OSI Systems, Inc. (OSIS) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 OSI Systems Earnings Conference Call. My name is Kim, and I will 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.

Well, thank you. 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 Second Quarter Fiscal 2014 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, located at www.osi-systems.com, for approximately 2 weeks. Earlier today, we issued a press release announcing our second quarter fiscal 2014 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, but not limited to, statements regarding the expected performance of the company's operating divisions, the company's overall financial and operational performance, as well as items related to contract and regulatory compliance matters with the U.S. government. Forward-looking statements relate to the company's current expectations, beliefs, projections and similar expressions and are not guarantees of future performance or outcomes. Forward-looking statements involve uncertainties, risks, assumptions and contingencies, many of which are outside the company's control, that may cause actual results or outcomes to differ materially from those described in or implied by any forward-looking statement. 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, other risks described in documents filed by the company with the SEC from time to time and the risks relating to any enforcement actions in respect of the matters that are the subject of some or all of the company's ongoing investigations and compliance review, as well as ongoing reviews by government agencies, which may result in judgments, settlements, fines, penalties, injunctions and/or debarment. 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 non-GAAP financial measures of the company's operating and financial results. For information regarding certain non-GAAP measures and comparable GAAP measures and a quantitive reconciliation of those figures, please refer to today's press release, which has been furnished to the SEC as an exhibit to a current report on Form 8-K. Before turning the call over to Deepak to discuss the business in more detail, including certain issues associated with our customer, the Transportation Security Administration, I will provide a high-level overview of our financial performance. We will again touch on several themes that we have discussed during past conference calls. Highlights for our second quarter of fiscal '14 are as follows. First, we reported record second quarter revenues with a 22% year-over-year increase, driven by double-digit growth across each of our operating segments. The Opto Division led the way with 33% revenue growth; followed by our Security division with 16% growth; and after a soft first quarter, our Healthcare Division bounced back with a solid 12% increase in revenues in Q2. Second, we again achieved record non-GAAP earnings, excluding impairment, restructuring and other charges, net of tax. This marks the 18th consecutive quarter in which we have generated double-digit year-over-year non-GAAP EPS growth. Third, we generated $69 million in operating cash flow and $35 million of free cash flow in the second quarter. Fourth, our Security division's turnkey program in Mexico continues to track to the approximate timelines discussed in our last call, and we have been busy preparing to go live before fiscal year end for our latest turnkey contract award in Albania. Although this new 15-year contract is not expected to contribute much to the top line in fiscal '14, we expect that it could contribute more substantially in fiscal '15 and beyond and further validates the increasing acceptance of this model in the global market for security screening solutions. And finally, we concluded the quarter with a strong balance sheet. I will provide some granularity regarding certain line items later on this call. We are pleased to report these solid revenues and non-GAAP earnings results, and we remain positive about our future. I will provide additional financial details and will discuss our updated fiscal 2014 guidance, but first, let me turn the call over to Deepak.

