OSI Systems, Inc. (OSIS) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the OSI Systems Second Quarter 2017 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 conference is being recorded. I would like to introduce your host for today’s conference, Alan Edrick, Chief Financial Officer. Sir, you may begin.

Good afternoon 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. Welcome to the OSI Systems second quarter fiscal 2017 conference call. We would like to extend a warm welcome to anyone who is a first-time participant on our conference calls. Please note that this presentation is being webcast, and it is expected to remain on our website located at www.osi-systems.com for at least two weeks. Earlier today, we issued a press release announcing our second quarter fiscal year 2017 financial results. Before we discuss our results, I'd like to remind everyone that today’s discussion contains forward-looking statements. I will now read the company’s cautionary notice regarding 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 growth, 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 statements. These factors include the risk factors set forth in the company’s last annual report on Form 10-K for the fiscal year ended June 30th, 2016 and other risks described therein and in documents subsequently filed by the company from time-to-time with the Securities and Exchange Commission. All forward-looking statements made on this call are based on currently available information and speak only as of the date of this call, and the company undertakes no obligation to update any forward-looking statement that becomes untrue because of subsequent events, or new information, 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 non-GAAP measures and comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release regarding our second quarter results, which has also 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, I will provide a high-level overview of the second quarter. First, we reported second quarter revenues of $243 million, a 23% year-over-year increase. This increase was driven primarily by our Security Division, which reported second quarter revenues of $140 million, up 49% from revenues in Q2 of fiscal 2016 and included revenues from the business operations of American Science and Engineering, which was acquired in the 2017 fiscal first quarter. Excluding AS&E revenues, Security Division revenues were up a solid 18%. In addition, our Opto Division revenues from third-party sales resumed growth, posting an 8% year-over-year increase. This topline Security Division and Opto Division growth was partially offset by an 8% decrease in our Health Care Division. Second, we reported Q2 GAAP diluted earnings per share of $0.25. On a non-GAAP basis, which excludes impairment, restructuring, and other charges, and amortization of acquired intangible assets, net of the related tax effects, Q2 earnings per diluted share were $0.68, up by 63% as compared to $0.42 in Q2 of fiscal 2016. The increase from the prior year was primarily driven by the performance in our Security Division. On a year-to-date basis, non-GAAP earnings per share was up 16% year-over-year. Third, operating cash flow was $20 million for the quarter, and forth, our non-turnkey Q2 book-to-bill ratio was 1.0 and our backlog as of December 31st, 2016 was approximately $691 million, up 11% from the backlog figure at the beginning of the fiscal year. Before diving into the numbers and discussing fiscal 2017 guidance, let me turn the call over to Deepak.

