Good day, ladies and gentlemen, and welcome to the OSI Systems’ Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference maybe recorded. I would now like to introduce your host for today’s conference, Mr. Alan Edrick, Chief Financial Officer. Sir, please go ahead.

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’ third quarter fiscal 2016 conference call. We would like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please note 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 third quarter fiscal year ‘16 financial results. Before we discuss these results, I would like to remind everyone that today’s discussion contains forward-looking statements. 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 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 and statements regarding the expected 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 statements. These factors include the risk factors set forth in the Company's last annual report on Form 10-K and other…

Thank you, Alan. And again good afternoon and welcome to the OSI Systems earnings conference call for the third quarter of fiscal 2016. During the quarter, we focused on meeting the challenges in the global markets while continuing to drive ongoing improvement initiatives throughout our organization. For example, in security, we reduced our cost base and are in the midst of improving certain manufacturing process to enhance efficiency and lower product cost. In opto division, we effectively completed efforts to shift the business mix to a more profitable revenue base. In healthcare, we recently brought a new leader, which I will talk about a bit later in my presentation. With the backlog of approximately $661 million and a strong pipeline of sales opportunities, we believe that we are well positioned with our customers over the longer term. Let's review the highlights for the quarter for each division, starting with the security division Rapiscan. Q3 sales were $111 million or about 11% higher than the prior year. We are pleased with this revenue growth given that Q3 comp was made tougher with the prior quarter as it contained about $16 million in the FMS revenues that Alan mentioned. Our bookings during the quarter were approximately $73 million or about 9% higher than the level achieved in Q3 of the prior year, and about 10% higher sequentially from Q2, representing a non-turnkey book to bill ratio of just under 1. Few business highlights. Momentum with our new Rapiscan real time topography offering continues as we see a number of RFPs in this space as European airports continue to upgrade their baggage screening infrastructure to meet the latest standards by 2020. Manufacturing capacity for this product line has improved and the ramp up will continue over fiscal 2017. Although, we still have some…

Thank you, Deepak. Third quarter results were largely in line with expectations as Deepak mentioned, except for the healthcare division, which was considerably softer than anticipated. As we said, revenues in the third quarter of fiscal ’16 decreased 2% year-over-year, security division revenues increased by 11%. If we exclude the impact of the FMS contracts, previously mentioned, security division revenues increased 32%. These fiscal 2016 results reflected $23 million of revenues for previously announced large order for customer in the Middle East. This was offset by reduced, albeit at higher margin revenues in the opto division, as well as by the disappointing healthcare revenues which were down 17% in Q3. In Q3, gross margin was 33.2%, down 50 basis points from the prior year, mostly due to the decline in sales in our healthcare division, which as noted earlier, delivers the highest gross margin, highest contribution margin of our three divisions. As mentioned on previous calls, the gross margin will fluctuate from period-to-period, based on product mix among other factors. Moving to operating expenses. In Q3, selling, general and administrative expenses, or SG&A, were up slightly by $1.2 million as a result of higher professional fees and transaction costs associated with M&A activities. Our goal continues to be to hold the SG&A growth rate below the rate of sales growth, for individual quarters may vary from this as has been this past quarter. As noted on previous calls, we remain committed in all of our divisions increasing efficiencies and prudently managing our cost structure. We continue to make significant investments in research and development in both our security and our healthcare divisions to expand our product offerings and improve our existing offerings. The R&D spending of $12.9 million in the third quarter was slightly higher than the same quarter in…

[Operator Instructions] Our first question comes from the line of Josephine Millward with Benchmark Company, your line is now open.

Yes, good afternoon Deepak, Alan. Can you help -- can you expand on what's driving the continued weakness in healthcare? What are these operational and execution gaps, because your healthcare competitors are not facing the same level of contraction in their business?

Josephine we talked on the last conference call so I'll give you a little broader so, one is that, some of the -- we have introduced -- of new products over the year and whenever you have new products basically anticipate some challenges, but you are working at that time for the acceptance of the new products in the marketplace. But you’ve also said that a year ago we got a very good success with a lot of what we call the placement from other peoples install base with Spacelabs that generate some extra bit of variation where you want to make people start working more differently to our products than what they are used to. We miscalculated, the management miscalculated the amount of time and training and handholding that was needed, which we talked about in the last conference call we have chained it and that also resulted in our decision that we wanted to change the leadership, which we have done as we mentioned that we got a new President on Board this week. But the focus is to put more focus on customers’ acceptance of the change as they go through from other competitors’ products to our products.