Thank you, Alan. And again, good morning, and welcome to the OSI Systems earnings conference call for the second quarter of fiscal 2014. We are now halfway through our fiscal year and are pleased that, for the first half, we delivered strong year-over-year revenue growth. And in the second quarter, we are proud to announce to have achieved double-digit growth in all 3 business segments. Alan will go into the financial of each division in a few minutes. Before discussing the highlights for the quarter, I would like to start by discussing an open matter that we are actively working to resolve with the Department of Homeland Security. Given its ongoing nature, as you can appreciate, our comments will be mainly limited to the content we provide here and cannot add anything further during the question-and-answer. I hope you understand. Having developed a close relationship with TSA for the better part of 2 decades, we were glad to put past issues behind us by way of the administrative agreement in June 2013, and we're pleased, 7 months later -- several months later, when Rapiscan received, in the first quarter of fiscal 2014, an approximate $60 million order from TSA to provide multiple 620 Dual-View x-ray checkpoint inspection systems. As you know, we have a significant installed base at various U.S. airports. As Rapiscan was preparing to execute on the new order, our management team uncovered a contract compliance concern. They've found that a new, more reliable version of the x-ray generator component of the 620 DV checkpoint inspection systems had not gone through the approval process by the TSA. And as a result, this generator component had made its way into Rapiscan's replacement parts service inventory and into some of TSA's current installed base at airports without TSA's prior approval. This became a problem because Rapiscan was required to seek TSA's approval before introducing the new version into TSA's field population. Although the improved generator was more reliable, performed on part of the prior generator and was provided into at no additional cost to the government, Rapiscan should have sought TSA's approval prior to the change. To summarize, the failure to obtain prior approval for the upgrade to the generator led to a series of events that resulted in the termination of the newly awarded $60 million order from TSA for default. It should be noted that the generator in question, which cost Rapiscan slightly more than the older generator, was sourced from a reliable, well-known vendor that supplies to a number of x-ray security equipment manufacturers worldwide, not just Rapiscan. In addition, Rapiscan had significant experience with the new generator, as we have been using it successfully in our commercial fleet, which is substantially larger than our government fleet. Although it is, of course, unfortunate that the delivery order was terminated, we note that we identified the issue and self-reported it to the TSA. We feel that reporting issues of significance is a part of being a responsible partner to TSA. Although we cannot predict the timing and eventual outcome of this matter, Rapiscan is fully committed to becoming a stronger supplier to the U.S. government at the end of this process. In doing that, we have beefed up our process control, program management and personnel. We have made some changes in personnel at Rapiscan and have added additional talent. Moving on to the other activities in our Security division. During the quarter, our Mexico turnkey project continued to perform well, as we ramped up the number of sites and generated strong free cash flow that Allen mentioned. After winning the new turnkey services contract earlier this year in Albania, we have clearly established our leadership in growing this particular service segment and expect to continue to leverage our position for further growth. I should mention here that the build-out phase for the Albanian turnkey services project is well underway, and we're happy to announce that it'll start generating revenues before the end of the fiscal year. I should also mention that the way the Albania contract is structured, on a pay-per-scanned-container basis, it is not included in our backlog, much in the same way we have treated the Puerto Rico turnkey contract. Thus, these large 2 contracts are not part of our reported backlog. Our international security sales pipeline remains robust, and we are pleased to announce that we made the first shipment of our new product Real Time Tomography RTT 110 high-speed hold baggage inspection system in Q2 quarter to an international airport. Moving on to Healthcare Division. Spacelabs. Spacelabs bounced back with a solid quarter by delivering revenues of $63 million, an increase of 12% from the prior year, with an operating margin of 14.6%. The general global economic recovery continues, and this was overall helpful in enabling us to have a nice quarter. The recent activity of new product launches across our 3 main product lines of patient monitoring, cardiology and anesthesia and ventilation have elevated our overall offerings and have been welcomed by our customer base. Along with our flagship XPREZZON patient monitoring product line, we continue to see growing interest in the Arkon anesthesia platform, as well as our other new products. Moving to our Optoelectronic division. We had a tremendous top line growth quarter. Revenues were higher by 33% compared to the prior period. We were successful in continuing to gain new customers in new segments, as well as increased sales with existing customers. In this division, the optical component growth and activity is driven by several factors and fluctuates quarter-to-quarter, but long-term growth has typically been in line with the overall GDP growth. Over the past year or so, the opto sensors business has been impacted by the slowdown in the defense industry. However, we have been able to grow the top line in contract manufacturing organically and by selectively acquiring add-on product offerings. Although contract manufacturing tends to bring lower margins to the mix, we are very excited about the growth experienced thus far and expect the margins to improve. Overall, we are very pleased with the financial results of the quarter, and I would like to thank our employees, customers and shareholders for this continuing support. With that, I will turn over the call back over to Alan to talk in detail about our financial performance before opening the call for questions. Thank you.