Thank you, Alan, and again, good afternoon and welcome to the OSI Systems' earnings conference call for the second quarter of fiscal 2017. We had a good quarter achieving $243 million in revenue, driven primarily by the Security and the Optoelectronics Division. Reviewing Q2 performance for each division, beginning the Security. During the quarter, revenues in Security were $140 million, 49% higher from the prior year. This was the first full quarter of impact from the AS&E acquisition and as Alan mentioned, it contributed in a meaningful way. Excluding AS&E, the Security Division grew by about 18%, driven by strength in multiple product areas including RTT, our HBS system. Security bookings in Q2 were $110 million for non-key turnkey book-to-bill ratio of approximately 1.0 and for the first half year bookings were $225 million. In the aviation checked baggage market, we continue to gain traction with our Rapiscan RTT Whole baggage Screening System. As the regulatory requirements compel the European Union airports to upgrade the checked baggage infrastructure, we have been able to capitalize on opportunities in the marketplace with our innovative technology. We announced an order valued at approximately $7 million from a European airport customer to provide our RTT110 Whole Baggage Screening System. This order was in addition to other smaller awards during the quarter. Going forward, we continue to be -- to foresee increasing activity for our checked baggage HBS Systems, especially in the European Union as their regulatory deadline approaches towards the 2020. In the United States, we are now in the testing phase for TSS Notification for our RTT110 product and are targeting completing the testing phase in this calendar year. At U.S. airports, we are also working with the TSA and the airports on their innovation lane program and making progress with our integrated checkpoint solution utilizing our Rapiscan Inspection System and our recently acquired Automated Tray Return Systems Company. Over the past several quarters, we have been ramping up our RTT production capabilities and improving manufacturing efficiencies. We're seeing the benefits of these efforts with lower manufacturing cost, leading to improving contributing margin, which is expected to be realized fully in fiscal 2018. In Turnkey Services, our programs in Puerto Rico, Mexico, and Albania continue to perform well. Overall, we see the pipeline staying robust and we remain optimistic that OSI will capture new turnkey programs in the near future. The Cargo Product business remains strong and has now expanded to include the AS&E product portfolio and service offerings. As we mentioned in our previous call, we are taking an integrated sales approach to the cargo market by offering a range of alternatives that include potential turnkey service solutions that also now add in AS&E's cargo products integrated. As we integrate AS&E into our overall Security Division, we're well on our way to achieving our annualized cost synergies goal from the combined security operation. Alan will provide more detail on these efforts. We've also realigned our focus in our Security Division by organizing teams around the cargo market including the turnkey solutions and the aviation market which includes our air cargo, checkpoint, and checked baggage screening solutions. We believe this approach makes us even stronger in handling the unique requirements of these different product lines. Finally, as we move pass the U.S. elections, we believe that the new administration's view and initial policy positions towards infrastructure and security spending, bodes very well for our product offering in the marketplace as we have a broad range of solutions to protect airports, borders, and critical infrastructure. In summary, our expanded customer base, a sustained backlog, and a solid bookings provide a great backdrop to deliver good second half performance in Security Division. Moving onto the Health Care Division where revenues were $51 million, $4 million lower than the prior year. Compared to the second quarter of the prior year, we saw year-over-year growth in North America, while the EMEA and Asia regions continue to be challenging. The Spacelabs' team has worked very hard to address many of the operational issues that have hampered this division over the last year and has made significant progress. While these efforts are still in process, we believe that we are taking the necessary actions for the long-term growth in this division. We have further strengthened the management team with key hires in marketing and operations. Looking ahead, we anticipate that the second half performance will be better than the fast half. Moving to our Electro-Optical Division, our external revenues were $52 million in the quarter, 8% higher than the prior year. As mentioned in previous calls, we have been shifting the revenue base to a higher profit mix and have been pursuing new opportunities consistent with that strategy. These efforts have started to pay off as we saw growth in external revenues during the quarter with an improved gross margin. Intercompany sales though are down primarily due to our efforts to right-size the inventory as well as in directional alignment with the performance of the Health Care Division. With our flexible global manufacturing footprint, we also believe that we can quickly adapt to market dynamics. Our goal is to continue providing our customers with the best value sourcing alternatives and the flexibility to shift production to more favorable regions as the need may arise. Overall, Q2 was a good quarter. We started seeing some of the operating leverage through the higher sales and cost synergies in our Security Division. We are pleased with the way the Opto Division has returned to third-party revenue growth and expanded operating margins. And while not pleased with the current operating results of the Health Care Division, we see a strong management team that has demonstrated that they can take decisive actions on operational issues and strategic initiatives that are putting the division on a path to grow. I would like to thank our employees, customers, and shareholders for their continuing support. With that, I'm going to turn the call over to Alan to talk in detail about our financial performance before opening the call for questions. Thank you.

