Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2014 OSI Systems Earnings Conference Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (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.

Thank you. Good morning and thank you for joining us. I am 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 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 two weeks. Earlier today, we issued a press release announcing our fourth quarter and full fiscal year '14 financial results. Before we discuss our financial and our 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. 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. Such statements include without limitation, information provided regarding expected revenues and earnings in fiscal 2015 and statements regarding the expected overall financial and operational performance of the company and its operating divisions. The company wishes to caution our 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…

Thank you, Alan. And again, welcome to the OSI Systems Q4 earnings conference call. As Alan discussed, in the fourth quarter and for the full fiscal year, we delivered record revenues and profit. Our Security division was the primary driver of our positive Q4 performance, while for a variety of reasons, Spacelabs and Optoelectronics did not deliver to our expectations. Overall, revenues for the year were $907 million, 13% higher than fiscal ’13. During the year, we maintained our strategic direction in each business unit and invested in facilities, products, processes and people throughout the company. As we approach close to the billion-dollar mark in annual revenues, we clearly are benefiting from having a presence in multiple end markets and having the ability to support customers with the manufacturing footprint that allows us significant flexibility in managing their demand and logistical needs. We have exciting opportunities across the company and look forward to making a further progress in each division during the 2015 fiscal year. Talking in detail about each business, starting with our Security division, Rapiscan where revenues were $440 million for the full fiscal year about 18% higher than the prior year, with an operating margin, excluding the effect of restructuring and other charges of about 15%. The strong profitability resulted from higher volumes and increasingly favorable mix towards higher margin products and turnkey services. Touching on the highlights of Q4 at Rapiscan. Rapiscan had an excellent bookings quarter of about $184 million non-key -- non-turnkey bookings. To break that down a bit, we received a $15 million order from a Middle East customer to supply multiple units of the Rapiscan Eagle M60 mobile high-energy X-ray cargo and vehicle inspection system. We booked another international order to provide several Rapiscan Eagle cargo and vehicle inspection systems for approximately…

Thank you, Deepak. Our focused efforts have continued to succeed in delivering meaningful revenue and earnings growth. I’ll now review in more detail the financial results for the fourth quarter of the fiscal year before discussing our 2015 guidance. Our revenues in the fourth quarter of fiscal ‘14 increased 14% over Q4 last year. As mentioned previously, this was primarily due to 45% revenue growth in the quarter in our Security division, resulting from strength across multiple sales channels and product volumes. The quarter also included approximately $23 million in revenues from the new FMS contract. Our Opto division's revenues were relatively flat year-over-year as Deepak described. In the drop-off in Healthcare revenues noted earlier, dampen in other way strong quarter, as the hospital capital spending environment proved to be much more challenging than our team had anticipated. Our gross margin in the quarter was down 5.3% from the same quarter last year. This was driven by a number of factors, including first, the revenue decrease in our Healthcare division, which carries the highest gross margin in the company's three divisions. Second, the change in product mix within our Opto division was stronger sales in the contract manufacturing side of the business, which carries lower gross margins than the Optoelectronic side and third, increased depreciation from our turnkey operations. As I’ve mentioned in our previous calls, the margin will fluctuate from period to period, based on revenue mix amongst other factors. Moving to OpEx, we continue to work to manage our cost prudently. Q4 SG&A as a percentage of sales was down by 460 basis points year-over-year to 15.3%. The lower Q4 SG&A benefited from our reversal of certain portion of performance-based compensation, which have been accrued in earlier quarters, based on forecast that anticipated stronger results in both our…

(Operator Instructions) Your first question comes from the line of Brian Ruttenbur with CRT Capital. Please proceed.

Yes. Thank you very much. Congratulations on a good fiscal year and a good quarter. The questions I have are pretty straightforward. Something that we’re not supposed to ask you about is Albania. Can you tell us if there is a potential for a write-off in terms of Albania?

Brian, this is Alan. Most of the costs that we've incurred to date that have been capitalized really relate to equipment, and that equipment is fairly standard equipment that can be used for Albania or other customers. The general operating expenses that we've incurred in that program have been expensed as realized.

Okay. So there is not going to be any one-time charge that you envision at this point related to Albania?

As we currently sit here today, we do not anticipate any.

Okay. And then in terms of other turnkey wins, this one appears to be going south but are you working on others and what’s the prognosis for additional wins?

Brian, this is Deepak here. We've said it before we continue to look at these kind of turnkey opportunities. I've said it on many calls before that any large cargo sales opportunity can be a service turnkey provider or a turnkey provide opportunity can turn at the last minute to a sale. So needless to say, I did say in my previous call that our pipeline and the fastest growing segment for our security business is in the cargo, both in equipment sales and turnkey services, and it continues to look very robust.

Okay. And then in terms of the TSA open letter, the big question is just going from history, how long can this open letter go in place or can it just go away. What’s the next thing that potentially could happen in terms of the DHS and the open letter?