Thank you, Deepak. Our continued focus on driving growth initiatives has succeeded in delivering significant revenues and earnings. I'll speak to our updated fiscal '14 guidance shortly, but first, let me review in more detail the financial results for the second quarter of the fiscal year. As I said earlier, our net revenues in the second quarter of fiscal '14 increased 22% versus Q2 last year. Sales from our Security division increased 16% over the same quarter last year, led by the year-over-year growth in turnkey services revenue. Our Opto Division continued its strong top line momentum, with 33% year-over-year sales growth for the quarter as a result of continued success in broadening our customer base, both organically and by way of acquisition. Opto Division's organic sales growth in the quarter was 24% over the second quarter in the previous fiscal year. Opto also benefited in Q2 from the demand of certain large customers, which was unusually high. And following a few tougher quarters, our Healthcare Division bounced back, growing 12% over the same period in the previous fiscal year, driven by sales increases in the U.S. and Europe. We scaled up manufacturing for our new anesthesia delivery system, Arkon, in the quarter, recognized some revenues and expect Arkon sales to accelerate over the remainder of fiscal '14. The Q2 gross margin of 34.2% represents a sequential increase from Q1 that was below the same quarter last year. As sales in our lowest gross margin division, Opto, increased 33%, this placed pressure on our consolidated margins. I will also speak later to our Opto operating margins. Moving to OpEx. Q2 SG&A as a percentage of sales increased slightly year-over-year. As you know from our past conference calls, we are typically able to leverage our sales growth to result in SG&A growing at a slower rate than sales. However, this quarter included higher professional fees, including legal and consulting, and higher bad debt expense in our Opto Division. All of our divisions remain committed to increasing efficiencies and managing the cost structure. We continued to invest significant resources in R&D to enhance both our Security and Healthcare product offerings. Our R&D spending of approximately $11 million was roughly at the same level as our first quarter of fiscal '14. We focus our efforts on innovative products and technologies to add value to our product offerings and to enhance future growth. We are seeing the results of these efforts in a number of new products that have been and are being released. Restructuring and other charges were $2.2 million in the quarter, primarily related to costs incurred in our Security division stemming from issues related to the TSA that Deepak discussed earlier and charges associated with an Opto facility consolidation. These charges are excluded from our non-GAAP EPS. Our effective tax rate for Q2 remained at 29%. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences amongst countries, as well as the impact of permanent taxable differences, tax elections and valuation allowances, among other items. The result of the items just discussed were record Q2 non-GAAP EPS per diluted share of $0.78 as compared to $0.70 in the comparable prior year period, excluding impairment, restructuring and other charges. Our GAAP EPS was $0.71. Let's move to a view of our operating margin, excluding impairment, restructuring and other charges. The overall OSI operating margin improved sequentially but was down year-over-year. This was primarily due to increased depreciation, as adjusted EBITDA margins increased over the prior year. Our Security division reported an operating margin of 15.8% for the second fiscal quarter compared to 12.3% for the same period a year ago, or an increase of 350 basis points. This margin performance was driven by overall strong year-over-year sales growth and significantly higher turnkey sales as Mexico was ramping up. Our Healthcare Division also experienced operating margin expansion as margins increased 220 basis points to 14.6%. This was a result of leveraging our cost structure on 12% sales growth. Finally, while our Opto Division experienced outstanding sales growth, the bottom line was challenged. Factors impacting Opto's operating income included an increase of approximately 800k in bad debt expense, additional costs as we integrate the 2 acquisitions completed in Q1 and certain customer sales coming in at a much lower profitability level than the division expected. The lower operating margin was also impacted by the product mix. Specifically, a significantly higher proportion of sales occurred in the contract manufacturing side of the division, which carries lower gross margins than the core Optoelectronics business. We have taken steps to improve efficiencies in the Opto Division, and we expect this to result in improvements in the future. Moving to cash flow. As we mentioned on past quarterly calls, we expected to see volatility in cash flow, primarily as a result of the Mexico turnkey program. While cash flow was light in our first quarter, it was strong in our second quarter. Cash flow from operations in Q2 was $69 million, our second-highest operating cash flow quarter ever. Capital expenditures were $34 million for the quarter and consisted primarily of the continued ramp-up in our Mexico turnkey program, the build for our new Albania program and the acquisition and expansion of our cargo manufacturing facility. Depreciation and amortization totaled $13.5 million, which is an increase of approximately $7.6 million from the second quarter of 2013, which is primarily related to the ramp-up of our Mexico turnkey program. A few balance sheet changes and cash flow items that are worthy of mention include our days sales outstanding, or more commonly referred to as DSO. As mentioned on our last call, we anticipated a reduction in DSO at the end of Q2. We achieved this, as DSO was 63 days compared to 91 days at the end of Q1 and 83 days at the end of our past fiscal year. This change was in large part due to the strong collections in our Mexico program. Our unbilled receivables declined from $45 million at September 30 to $3 million at December 31. Our level of DSO will fluctuate from period to period. Our inventory balances decreased in the quarter as the focus on improving turns paid dividends, though this metric, too, can fluctuate significantly from period to period. Customer advances. As you will recall, we received a $100 million customer advance associated with the Mexico turnkey program. This advance amortizes over 4 years and is currently expected to decrease approximately $25 million per year from fiscal '14 through fiscal '17. There is no P&L impact associated with this amortization. Our deferred revenue increased approximately $31 million in Q2 due to strong receipts in advance of revenue recognition. And we also reduced our revolver borrowings by $19 million in the quarter. Our balance sheet is strong, and our leverage ratio is well below 1. Our attractively priced credit facility provides great flexibility to execute on our business plans. And finally, turning to our fiscal 2014 guidance. With the strength of our Q2 sales, we are increasing our revenue guidance for fiscal '14 to $890 million to $920 million, representing 11% to 15% year-over-year growth. We generally provide overall company guidance rather than guidance by division or program. We currently believe the sales guidance reflects reasonable estimates. However, actual sales could vary from this range because of the risks and uncertainties applicable to our business and industry, including the timing of certain awards and the outcome of the issues relating to TSA that Deepak discussed earlier. And subject to this, we're also currently expect to achieve fiscal 2014 non-GAAP diluted earnings per share of $3.10 to $3.39, excluding impairment, restructuring and other charges and the impact of tax elections, which reflects increased professional fees and the increased costs in Opto, both of which we discussed earlier on the call. This would represent 12% to 23% growth on a non-GAAP basis over fiscal 2013. However, as with the sales guidance, actual non-GAAP diluted EPS could vary from this range because of the risks and uncertainties applicable to our business and industry, including the timing of certain awards and the outcome of the issues relating to TSA. During the past few years, we have consistently delivered a strong bottom line. The investments we have made enabled us to be a leader in turnkey screening solutions and to continue to innovate to bring new products and services to market. We look forward to sharing our progress on upcoming calls. Thank you for listening to this conference call, and at this time, we would like to open the call to questions.