Thank you, Deepak. So, let's review the financial results for the second fiscal quarter in some greater detail. As mentioned previously, revenues in Q2 increased by 23% on a year-over-year basis. Revenues in the Security Division increased by 49%, primarily as a result of the inclusion of $29 million of revenues from the AS&E acquisition, a significant increase in sales of our RTT Checked Baggage Systems international customers, and an increase in turnkey screening services revenue as a result of the program in Albania, which ramped up in fiscal 2016. Were pleased that the Opto Division returned to external revenue growth, posting an 8% year-over-year increase. Intercompany Opto sales were down due to right-sizing of inventory in the other two divisions along with lower sales in Health Care which as Deepak mentioned continue to be challenged by the marketplace and some product issues. The Q2 gross margin was 34.1%, down from 34.5% in prior year, due primarily to decreased sales in our Health Care Division, which generates the highest gross margin of our three divisions as well as the impact of increased international sales of RTT, which currently generate lower gross margins than those of our business generally. As mentioned on previous calls, the gross margin will fluctuate from period-to-period based on product mix amongst other factors. Moving to operating expenses. In Q2 of fiscal 2017, selling, general, and administrative expenses as a percentage of sales decreased to 21.2% compared to 21.9% in Q2 of fiscal 2016. In absolute dollars, SG&A spending was $51.5 million, which was up by $8.3 million over the prior year. The increase was primarily driven by the impact of acquisitions as well as increased cost to support the strong growth in our Security Division. Partially offsetting this growth was a decrease in SG&A in our Health Care Division. As noted on previous calls, we remain focused in all of our divisions to increasing efficiencies and prudently managing our cost structure. R&D expenses were consistent with the prior year. As a percentage of sales, such expenses were 5.4% in Q2 of fiscal 2017 compared to 6.6% in the prior year period. We continue to make significant investments in research and development in our Security and our Health Care Divisions to enhance product portfolios. We remain focused on growth platforms and innovative product development, which we view as vital to the long-term success of our business. We previously announced a goal of $18 million of cost synergies related to the AS&E acquisition over a two to three-year timeframe. We have been aggressively but prudently pursuing such cost reductions. We are pleased to say that we estimate we have achieved current run rate annualized synergies in excess of two-thirds of this target in just four months. We incurred Q2 impairment restructuring and other charges of $9.4 million, which were primarily related to our effort to realize synergies and cost savings from the AS&E acquisition. The company's effective tax rate was 28% in Q2 and the same in the first half of fiscal 2017 compared to 27.5% in the first half of fiscal 2016. Our provision for income taxes is dependent on the mix of income from U.S. and foreign jurisdictions and tax rate differences among countries, as well as the impact of permanent taxable differences, tax elections, and valuation allowances among other items. Let's now turn to a discussion of our non-GAAP operating margin, which excludes impairment restructuring and other charges and amortization of acquired intangible assets. As would be expected with an increase in sales and profitability, the company's adjusted operating margin improved markedly in Q2 of fiscal 2017 as compared to Q2 of the prior year. It grew to 8.5% from 6.3% in the prior year period. Given the strong revenue growth in Security and the impact of a full quarter of AS&E activities, the adjusted operating margin was strongest in this division, improving to 13.5% from 9.6% in Q2 of fiscal 2016. We are again pleased to see strength in the Opto Division as adjusted operating margin increased to 10.1% from 9.7% year-over-year. But as we have noted on prior calls, with strong contribution margins in our Health Care Division, changes in our company's operating margin is sometimes disproportionately impacted by increases or decreases in sales of that division. With an 8% decrease in Health Care revenues, the Health Care Division's adjusted operating margin declined to 3.6% in Q2 from 6.4% last year. But the favorable impact of security in the Opto Division, operating margin expansions overcame this, Moving to cash flow and in the balance sheet. In Q2 of fiscal 2017, cash flow from operations was $20.1 million. Capital expenditures were $1.5 million, while depreciation and amortization was $16.8 million. Days sales outstanding or DSO was 67 days for the second quarter of fiscal 2017 as compared to 73 days in Q2 of fiscal 2016. Days inventory improved 37 days from Q2 of last year and in absolute dollars, inventory decreased approximately $6 million on a sequential basis from the end of Q1. We repurchased $13.4 million of our common stock in Q2 including net share settlements. Our balance sheet remains strong. We made several enhancements to our revolving credit facility in December of 2016, increasing the facility size from $450 million to $525 million extending the length to a new five-year term and modifying other terms to lower the cost of borrowing and provided added flexibility. We ended the quarter with net leverage of 1.5 as defined under our credit agreement. Finally, turning to guidance. We are reiterating our sales and earnings guidance as provided in October. Aspects of our business have outperformed expectations by giving ongoing challenges in our Health Care Division; we believe it is prudent not to raise guidance at this time. We currently believe this sales and earnings guidance reflects reasonable estimates, actual sales and earnings, however, could vary from this range because of the risks and uncertainties that affect our business and industries generally, including items that may not be entirely within our control such as site readiness, or product installations customer acceptance, and the timing of orders in each division. Over the past decade, we have a track record of producing sales and earnings growth with strong cash flow generation, while simultaneously investing in product development and innovation for the future in conjunction with strategic acquisitions that have served us well. Our investments have enabled us to continue our leadership role in the turnkey screening solutions market space and have allowed us to introduce innovative products and solutions to the market across our various industries. Thank you for participating in this conference call. And at this time, we would like to open the call to questions.

Thank you. [Operator Instructions] And our first question comes from Brian Ruttenbur from Drexel Hamilton. Your line is open.

Yes. Thank you very much. Very good quarter. Couple of questions. In terms of the strong quarter, you were talking about why you didn't raise and that's because of your cautiousness; let me say on Health Care going forward, can you elaborate a little bit on that? And do you anticipate remaining profitable in the Health Care Division moving forward?

Yes. Brian this is Alan. As Deepak described, we do believe that the second half of our Health Care will be stronger than our first half and given that we just end Q2 in a profitable position for Health Care, we do remain -- we do believe that we will be profitable in each of Q3 and Q4 and we're looking to grow the business. After experiencing the challenges in Health Care business, really over the past five quarters, although we think we're on the right track, we thought it most prudent at this time to give ourselves another quarter to see what goes long before changing the guidance.