Well, as we have said before, we continue to work with DHS. We don't have any other input to give at this time, and I can't speculate on any timing either.

Okay. And then -- thank you Deepak. The question for Alan would be CapEx in fiscal ‘15 and cash flow in ‘15, you gave revenue and EPS, but it appears that cash flows would be very high and what is your CapEx for fiscal ‘15?

Sure, Brian. So excluding potential new turnkey wins, which we’re always optimistic about achieving, our general CapEx is -- should be somewhat below $30 million for the company, overall. So that would imply some pretty good potential free cash flow for us. Important to note for fiscal ‘15 that differs from fiscal ‘14 are the taxes that we’ll pay given the election to accelerate depreciation in Mexico, which made a lot of sense from a business and a cash flow perspective, it lead to very low taxes in ‘14, will lead to a little bit higher taxes in ‘15. So that’s just one of the variables to factor into that equation, overall.

Okay. In ‘15 though, at least how I do back of the envelope, it appears that cash from ops or something should be approaching $100 million given your guidance range around the $100 million mark? Is that -- is that correct in ‘15 -- fiscal ‘15?

We do not think that’s unreasonable.

Okay. Very good. I’ll let somebody else jump in there. Thank you.

Thanks.

Your next question comes from the line of Tim Quillin with Stephens, Incorporated. Please proceed.

Hi. Good morning.

Good morning.

I think I -- if I heard you correctly, the amount of Iraq FMS order that shipped in 4Q was $23 million. Is that correct?

Tim, this is Alan. Yes, that is correct.

Do you have a sense, is that -- is that the way we should think about the pace of deliveries of the $102 million over the next few quarters or how do you expect that to be recognized as revenue?

Sure. Tim, this is Alan again. The pace won’t be linear. In fact, while we don't necessarily provide guidance by quarter per program, I would tell you that Q1 for FMS should be something like half of that number for Q1. And then we would expect it to accelerate beginning in Q2.

Okay. And would you expect to complete deliveries under that order by the end of your fiscal ‘15?

We think that the majority of revenues will take place in -- by the end of fiscal ‘15. However, there's an expectation that there will be revenues that go beyond that as well for service and other components as well.

Can you give us a sense of what the service tail is on the initial order, and then what is the hope or the expectations for additional orders?

Well, Tim, this is Deepak here. For competitive reasons, I don't want to break it down but as you know that there is talk about more business there and we are well placed. Right now, our focus is to execute the program and we continue to look favorably to additional business.

Okay. And then on the turnkey side of the business, do you expect the turnkey business in Mexico to have a little bit of a ramp still ahead of it in fiscal ’15 or was fiscal ’14 relatively full year?

Tim, this is Alan. Fiscal ’14 was a strong year. We are still not doing all of the sites. So there is an opportunity, if and when additional sites come online, there could be some additional revenue opportunities there. But fiscal ’14 in and of itself was a very strong year.

Okay. And I don’t -- I know that you can’t say much about TSA, I don’t know if you said anything in your prepared comments about the FDA notice that you received? Is there anything you can say about that or what the issues were involved in that?

Yeah. Tim, this is Deepak here. The FDA’s warning letter was for the observations with regard to our internal processes to a routine audit that every couple of years they come and do. We have a plan to improve those processes to meet or exceed the FDA expectations. And like other companies, we continue to do better and have put in place processes -- process improvements and consultancy services to help us meet and exceed the expectations that the FDA has required.

Okay. Okay. Fair. And then, with regards to the restructuring charge and I think, restructuring and other charges in the quarter, I think, part of that is on going cost and if I get exactly, how you phrased it, but around contractual issues with the government. Is that something and until you resolve your issues with the DHS that level of charge would continue into fiscal ’15 or how should we think about that?

Yeah. Tim, this is Alan. I think you are right in your assumption that some of those type of charges will continue into fiscal ’15 and may not be the same level that we just experienced in the fourth quarter, but I think it would be prudent to anticipate that you will see some of those costs in ’15 as well.

Okay. And then just lastly, excuse me. Do you have specific backlog numbers for the overall company and for the Security business? Thank you.

Tim, this is Alan. The backlog number was north of $800 million, so to round it down to the $800 we talked about and the Security number was a little bit north of $700 million. So, very strong in each regard.

All right. Thank you.

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

Yeah. Hi, Deepak. Hi Alan.

Hi.

Hi, Jeff.

So, could -- Alan could you give a sense of timing, there are two sizable cargo orders, the $13 million and $15 million orders, in terms of timing when that will fall in the fiscal ’15, generally speaking so we can model it with some accuracy?

Sure. Jeff, those two orders you are referring too, I think, we announced in May, very nice orders for our Rapiscan division. Generally some lead time associate with cargos, so we would expect those to ship most likely in the second half of our fiscal ’15.