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

Couple of questions. First of all, G&A going forward -- SG&A going forward, should we be holding it at these levels or is there going to be a decrease from these levels? And how much is embedded in there because of the increased legal and consulting expenses?

Brian, this is Alan. As you may know, we generally provide overall guidance from a sales and EPS perspective as opposed to a line item on the P&L. That being said, our SG&A was higher in Q2 as a result of some of the factors that we've talked about related to legal and professional fees and some other items. So we -- while we will not anticipate or while we will not project what we expect it to be going forward, you could factor in that they were higher in Q2, though we may see an elevated period as we work our way through the various issues.

Okay, very good. Some other housekeeping and then some harder questions. CapEx this year and fiscal '14 for the remainder of the year, what do you anticipate given that Albania is ramping and Mexico is near the end of the ramp, correct?

Yes, that is correct, Brian. It's Alan again. We had a pretty heavy CapEx quarter here of $33 million, $34 million in Q2, bringing us to a total of about $42 million for the first half of the year. The heaviest spending is behind us. We're anticipating that our total CapEx for fiscal '14 to be roughly $65 million, give or take. So when you compare the $34 million in Q2 to roughly $23 million, give or take, for the second half, you can see that the pace of CapEx is expected to slow in the second half.

Okay. So then looking out to fiscal '15, assuming you don't have another turnkey operation, what kind of CapEx should we be thinking about? Because we haven't been at a normalized rate, given Mexico and Albania and everything, for a while, so I'm just trying to figure out where your normal CapEx is.