Deepak, can you also comment on Smiths’ acquisition of Morpho Detection. How do you see that changing the competitive landscape? And do you anticipate further industry consolidation?

Well, it's a -- we were aware of it, and more than that I won’t say in terms of make it a pretty small industry. Definitely they become a formidable player. But we have all the products accepting phase, we don’t have much presence in it. But in all the other areas, we have heavily invested for a long time our own product line. We have an install base. We have an engineering base. We have a sales channel. We have a large installation all over the world. We’re getting success with our RTT. So, we are ready for the challenge, but definitely that combination makes it stronger and stronger competitor and they still have some hurdles to go from the anti-trust side.

And last question is for Alan. Alan, can you tell us what is the revenue contribution from your opto acquisitions?

Josephine it was about $4 million in the quarter between the two acquisitions, they’re two small acquisitions that were done that did not get a full quarter’s worth of revenues so they’re done throughout the quarters.

And for the full year for Q4, what do you accept?

We’ll say it increase to $5 million to $6 million.

Our next question comes from the line of Brian Ruttenbur with BB&T.

So, Josephine asked lot of the good questions already, but I am going to hit you with another ones. In terms of tax rate, you mentioned -- what is the tax rate going to be in the fourth quarter on your EPS guidance?

We’re presently anticipating it to be in the mid-20s.

And then Albania started, you said in the third quarter, how much revenue did that contribute?

No, we don’t generally talk about revenues by project. But as you know, Albania at full run rate is in the neighborhood of the $12 million to $13 million a year, increasing on an annual basis.

In terms of the third quarter security revenue, was the strong security revenue in the period related to delays that happened in the second quarter?

Brian, this is Alan. Yes, that was partially attributable. We had $23 million in revenues from a Middle East order, part of that was anticipated to ship in Q2 so that move from Q2 to Q3. So, you’re right.

And then we already got the acquisitions of size on the opto side impairments going forward in the fourth quarter, in third quarter you had I think $3.5 million, $1.2 million of that was related to security. Can you talk about those impairments? What was in the security division, the specific impairment, was it a write off of bad equipment or something?

No, some cost reduction efforts we were doing, so primarily severance.

And then planned impairments in the fourth quarter, do you have any -- I assume you have some impairments or reductions in the fourth quarter?

We will. We’re continuing as Deepak mentioned with further cost reductions in the security division and looking elsewhere in the Company as well. So while we don’t have a number, but that restructuring charge will be in Q4. We should plan on there being restructuring charges in Q4.

And your guidance of $0.45 to $0.70 excludes restructuring. Is that correct?

That’s correct Brian.

And then just understanding the guidance for the fourth quarter, and I’ll be quiet, is the -- a lot of the shortfall, it appears to be happening in two divisions in the healthcare and the security, opto for the most part is performing as planned, is that correct? Is that a correct summary?

That is a correct summary.

And then Deepak last one, and I said it was last one, but one more. You expect to recovery of Healthcare and Security sometime in 2017, beginning of 2017, mid 2017, when do you expect both divisions to recover to former glory.

We are planning very focused on it in 2017 now, I mean depending on what you define by early, we're going to -- as Alan mentioned, as I mentioned we're going to take some impairment charge even in Q4 so we'll start looking at efficiency and productivity improvements as we go into the 2017 and we'll continue.

Great, thank you very much.

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

Thanks, good afternoon guys. Was just curious if you could outline maybe a high level summary in terms of the benefits of additional operating efficiencies that you're putting in place, and do you have a timeline on when those should be largely completed.

Well, this is Deepak here, on the efficiency as I've mentioned on the RTT manufacturing side it'll continue, I said in my script that it's going to take us a quarter or so, at the same time I've mentioned Alan and both of us said we are looking at some cost savings by looking at the total structure in the security area, our target is that when all done it will result into a annualized saving approximately of 10 million bucks,

Okay and that's just on the security side of that's companywide.

That's on the security side, we're looking at the healthcare side too, our focusing right now is on the security side with additional looking at both security and on the healthcare.

Okay and then can you remind us when your contract with Mexico is up for renewal and shed any light on, that the progress, if there are any discussions on the renewal at this point.

