Good day, ladies and gentlemen, and welcome to the OSI Systems’ Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Alan Edrick, Chief Financial Officer. You may begin, sir.

Thank you. Good afternoon 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’ second quarter fiscal ‘16 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 webcasts and is expected to remain in our Web site located at www.osi-systems.com for at least two weeks. Earlier today, we issued a press release announcing our second quarter fiscal year 2016 financial results. Before we discuss our financial and operational results, I would like to remind everyone that today’s discussion contains forward-looking statements based on the environment as we currently see it. I will now read the Company’s cautionary statement on forward-looking statements. 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 year 2016 and statements regarding the expected overall financial and operational performance of the Company and its operating divisions. The Company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from these forward-looking…

Thank you, Alan. And again good afternoon and welcome to the OSI Systems earnings conference call for the second quarter of fiscal 2016. With the global macroeconomic dynamics that have affected most industries to various degrees, our security and healthcare divisions' performance was also adversely affected to some extent by these conditions. On the other hand, our optoelectronics division again delivered increased adjusted operating income and margins. Alan Edrick will discuss the financials of each division in more detail later on. Jumping right into the review of the Q2 divisional performance, we will share our view of the market and the changes we are making to improve the performance of the Company. We will begin with the security division. During the quarter revenues in securities were 94 million, increase of 32% from the prior year. As Alan has mentioned in prior calls, we anticipated a tough comparison due to significant FMS revenues in Q2 last year. This quarter's security revenues however were lower than our expectations. There were a couple of reasons for this which were largely beyond our control. The primary factor was a delay in the customer schedules of certain cargo screening systems as well as our recently launched Rapiscan RTT whole baggage screening systems. Certain shipments were scheduled for second quarter but installations and customer acceptance were delayed by the customer due to the own readiness, nothing to do with the Rapiscan products. In addition, we see customers taking longer to make marketing decisions on some book and ship tenders primary in our small baggage and inspection product lines in the international locations. Together these factors led to security sales being 5% lower than the prior year excluding the FMS contracts from last year. In Q2 this year, security bookings were $67 million and for the first…

Thank you, Deepak. The second quarter proved to be very difficult as a result of macro-dynamics and customer exchanges where the impact was felt most significantly in latter December. Our team has embraced the challenge of navigating the macro-economic pressures and improving operations and is focused on delivering revenue and earnings growth in the future. While the security and healthcare divisions have their problems, the optoelectronics division delivered higher non-operating income as our operating margins expanded for the eight consecutive sequential quarters. Let review in greater detail the results for the second quarter before discussing our updated guidance. As mentioned earlier, our revenues in the second quarter of fiscal ’16 decreased 23% over Q2 of fiscal ’15. Security division revenues were down 32% or 5%, if we exclude FMS contract previously discussed. We shipped approximately $15 million of security equipment during Q2 of ’16 for which revenue is expected to be recognized in future quarters as the product is installed and the revenue recognition criteria are met. The Albania turnkey contract has been ramping up nicely and is expected to be fully operational in Q3. Revenue in our healthcare division decreased 20% while sales in the U.S., our core Market was down somewhat. International healthcare sales declined 30% primarily as a result of foreign currency exchange impacts, deferred purchasing decisions, weakness in China and a generally soft global healthcare market which we believe is due to the global economic uncertainties. In the end as expected our Opto division revenues decreased by 8% mainly as a result of lower contract manufacturing sales as we shift our customer mix. Our Q2 gross margin was 34.5% virtually the same as our Q2 fiscal year 15 margin of 34.6% with a more favorable product mix offset by negative economies of scale due to lower…

Thank you. [Operator Instructions] And our first question comes from the line Jeff Martin from ROTH Capital Partners. Your line is now open.

Alan, could you give us more insight into the specific drivers behind the changing item?