Yes. We certainly like to have the high-class issues of winning new turnkey contracts and having the elevated CapEx, such as Puerto Rico and Mexico and Albania. And certainly, we hope to have more in the future. But excluding any impact of turnkey, our regular business tends to be in sort of that $25 million range, plus or minus depending upon what's taking place in regular CapEx.

Okay. And now the harder questions. The status of Iraq FMS and then RTT certification, are both of those dead in the water or are things still moving forward?

This is Deepak here, Brian. Absolutely not dead in the water. As a matter of fact, we remain optimistic on the FMS. But as you know out of our company policy, we don't go into detail on anything active until it lands. Regarding the RTT certification, as you know, the ECAC certification in Europe, we already got. We continue to move forward in the testing at the TSA. We remain optimistic, but we are -- we operate that at TSA's scheduling for this testing completion. But we can also add on that we are very happy that, in the Q2, we booked additional bookings of our RTT product from international aviation customers.

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

Alan, I missed the depreciation number in the quarter. What was that?

Depreciation in the quarter was $13.5 million.

Okay. And then depreciation and amortization combined?

Excuse me, that is depreciation and amortization combined. It's $13.5 million.

Okay. So that would put trailing EBITDA at about $150 million. Is that in the ballpark?

Yes. Calendar '13 adjusted EBITDA would be -- you're very much in the ballpark.

Okay. And then what's your expectation -- I mean, is $13.5 million a quarter a good run rate, with a little bit of step-up as Mexico comes on a little bit more throughout the year?

Yes. We would anticipate that, that level will rise a bit for precisely the reason you outlined, as Mexico continues to ramp a little bit more and then, of course, as Albania comes onboard.

Okay. And then just so I have it straight, are you planning to pro forma out professional fees, primarily legal and consulting type, to the issue at hand with Homeland Security? In other words, is that in your guidance or is that pro forma-ed out?

So there are various different aspects of that. Part of our program consists of, as Deepak was mentioning, bolstering our own internal people, policies, training, et cetera. And then there's also direct costs we're incurring from outside from a legal perspective. Some of those direct costs have been and we do intend to pro forma out. Some of the other costs will just be part of our ongoing SG&A component.

Okay, understood. And then are you seeing any negative reaction from international customers with respect to checkpoint security systems? Is that -- do you think that's having any impact on timing or orders?

This is Deepak here. The answer is no. As I mentioned, our pipeline, internationally especially, remains very robust. I just answered Brian's question, that we booked additional RTT systems in Q2 and continue to look at more international opportunities all the time.

Okay, great. And then how is the rollout of Arkon going? If you're ramping up manufacturing now, I would anticipate you have pretty good expectations for the next 12 to 24 months from the product.

That's right. Basically, up until now, the Arkon has not produced too much revenue. We are very excited about it, very well received. We have ramped up -- I think, on the last conference call, Alan mentioned we have ramped up our manufacturing in Seattle, and we look forward to the second half, generating more revenue. And going into the next years, Arkon should be a very good revenue-getter for us.

Your next question comes from the line of Josephine Millward from Benchmark.

Can you tell us what security bookings were in Q2 or, alternatively, funded backlog for Security?

Sure. Josephine, this is Alan. Our Security bookings, we had about a book-to-bill ratio of just under 1 when you exclude the de-booking of the TSA award for $60 million and you exclude the turnkey services awards. So our bookings were in the neighborhood of $70 million-ish, which is just under 1:1.

So bookings were around $70 million, okay. Can you -- Deepak, can you talk about your Security pipeline? Because your book-to-bill has been -- it has been decent but not great, and looking -- and I don't know if you're seeing delays because of the issues with the TSA. Can you just talk about some major opportunities you see in the coming 6 months?