The [indiscernible] age is 2018, and we said in the last conference call I think Brian asked obviously too early to talk about renewal sometime by this time next year we will start into discussions, we're a very satisfied customer.

Okay, great. And then, in terms of the guidance revision, could you touch on in security which particular product lines you're seeing pressure within. Is it across the borders, specific to cargo and RTT or cargo and something else.

Primarily it's cargo, as I mentioned that some of the orders that we got we just don't have enough time to ship them out, some of the orders, just like what happened in Q2 that pushed by the customer, no fault of ours, by the customer's request and that is what we're seeing in the global press in the cargo primarily and on the RTT side it's not push outs it's the acceptance and when we can recognize that and we said that in the last conference call also that 2016 was trying to push some of that [indiscernible] into 2017, Alan you want to add something.

Yes, that's correct.

Okay. And then are you expecting revenue growth in 2017 at this point?

Jeff we haven't given 2017 guidance, we'll be doing that in our next call our goal as a company overall is always grow.

Okay. Thanks for taking my question.

Our next question comes from the line of line of Les Sulewski with Sidoti & Company.

Good afternoon. Thank you. Deepak could you provide a bit of a high level regional breakdown on what you're seeing in your security and also if you'd expect any increase RFP in turnkey solutions given some of the global weakness?

We said it in -- we've seen no degradation in our pipeline, there's a lot of activity everywhere and what’s changed little bit in the marketplace is the predictability of when a certain order is booked and then the new variable is when the customer expects and wants the delivery of that order. Our pipeline is quite strong, cargo specifically the RFP activity in RTT especially in Europe is quite strong. BPI product line has also very good strength and on the turn-key side definitely with all the volatility everywhere and you can’t open the paper any day without seeing some bad things happening in places. Our activity is out there, it's very difficult to predict the closure of whatever we're working on.

Okay, that's helpful. Alan perhaps your fourth quarter guidance and if we're looking at the midpoint EPS there and outside of contribution margins from the healthcare since that will be lower, are there any additional expenses that you expect for 4Q that move into the next year as well. And also that EPS assume a share repurchase there in the quarter?

So Les, there are no incremental expenses of material nature in Q4 that are anticipated that at this point in time so nothing that would carry over into next year. And that guidance does not imply, at this point, any incremental share repurchase, so that certainly at our option.

Our next question comes from the line of Juan Molta with B. Riley.

On the healthcare, could you talk about what lines of business in healthcare you’re seeing weakness in, and if it's more international or more domestic?

I think at this stage, definitely internationally it's very-very weak and unpredictable. But we’ve seen some push outs even in the U.S. side. It’s basically globally the way we look at it. And we have to say that since we are primarily then take into the patient monitoring side. There is weakness there, especially in international site.

In the past you’ve released a healthcare book to bill. Is that something that you can release and have at this time?

Our book to bill in healthcare, almost always is right around 1, because it really is a book and shift business. And so it always will vary plus or minus right around 1, not just on a big backlog business.

And my another question on healthcare. Have you lost out in any way to gauge if you’ve lost out on competitive situations and getting product solid to hospitals?

Well, we like to say no. But frankly speaking I am sure that some -- we win some, we lose some. We haven’t seen what would say any significant losses. We see lot of push outs. Last year, year ago, we have a very successful Q4 where we do a lot of conversions from our competitors to Spacelabs products. We haven’t seen that aggressive activity at present.

And then another one, since you your new leader in place, is there any more color you can provide as to what the kind of action is to get that healthcare segment backup and running and growing again? Anything else you can share.

Well, I think it's kind of the pace, we’ve said focused and to ripped up execution of what we got in the product line. We place the product. We want to make sure the customer is happy. We want to place it in a timely fashion. And we want to get more -- protect both of timing and the specification and product definition and the R&D. We want to look at better leadership role of what I would call execute the commitments made to customers, and at the same time, defining the vision of new product introductions.

I am showing no further questions in queue at this time. I’d like to turn the call back to Deepak Chopra for closing remarks.

Ladies and gentlemen, thank you once again for attending our conference call. We look forward to speaking with you all once again in August for Q4 and our year-end call. I want to emphasize that the management is very much focused into it. Some of the things, especially healthcare have been disappointing. We are addressing it. We’ve got a new leader in place this week. Alan and I are committed to reduce the cost in the security side and to look at more predictability in our book and ship in a timely fashion the healthcare products and the quality of the products. Thank you.

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