Yes, Jeff. Factors that contributed to the change in revenue guidance some of which were sort of mentioned in the call, we had a push out in RTC, installation base for our customers into the next fiscal year. This impacted revenues by about 15 million from what we were thinking. We have push outs and certain cargo awards in the Middle-East as well as the timing of deliveries of some of the backlog in cargo that probably pushed things out by about another 25 million. Given the healthcare Q2 that we had that revenue shortfall which we don’t expect to make up and maybe a generally more conservative stand following the quarter brought down healthcare revenues by 20 million or so. And probably about 15 million in Opto as third part customers demand has softened a little bit in the wake of the economy even though profits remains very-very strong in that business.

Okay that's helpful and then, Deepak had mentioned some inefficiencies with respect to the early stages of the RTT rollout, could you help quantify that either from a margin basis or an absolute dollar basis, what kind of timeline do you expect to improve on those inefficiencies?

I guess Alan join in, it's difficult to specifically talk about dollars in a margin number. Basically the way that what has happened and what is happening is, we finally got traction in the order book in our RTT and as you know that we have not shipped too much product going into this year. And as we won successfully multiple orders, with that comes dates on a certain date that we got to ship the product because it has to integrate into the systems at the airport. And so we ramped up from a very low quantity to what I would call a medium to high loaded in a very fast manner and obviously that brings up efficiencies in production and manufacturing and trying to put the facilities together expedite parts get bought in and just that takes more inefficient labor till we can get to the fine-tuned revenue rate. And that what's happening and to make matter worse, some of the stuff as Alan has mentioned on the call that we were working hard and heavy to get the units in time and then the customer changes their mind because of their own delays or whatever it is with the result that we can't take revenue recognition. So this things is there and good news is we got a lot of product to manufacture, how long is going to last, I think it definitely goes through 2016 at least and maybe somewhere in the first quarter, but as a revenue ramps up it would start making it more efficient. Alan, do you want to add some color to it?

Yes, I think Deepak summarized it well.

Okay and then could you give us a sense of the international exposure by the healthcare and security segment?

Jeff, its Alan. On the international side, the U.S. has always been our biggest market on the healthcare business. It represents the majority of sales. We tend to see depending upon a particular quarter 40% of our sales or so outside of North America in healthcare, so we have some exposure there, but it's the U.S. market that tends to be the most important market for us. On the security side with some of the slowdown in spending over the last many years actually in the United States, the greatest growth for that business has been internationally and as we look forward though we've received some nice U.S. wins, we continue to believe that the international area is the highest growth area for us in security.

Jeff, just to add on to it the strong booking in Q1, majority of them were international and our focus we have said it on the previous conference calls that our focus has been that the growth both in the turnkey business and in cargo and in the RTT for the time to come is all international.

Okay and then you referred to Q4 being a very significant quarter, could you give us a sense of what some of the expectation is built into that either from a segment point of view or if there are larger contracts to the point to, maybe point to those?

Jeff, its Alan. I'll take a shot at it. Our second half is heavily weighted to Q4 and that’s predominantly in the Security and Healthcare business. The healthcare business traditionally has a much larger Q4 than Q3 and that was expected to be the case yet again. On the Security side, based on the strong backlog that we have principally in the cargo as well as in the RTT a huge amount of our shipments and revenue that will be recognized in each of those product lines is going to occur in Q4. So Q4 is shaping up for us right now to be an extremely strong quarter.

And then last question if I could, on the Healthcare side you’ve got some senior management change going on there. What are some of the strategic things that you expect to be implementing over the course of the initial Phase of making some improvements there?

Jeff, Deepak here again. Number one is that we are focusing on what we call centre of excellence and execution in operations and in quality and in new product introductions. We are also looking at a more strategic way forward for the product line. And as we look for -- search for the new leader for that area all these factors and the strengths are going to be looked at needed towards what we think we need going forward. In the meantime while we are trying to sell that position, Alan and I are taking more focus on leading the Spacelabs’ growth.

And our next question comes from the line of Josephine Millward from Benchmark & Company. Your line is now open.

