking more orders. But we've also said that the timeline is such that the major impact in the revenue stream will be the next fiscal year.

Very good. Last question is for Alan, and it's a multiple-part question again. Talk about where you see -- I believe you mentioned CapEx going down on the year with everything going down in Mexico in terms of the need for capital there. Can you talk about cash flows, CapEx and where DSOs should settle out as a norm? It's all about cash flow.

Sure. So with respect to CapEx, as you mentioned, Brian, last year was quite significant during the buildup of the Mexico program. While we still have some Mexico CapEx to go, it will be substantially down. We would anticipate our CapEx for the year to be more or less around the $60 million range. That includes Mexico. That includes Albania, includes our general maintenance CapEx and a few other items. With respect to DSOs, DSOs were higher at the end of September. They're also higher at the end of June. We would expect that, that will begin to normalize here, actually starting right now in the December quarter. We received a substantial payment already this month in October relating to some unbilled receivables we had at the end of September. So though our normalized DSO rate may be a bit higher than it used to be in the past just because of a greater proportion of international sales, we do expect it will come down from where we ended the September quarter and therefore represent a significant source of cash flow for us. So we do believe that we'll be generating some nice free cash flow this year and going forward.

Okay. And will you then start talking maybe about -- because this turns into a nice cash generator in December or March of this year with all of this, do you plan to start talking more about cash flow and cash generation going forward?

We do, we do. Certainly, as we begin to normalize here with some of these turnkey programs, that is an area that we can elaborate on a bit more.

And your next question comes from the line of Yair Reiner with Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So first on depreciation. The number was a bit higher than I expected for the first quarter. I know that the way you book depreciation can be a bit lumpy in terms of when it kicks in. Can you give us a sense of what we should be modeling as we exit the year and kind of what the rate of increase is going to be over the course of 2014?

Sure, Yair. It's Alan. So we are about $12.9 million for depreciation and amortization for Q1. We would expect that number will tick up going forward into Q2 and Q3 and Q4 as Mexico continues to ramp. And then as we bring on new turnkeys such as Albania, when that begins to get into a revenue-generating position, we'll see some further depreciation there, and we'll see some depreciation just with regards to our regular business as well. So I would anticipate that we'll see our CapEx tipping up -- ticking up on a sequential basis from the roughly $13 million that we reported for Q1. Yair Reiner - Oppenheimer & Co. Inc., Research Division: And then kind of the run rate exiting the year in terms of D&A?

Well, there's a lot of factors that could go into that based upon how our business develops over the next few quarters. But I would expect it will be up a few million from this quarter from a run rate perspective as we exit the year at this point. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay. And then in terms of Arkon, you mentioned that you expect to see sales beginning to kick in, in the third and the fourth quarter. Can you give us kind of a rough idea of what you're anticipating in terms of contribution from Arkon this year?

This is a Deepak here. Firstly, just to clarify. We expect sales to start even in Q2 with second half being even higher. Regarding the specific breakdown, for competitive reasons, I would rather not say anything except to say that we have a lot of optimistic view that we will start ramping up and capture significant market in that area. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then if you think about the core Healthcare business, I guess it's been a few quarters here that things have not shaped up according to your expectations. I recognize that a lot of that has to do with forces outside of your control. But is there any need to maybe go in and try to rethink the cost structure in that business?

Well, as you know -- it's a Deepak here. Both Alan and I are very focused onto the cost structure. And frankly, if you look at it, we always look at it, but what you end up and what happened at this quarter is that really, it was not a good quarter. I mean, that's a truthful answer. And you can only cut cost as much. But we look at it all the time. We look at primarily all our divisions, and Healthcare has been very focused. If you see, with the last couple of quarters, Alan has said, we've had a great operating margin on the Healthcare. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay. And then one final question. On Security, on the core business outside of turnkey, it looks like you had a very good quarter of bookings. Can you give us a sense of how you anticipate kind of federal part of that to kick in this year? I know that last year, in terms of new orders, it was fairly poor. Any visibility about how that tracks in 2014?

Yes. One thing we can very proudly say, that normally September is a pretty strong quarter for the government year-end bookings. Because of this shutdown, obviously, and you've seen some of the other companies reporting, we are very proud to say that our bookings have been very strong from the federal government for the September quarter. And we believe, going forward, obviously, we can't be immune to it. But one of the things that is our core strength, we are geographically so broad that we are less affected with what happens in Washington. And the other second part of that thing is keep in mind that our products are necessary for security. So we do get a little benefit in these times where security is paramount important. And that does play, that our business remains pretty healthy. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Great. And I guess just one follow-up on that. In terms of RTT, has the extended period that is taken to get certification, has that prevented you from getting any wins? In other words, have there been many check baggage inspection awards that you haven't been able to participate in, in the last several months?

We can say very confidently, none. As you know, the government spending in the shutdown, everything has slowed down in the domestic market. And we haven't seen any big procurement in that area anyway. And with the ECAC certification, we are aggressively looking at the rest of the world.