Josephine, this is Deepak here. The way you have to look at the business of Rapiscan going forward is that, for example, Albania, when we look at the bookings, we look at bookings and then there are some service booked contracts like Albania, Puerto Rico. There are large contracts that never get into the backlog. So we continue to look at that stuff. The rest of the area, we're very optimistic about the RTT launch, especially in international. We don't see any slowdown. There is robust activity in all over internationally. We are continuing to monitor it. We have had no impact that -- to speak of, of the TSA issue that we are dealing with. And I think that the one on 1:1, all the time, we can go up, we can go down, but we are very much optimistic of the pipeline increase and are looking forward to a continued growth in our Rapiscan product line, both what we call nonservice business and additional service contracts.

Right. No, I appreciate what you're saying. It's getting harder to gauge your prospects in Security by looking at funded backlog. But if I assume, say, $15 million, $20 million for Albania a year, and for Puerto Rico, we're still looking at -- excluding Mexico, we're still looking at a Security backlog that's not really growing. So I'm just trying to get more comfortable with the -- do you -- what do you see as the biggest driver in the coming quarters in your Security business? Would it be turnkey? Or is it RTT? Or is it a combination of the above?

I think the biggest opportunity going forward is cargo. That's the robust pipeline. That, what we call, is the 100-pound gorilla, and there's a lot of activity all over as the economy has improved everywhere. The trade has increased, and everybody's looking at it. And unfortunately, whenever there's unrest in parts of the world, it makes people more aware for security, and our pipeline grows. Middle East is very strong for us, while Latin America continues to look very good. Europe, there are places where we are looking at growth. The CIS block looks very good also. So all in all, cargo is the big 100-pound gorilla. RTT, in our opinion, especially in the international sector because, as we have mentioned before, that post 9/11, people bought a lot of stuff and some of them are getting aged. We have a state-of-the-art technology. We provide a very good price-to-performance solution. So we think, besides the services businesses, which we keep looking at -- and keep in mind, we have said it in our conference call before, all potential cargo opportunity upsales can also be services opportunity or vice versa. So that whole area is a big growth opportunity for us.

That's very helpful. Can you -- also, on your outstanding issue with the Department of Homeland Security, do you think it's possible for you to reach a favorable solution without receiving a notice of debarment like you did last time?

Josephine, as I mentioned in my initial remarks, this is actively engaged with the government, and we would rather not make any speculation or any comments at this time.

Okay. So you're currently in discussions with DHS, and you don't want to comment on potential outcome?

That's true.

And do you -- in terms of timing, would you say it's in your best interests to resolve this outstanding issue as soon as possible?

I will not add any more than what I've already said, sorry.

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

So Alan, in terms of the backlog, are you able to give a more precise backlog for this quarter and last quarter? Just to give us a better sense of the -- especially the book-to-bill in the other parts of the business, other than Security.

Yes. Tim, I think we've been providing it at a little bit of a rounded level. But I think, in Q1, it rounded up to $1.0 billion. And this quarter, it also rounded slightly up to $0.9 billion as well. The backlog is heavily weighted to Rapiscan, with Opto coming in second. And Healthcare, as you know, is more of a book-and-ship business.

Yes, I understand. And so how about just giving us a sense of what book-to-bill looks like in the Healthcare and the Optoelectronics businesses?

Yes. In the Healthcare business, it was roughly 1:1, and in Opto, it was just below 1:1 given the very, very strong revenues in the quarter.

Right. Yes, makes sense. And then just -- this has obviously come up, but I just want your view on whether you believe that the form -- the pending or potential for a military sale and the potential certification of RTT are impacted by the TSA issues in the sense that the process has slowed to take a further look of what's happening with the TSA issue.

Tim, this is Deepak here. There is no indication on both those things if there has been any impact.

Okay. And so it sounds like you made pretty good progress on rolling out additional sites in Mexico. How close are you to fully ramped right now? And when do you expect to be fully ramped in Mexico?

So Tim, this is Alan. We're around 90% ramped right now. We always hate to say fully ramped, meaning 100%, because, as you've seen in Puerto Rico, there's just going to always be a few straggling sites. But being over 90% gives you an indication that we're awfully close.

Yes, no, that's helpful. And what does the turnkey pipeline look like right now? And when would you hope or expect or think that you will win an additional turnkey contract?