Okay. And then what was depreciation and amortization and your adjusted EBITDA in the quarter?

Sure. One second.

I'm sure that will come out in a day or two, just

Yes. So, Brian the adjusted EBITDA was $33.4 million and depreciation and amortization was approximately $14 .5 million.

Okay. And then -- just couple other housekeeping AS&E, it is largely integrated, we're a couple more quarters away, what's the status and can you talk about where the factory stands and how production is in our these new orders that you got from DHS going through the Massachusetts facility or when you’re other facilities.

This is Deepak here, Brian. Answer to all your questions yes, yes, and yes. It is integrate as Alan mentioned with two-thirds of the synergies that we had planned for it. Our annualized basis, we've already achieved. The teams are working very well together. Answer to your second question, the factory in Billerica is doing well and the CBP orders that we had announced all that AS&E products will continue to be filled in the and Billerica facility.

And Brian this is Alan, I just to want to update those numbers I gave you a second ago. I was reading off of wrong page. The EBITDA is about -- adjusted EBITDA is $40.6 million and depreciation and amortization is $16.8 million.

Okay. Thank you very much for that. And then last question was on backlogs. Europe 11% year-over-year, is that correct and how much are you up sequentially and is that largely because of Security or something else?

So, Brian on a sequential basis, we're down a little bit as the normal turnkey backlog amortizes down, but on a year-over-year basis, you're correct.

Okay. So you're up 11% to over $600 million, is that correct?

That's correct. We're $691 million at the end of a September -- at the end of a December.

Perfect. Thank you very much.

And our next question comes from Larry Solow from CJS Securities. Your line is open.

Great. Thanks. Good afternoon. Just a few follow-ups to Brian's questions. On AS&E, it sounds like you're a little bit ahead of schedule at least on some of the integration. Is it fair to say that you might achieve this $80 million in synergies, which I think was close to a two-year target sooner than originally expected and could you maybe exceed that number?

Well, thing is when you look at and you've not stepped into the company, you were looking outside, and you get some time that you wanted integrated the two company, the two cultures. As Alan has mentioned, yes we are ahead. Regarding the absolute number, it's too early for us to look at it because keep in mind, synergies is one thing, but we also want to combine the two companies and make one plus one better than two in a cultural way and the product way and the R&D way. So, right now there's no plan in that we have something on a bigger target.

Okay, fair enough. Just a few more -- just on the legacy side, obviously the RTT110 is driving a significant portion of your growth, can you just remind us in Europe, I know, I think the regulatory change is supposed to be done by 2020 or 2021, I think, maybe in some select countries. We're still pretty early in the amount of airports that have actually adopted it, right. So, I mean, I think less than 25% penetrated right. So, the opportunity going forward is still significant and you assuming you retain this proportion of wins should be a lot higher, is that fair to say?

Well, the answer to your first question is yes, the 2020 is the deadline. Yes, some airports, something countries have asked for an exception 2021 or 2022. Most of the requirements are known to us and our competitors. We're all looking at it and it's not too early, because keep in mind, a typical large airport, the cycle is may be as much as six, nine months or a year by the time we've complete all the construction and everything else. So, they are all active and out we feel good about it, our product has been well received, we're ramping up production, our costs are coming in line, and we continue to aggressively go after and the tender activity or the funnel activities very strong.

Okay. And I know you mentioned you have seen some improvement on the manufacturing side, it's still weighing a little bit on the -- I guess on the overall gross margin. Do you think -- it sounds like you did say that we're -- by 2018, you should realize the full benefit. Did it weigh significantly on the results this quarter or is it sort of getting towards more of a neutral territory?

Yes. So, Larry this is Alan, so the revenue that we recognize from RTT this quarter was predominantly from RTT Systems that we manufactured two or three quarters ago when we had a higher pressure. So, yes, it would weigh down the margins in the second quarter that we just reported. It will dissipate a little bit through the second half of the year and as move into the fiscal 2018, it will -- it should really nicely improve.

Just to add on to it Larry that -- definitely we have said that that as we learn more, as we get more into it, our manufacturing cost is getting better. A lot of it has to do with their -- with the volume. But more important thing is that we go forward. Each airport has different requirements. So that as you look at each airport, it's not like a constant margin, you look at airport-to-airport whether you're displacing an incumbent or suppression new terminal. So, it changes from that, but overall, our manufacturing efficiency is getting better.