Deepak can you give us more color on what happened in Healthcare, was it primarily a weakness in emerging market, Europe and when did you see this coming and how do you see things including going forward?

Josephine like Alan said that the most of the fall was on the international sector. And it really basically comes down to the volatility in the marketplace out there and we didn’t see much coming of it, it came. Frankly every time we’ve done that for last couple of years it just goes into always the third month and December is a pretty strong month because everybody is trying to do it before the shutdown or before the holidays. In this particular case if you really look at it there was so much turmoil in the international sector in late December that some of the things they were counting on and building pre-bill and that’s why there is also an inventory increase as Alan mentioned, it just didn’t happen in a timely fashion to get it out. And it's not just primarily to just one area we can look at Asia-Pac, we can look at Middle East, we can look at some of the European places, we can look at Latin America, we can look at Mexico. So all of that international area from basically it was always pushing to the end in December in this particular case it just didn’t make it in time.

In terms of Security, can you give us your bookings number for the quarter and your funded backlog for Security?

I did mentioned it on my call -- on my team, but go ahead Alan.

The backlog for Security Josephine is about $571 million and the bookings were in the neighborhood of around $67 million.

What do you have in your backlog for Albania Alan? It's not the $200 million, you don’t have all of it in here?

That’s correct we only include five years’ worth of revenues on Albania and our backlog, so that’s in the neighborhood of $60 million plus or minus.

Can you give us an update on your Security pipeline and the level of activities since the terrorist attacks? Are you seeing anything not in pace or are you seeing things? It sounds like you’re seeing things, decisions being push to the right.

Josephine, firstly I think to say that Paris attack is a driving factor, I think that’s not a right statement. The better way to look at it, there is a lot of uncertainty and there is lot of turmoil which is generating interest in security in all of the places especially in Middle East and Africa. Second, we’ve been saying it for last couple of years as we approach more towards the 2020 deadline it automatically has a built in requirement for regulatory reasons for airport upgrading in the HBS check baggage market especially in the European Union. And one of things that we are seeing is that now that it’s coming into the 2000 -- late ’15, ’16, we have seen good successes of wins and the activity is very well defined in those airports where our clarity is much better now which airport and what product they’re going to buy and when then it was six months ago, nine months ago. We were talking in general terms at that time number of sockets now we can be more specific on airport to airport to airport. Regarding the cargo side, it is mostly driven by what I call the awareness that you have to protect your infrastructure, so in one case with all the crisis that’s happened whether you say it oil or whether you say the uncertain economy, it's also driving those countries that are heavily dependent upon oil and other place to defend their infrastructure, which generates more interest in making the right choices of the products, which gets back into the cargo and the turnkey solutions. The challenge is to be to go from requirement to closure and then to delivery when all the stuff is in a volatile mode of settling down. Once it settles down, it's not going away, it's very specific and it's more needed now than before. So our pipeline continues to look very strong and our booking in the first half sort of say that our bookings were almost 3x to what we last year.

And our next question the line of Brian Ruttenbur of BB&T Capital. Your line is now open.

So first question, you completed $11 million in charges in the quarter as I understand it, how much more restructuring do you expect this fiscal year?

Brian, it's Alan, sort of in the want of continuous improvement and looking at our cost structure, we do expect more in Q3 and probably Q4 as well. We're still going through that review right now, so we haven't quantified it, we don't expect it will be at those types of levels it will be significantly below that, but we do expect more charges in the second half.

Okay, and then I think that you've mentioned $6 million in annual savings on the security side, is that 6 million annually and do you have to do any more cuts in order to get that $6 million?

Brian, this is Alan. That 6 million has been implemented, so that it is on a go forward basis and we are also looking for further sums above and beyond that 6 million.

Okay so that’s not annual savings, that was how much in restructuring charges have taken place rather than I misread than your actual savings going forward, correct?

Brian that is our actual savings. We will have 6 million of actual savings going forward.

Okay, great and then your cash right now is roughly 80 million, are there any plans in place, I know that there are plans in placement, maybe you can tell me for repurchasing what do you have authorized right now?