Okay. And then could you give us an update on how things are going, you eluded to it generally, but anything some specifics on the Healthcare sales organization that you are working with? Have you added any? Are you seeing progress with certain of them and less with other system detail that would be helpful?

Well, Jeff, this is Deepak here. We are disappointed, but confidently we can say, we did not lose any orders, it just getting pushed. So we have focused ourselves, as I mentioned in my presentation, working with GPO organizations on the IDNs. We are focusing more on our ARKON launch not just domestically in U.S. but internationally. So, we are optimistic cautiously and we continue to look at where we can efficiently increase productivity. And overall, we are very much focused on to it and we think that 2015 we are going in with a much more confidence than 2014.

Okay. Great. And then, if you had to characterize your top three U.S. opportunities in Security what would those be in specific order?

Well, we always maintain that the two fastest growing segments are cargo, both cargo equipment sales and turnkey, and the other opportunity is in the RTT, in the checked baggage, whole baggage screening opportunity. As you know, that everywhere post 9/11, there's a lot of replacement demand up there, but what's happened in the last couple years in Europe, everybody has sort of pushed the deadlines, but sooner or later they have to replaced. And we are well-positioned our Oslo win has been a great success for us. We now have a -- what I call a Western Airport under our belt. So, we are looking at these two opportunities, not to mention that the other ones on the trace detection and other places, but these are two major opportunities, cargo and whole baggage screening.

Okay. Great. Thanks very much guys

(Operator Instructions) Your next question comes from the line of Josephine Millward with Benchmark. Please proceed.

Hi, Deepak. Hi, Alan.

Hello.

Hello.

Deepak, I was wondering if you can give us an update on timing of potential certification with TSA on RTT. Do you think we could see that happening in your fiscal year ’15?

Josephine, hi. I mean, I do feel…

I know that’s your favorite question.

Yeah. No. The thing is that. The first thing I want to emphasize is that whatever is happening with TSA on the DHS has no indication of any delay in our ability to get certification at DSA. We can confidently say that. We are indeed in the test phase. It goes the same way because the blind test and I would like to make the same statement I’d made before that by the end of calendar year maybe, if you're lucky, by the end of fiscal year we are hoping that we will pass that hurdle.

Great. And can you talk about how potential U.S. government continuing resolution or shutdown or impact your outlook in the coming year?

Well, obviously, we look at it cautiously. Keep in mind that our total focus of our business has been directed at the international arena, though in many places we still depend upon U.S. government funding like the FMS program. But most of the programs that we are working with are funded and we look at the global picture and I meant it when I said that our pipeline has never been as healthy as strong as we've seen in the last quarter. We said we are going to have a very strong booking and we did that. We believe the 2015 and it reflects in our guidance that there is a lot of opportunity all over internationally in Middle East and Africa, in Asia and Latin America. So we believe that overall, we will definitely have impact with the U.S. government’s sequestration, but we have maybe better position than some of our competitors.

Okay. Let me switched gear to Healthcare. You mentioned that ARKON contributed to your healthcare in Q4. Can you give us the number? And can you also expand on what gives you confidence in the recovery in ’15 given macro-environment remains as you know, quite uncertain?

Well, number one, on ARKON, we started shipping in Q4. I did mention in my presentation that we have ramped up for volume production. Definitely 2015 we are expecting relatively a bigger growth in the revenue in Healthcare from the anesthesia ARKON product line than what happened last year. What gives us confidence is that, there has been a tremendous push in the Healthcare system of EMR, electronic medical record. That is now sort of done and hospitals now are focusing from what we are hearing back to capital equipment procurement and our focus working with the GPO groups and with the IDN groups make us feel confident that 2015 will be a good year. We've also said, we did not lose any business and that gives us the confidence that some of that got pushed from 2014, we will book and ship in 2015.

Thank you and congratulations on the great year.

Thank you very much.

Your next question is a follow-up from the line of Brian Ruttenbur with CRT Capital. Please proceed.

Yes. Thank you very much. I just want to drill down a little bit more on the medical weakness? I was wondering if there was a specific line, specific product that you're seeing weakness on?

Brian, there is no specific product. The region wise, as you know we are very much dependent on U.S. still. U.S. was weak and again it got pushed. I think the important thing is that where the people could delay buying, they delayed it and we were expecting some bookings to happen in Q4 that we could ship out, it didn't happen in time. There is no product weakness as such. It's just geographic.

Okay. So the FDA situation didn't contribute at all to this weakness, right?

No at all. As a matter of fact, the warning letter, we announced it before even the FDA published the letter, it happened after the quarter was over.

Okay. Thank you very much.

There are no additional questions at this time. I will now like to turn the presentation back over to Mr. Deepak Chopra for closing remarks.

Thank you. I would like to thank everybody for joining our call. We are very excited about fiscal 2015 going into it with a strong backlog, with good products and we want to thank all people, especially the employees of the company for a job well done and we continue to look forward to an exciting year. Thank you.