Tim, you know that policy. All I can say to that is we have beefed up our staffing in the services, marketing and sales pipeline. We continue to look at international opportunities. We are very optimistic about it. But more than that, we have never said it. Until we book, we don't talk.

Right. How about just the notion of does the pipeline -- in terms of the number of opportunities that you're pursuing, is the pipeline bigger now than it was 6 months ago?

The answer is positively yes.

Okay, good. And then in the Optoelectronics business and the contract manufacturing business, I know you had some contracts that were low margin, maybe not bid precisely correct in retrospect. Should -- in 3Q, should we expect revenue to decline as that business rolls off and then margins to improve as well in 3Q?

Tim, this is Alan. Yes, we would indeed expect that margins will improve in 3Q for the Opto Division. In terms of on an absolute basis in terms of sales, as I mentioned, Q2 sales were particularly strong given a couple of customers who had a high demand in Q2. So it would not be unreasonable to see sales, while they improve year-over-year, to be down a little bit sequentially in Opto in Q3.

Yes, that makes sense. And then lastly, Alan, do you have stock compensation for the quarter in front of you?

Yes, Tim. That number is $5.1 million.

[Operator Instructions] Your next question comes from the line of Yair Reiner from Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So on the TSA, I understand that you're limited in your ability to speculate on the outcome, but can you perhaps help us understand a little bit about the process, where you are or what needs to happen? I think it'd just be helpful for us to know kind of what to expect, at least procedurally, over the coming weeks and months.

Yair, this is Deepak here. Again, I'm sorry to say the same thing. What we have said, I cannot add any more because we are actively involved in this thing, and we just can't comment. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Okay. On Arkon, I know that you're not going to give us a specific guidance for a single product line, but you're starting to get orders. You've started shipping the product. Any sense you can give us on what kind of an appropriate bogey would be for you for the year to give you the sense that the product has kind of a good tailwind behind it and that maybe, 2015, it will be a meaningful contributor?

One of the things, you said it. It's one of the product lines. We've got 3 product lines: monitoring, cardiology, anesthesia. We already have some anesthesia machines, BleaseFocus and a series of model numbers. I don't think that we ever break it down into the specific lines for competitive reasons. All we can say is that, compared to the monitoring business, anesthesia is not as big as monitoring. But we feel that with Arkon, we will get more traction. And in 2015, we'll have revenue growth compared to what we have seen up until now in the anesthesia business, and we think that Arkon and its next-level platform products -- byproducts will be very well received and will have a contribution which is significant to our revenue and profitability. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Fair enough. And then just one final question for me. In terms of the Opto margin, I understand that kind of the 3% for the December quarter was unusually low. In terms of the bounce-back, can you help us at all, Alan, kind of think about whether that's going to be more in the kind of mid single-digit range? Or is there a chance of getting back to the high single digits we saw towards the latter half of 2013?

Sure, Yair. Yes, sure, understood. As Deepak described earlier, our mix of revenues in our Opto Division is changing. The fastest-growing aspect tends to be the contract manufacturing rather than the sort of the core sensors. So contract manufacturing doesn't carry the same margins as the core sensors. And even within the core sensor business, we used to do quite a bit in defense, and that's been a little softer as of late. So we certainly expect a bounce-back in operating margins, maybe not to the levels that you saw a year or so ago, but they'll be significantly higher than what we just saw.

This is Deepak. Just to add on, as Alan has mentioned that we are also digesting couple of new product lines in the Opto, and we are looking at continued improvement in efficiency. And going forward, we would also look at some contribution from the efficiency of our operation.

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

And I understand this is a sensitive issue, but my understanding with your issue a year ago with body scanner testing, when you had the show cause notice, there wasn't a lot of -- there wasn't 2-way discussion going on with Department of Homeland Security really until you had the notice of proposed debarment. Now is there -- do you at least feel like there's more 2-way discussion during this process than you had last time?

Tim, I really -- again, we are actively involved into it. I just don't want to make any more comments at this stage.

There are no more questions at this time.

Ladies and gentlemen, thanks once again for attending our conference call. We're looking forward to the second half of the year and speaking with you all once again next quarter. Thank you very much.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.