Sure, Brian we have a stock buyback program, we have about 965,000 shares as we sit here today authorized for that program and we can participate as we deem appropriate.

Okay and then the new guidance of 295 to 320 and operational earnings, how much cash from operations or cash generation, whatever way you want to define it, should we be looking for this fiscal year?

Brian, we don't provide guidance on operating cash flow or free cash flow. But what I can tell you is that with more heavily weighted second half to Q4 you’re going to have big Q4 sales, those Q4 sales will ultimately be collected in Q1, Q2 of 2017, fiscal 17, so I think this is going to be a little lower year for us from a cash flow standpoint but positioned extremely well for significant cash flow in fiscal ‘17 six months from now.

It won't be a negative cash flow year, it'll just be not as positive as past ones, is that correct?

That's I believe, yes.

Okay and then another question, I am just trying to go down through the list and get check here, breakdown of revenue, should we see anything differently in terms of three buckets Opto, Healthcare and Security in terms of percentage of Opto is 25% to 28%, Healthcare 25% to 28% and then roughly 50% of Security, can you talk about the buckets, are they going to switch for the year because of changes with healthcare and things like that?

Brian, it's depended on these quarters on the particular mix with the fourth quarter expected to have such significant revenues from the security basis, we would expect in that quarter that mix to be much more heavily weighted towards security, that's probably the biggest drive of change between the buckets.

And then you've mentioned healthcare foreign exchange, how much did foreign exchange impact you in the period?

Yes, it impacted us by about well overall to the Company by about 2%, healthcare a little bit higher than that because they have a little bit more foreign exchange exposure.

Okay and then SG&A you've been running around 18%, do you expect to get back to that by the end of fiscal year or is that something in the out year that you can get back to as a percent?

Yes, that's really a function of that top line. We pay close attention to that percentage as a percentage of sale, but we also probably look on an absolute dollar basis as well. So as revenues increase clearly we'll get to the leverage and the economies with the scale and as a percentage of sales SG&A will go down, so you will start seeing that in the Q4 time period.

[Operator Instructions] And our next question comes from the line of Les Sulewski from Sidoti and Company. Your line is now open.

Alan can you provide a little bit more color on the security bookings perhaps a breakdown of RTT versus cargo and the turnkey side?

Les, our general policy is not to provide breakdowns of our particular bookings, so we did have a book to bill of roughly 1 in the Security segment for us.

Were there any additional awards from the IDIQ in the second quarter?

Would you repeat that question again?

Were there any additional awards from the IDIQ in the second quarter?

No, the CBP we announced was that in the first quarter of the [multiple speakers]. We don’t expect that award to have any additions till we’d start delivering some of the products. And just to mention it again that there were four IDIQs given to us and three other competitors, everybody else got a first tranche which is quiet small, we are the only ones who got a very large second tranche. I think we’ve talked in the last conference call.

And also Deepak I think you mentioned some issues regarding new product introductions in Spacelabs, perhaps maybe you can touch a little bit more on that if you could?

It's one of the factors where when you introduce new products you plan a launch and you all take the right precautions and you do it, all the right things and sometimes it doesn’t go as well as you expected to. So you have to redo it and it happens in some time and that’s what happened to us. Alan?

And the team has done a really nice job addressing the issues and re-launching the product here in January. So consequently we feel much more comfortable going forward for the Q3, Q4 sales for Healthcare.

I guess one more from me, and I’ll jump back in the queue. How far are you in weeding out the remainder of the less profitable Opto line?

We are principally done with that, so I would say that all the heavy lifting is behind us in that regard.

And I am not showing any further questions. I would now like to turn the call back to management for any further remarks.

Ladies and gentlemen, thanks once again for participating in our conference call. We look forward to the second half and speaking with you at the next earnings. I do want to say that we are as a Group disappointed at our Q2 and we’re going to do everything possible to make it better. Thank you very much.