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

Just a follow-on, on kind of the train of thought regarding the security bookings in U.S. government. So a good quarter in terms of bookings. I guess number one, could you break it down further? I think when you talked about maybe one large order, that was in that $125 million of Security bookings, but could you just give a little bit more color about the nature of the bookings during the quarter?

Well, as you know, Tim, we are very specific -- we don't talk specifics. All we can say is even without the TSA, we had a very broad booking quarter from the federal government.

Okay. But how about in terms of the breakdown between maintenance orders and service orders and equipment?

Well, I think you can say that it was heavily skewed towards booking new products.

Okay, okay. And in terms of U.S. government order flow, so again, kind of a relatively good quarter. In the September quarter, I'm guessing things are going to get a little bit worse. So how are you -- what's contemplated in the guidance in terms of continued U.S. government order flow in this fiscal year?

Well, we look at it in a conservative view, as Alan has said. Obviously, we're not immune to it. Everything does slow down, especially the uncertainty, every 3 months. But keep in mind, we've always said to all of you, we are less dependent upon the U.S. government than maybe some of our other competitors. We are aggressively looking at the international sector. And one of the big advantages we have with a broad portfolio of products and looking at especially the cargo business internationally, people are getting quite comfortable with the turnkey solution model. And we look at that. And like I said, you guys were asking us in the last couple of calls, are we going to get anything else? And we announced Albania. We continue to look at converting some of the large buying of the cargo business from customers internationally to convert them to services. Second area we're looking at optimistically is the RTT, though cautioning, we also say that most of the revenue of that will be the following year. But we look at that. We're going to have a pretty healthy booking in the remainder of the year in the RTT product line. So all in all, we got RTT, we got cargo, we have services, and we are definitely getting a good traction and interest in our trace product, especially as more and more international organizations look at our product as a mobile product. You can sort of hold it in your hand. It's lightweight. So that first responders are looking at it, police, DoD. So there's a lot of opportunity -- radiation monitoring. So we have a broad portfolio. So we are feeling good about it, though we want to say that, that we can't be immune to what's happening in the U.S. government.

Right, right. And then on the turnkey side, how many opportunities are you currently pursuing? And when are the expected award decisions on those opportunities?

Well, Tim, you already know the answer. Every conference call we say that. There are multiple opportunities we are looking at, and I mean, I'm trying to talk about it in every conference call. All large procurement potential cargo business is a potential turnkey business. And the more we show and tell with our successes in where we are, the more people -- customers get confident. So there are multiple opportunities, and I'm not going to comment on when specifically anyone is going to book. But we are feeling quite good about it and expect to close multiple ones soon.

Okay. I like the sound of that. And then just lastly, I know there's not too much you know or can say about the status of the pending order from the government of Iraq, but based on what you know now, would you hope to secure that order -- or initial orders there, I should say, by the end of the calendar year?

Well, Tim, I think what we said in the conference call, we feel good about it. We are working on both sides. It's very difficult when governments are involved to pin down the timing or what's going to be the outcome. All we can say to that is we feel good about it.

And your next question comes from the line of Josephine Millward with Benchmark Company.

Can you tell us whether you expect to ship most of the 60 million TSA order in this fiscal year?

You know that we can't comment on that.

Okay. How about if you -- can you give us your funded Security backlog and break out Mexico for us?

I don't think so we've ever broken up that way, but I think what we have said is our bookings for the quarter for non-services business of about $107 million [ph].

Okay. That's all right. I can back into it. I was hoping maybe you can break out Mexico for us because your book-to-bill excludes Mexico, right?

That's right.

Okay. In terms of RTT, as you know, TSA has actually recently awarded a new IDIQ for reduced size explosive detection systems. Can you clarify whether you have a reduced size or medium speed or that's going through TSA certification or you're just going after the high-speed market?

We are on the high speed and mid-speed. That's what [indiscernible].

Okay, great. And Alan, are you anticipating any more restructuring for the remainder of this year?

Josephine, we always look to get more efficient in everything we do. For the second quarter, there will be a consolidation of one more of our facilities that we alluded to earlier that's been in process within our Opto division. So we'll have something here in Q2, though it shouldn't be significant. We don't have anything else planned, but we always look to get more efficient.

Okay. And just a little more clarity on your guidance. So based on what we saw in Q1, would you be comfortable saying that Healthcare can still grow for the year? Or should we think about Healthcare being a flat to down business this year?

Josephine, as you know, we don't provide guidance by division. Deepak, I think, was pretty optimistic in his comments about a return to growth following a shortfall here in Q1. But our overall guidance is really only at the OSI level.

At this time, we have no further questions.

Thank you very much. I want to say we are very excited about the beginning of the year. Look forward to talking to you after Q2. We have tremendous opportunities in all divisions, and we're looking forward to a very successful both top line and earnings growth for the remainder of the year. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.