Okay. Just switching gears to Health Care and I appreciate those answers. Obviously, there was -- you guys are still working on execution issues and whatnot. Could you maybe just give us a little better color on A; some of the things you have done or I don't know if you can qualitatively discuss or what gives you the confidence in the improvement and the results year-to-date, is there some macro factors still weighing in on your performance and is international markets maybe not quite as good. Have you seen any last question not that or anecdotally any talk of hospitals may be delaying decisions or due to some uncertainty what happens with Obama Care?

That is a long -- couple of questions in your question. The first one is what signals we are seeing is the new leadership is doing better. Alan and I very much focused onto it. And the fact that we've seen some growth in the quarter, in the North America side makes us feel that we're on the right track. We're in constant touch with some of the clinical staff, we're addressing the issues properly, the new leadership is out there in the open, and we are getting a good -- a better feeling that the customers are happy with the progress we're making. Regarding the Asia and EMEA, we've said it before that market is really -- is a very challenging market, but it's nothing to do with the -- what I call the technology issue, it's just that they don't have the money. They are in a turmoil. Regarding your latter question about Obama Care to early. The ACA, whatever is going to happen neither the -- neither Washington knows yet what really is the facts, nor guy like us. We're all watching, but we have a pretty focused platform that we think will do well during this stage.

Okay, fair enough. Thank you very much. Appreciate it.

[Operator Instructions] And our next question comes from Andrew D'Silva from B. Riley. Your line is open.

Hey guys. Thanks for taking my call. Good job this quarter. The first question just kind of following up on the last question from the previous caller, as it relates to Health Care, when you're in there negotiating with the decision makers within the respective healthcare systems that you're working with, this is that -- your products are typically a capital expenditure, right, it's a budget that's usually set a year or two in advance, am I correct there?

That's true.

So, do you -- based on conversations that you're having right now, have any sense of how that's trending calendar 2016 versus calendar 2017, or is it too early to tell at this point?

Well, I think the first question, yes, it's capital equipment. Two, yes, the hospitals have to plan ahead a year, year and a half, two years even of the spending of the capital expenditures. Many times, it stayed up unless it’s a replacement of the product is tied up to the construction of the new wing of a hospital or whatever else. So, if there -- the answer to your question is what are we signing about it. One of the challenges that the marketplace has is there's a tremendous amount of consolidation going on in the hospital area. So, that that whole thing -- and we've said in last couple of conference calls, where you were dealing with a hospital for an order for $0.5 million or something, that hospital now is part of the bigger group, GPO or IDN and that way, it becomes a little bit more difficult to plan the timing of it. But all of this capital equipment is a must-have for the hospitals. They have to have it, without that, they can't put a patient in there.

Okay, got it. Understand it. And then, if you can, I know this is maybe a little bit of a stretch of an ask from you guys. But we're a little bit less than a month into the third quarter and this would probably help on the modeling from a quarter-over-quarter basis for us at least when we're think about growth third into the fourth. Are you seeing progress in the first couple of weeks here of the first quarter or the third quarter versus the second and the first quarter or is it pretty much steady state to this point?

Hey Andrew, this is Alan. We don't provide any sort of interim information within quarters, so it's just not something we've historically done.

Okay, fair enough. I figured -- I'm trying. And then, my last question really just relates to AS&E, you've had time at this point to integrate as you mentioned. Have you seen any low hanging fruit opportunities from the combined entity now that weren't present when AS&E was maybe a standalone entity? And is that -- any increase to maybe opportunities from legacy businesses in the Middle East that they were generating a meaningful portion of the revenue from in 2013 and 2014. Is that coming back in any way or is that still maybe something we should not think about at this point in time?

Well, I won't call it low hanging fruit. AS&E's business model was different from our business model. They are more into sole source specific products with lot of the investment made with their customers. Those customers we have talked to, they are very happy, they are all supportive of it to be -- AS&E to be part of the bigger product portfolio and we can offer a more broader product portfolio, high energy, middle energy, low energy, backscatter, transmissive. So, we think that one plus one makes more than two and we have been well received, the organization and the customers are quite happy. And many of the customers that they had, Rapiscan also had. So, together it makes more synergistic way to go forward.

Great color there. Thank you. And last part of that question I just thought of it was, is there an opportunity to plug any of AS&E's products into maybe a Turnkey Services business model or is that not something that's realistic based on the offering that they have?

Absolutely. Yes, and I think I did say it in my thing that we have more broader product portfolio to offer to the customer in the Turnkey Solutions, and we are definitely capitalizing on it.

Fantastic. Great. Thank you very much and good luck going forward for the rest of year.

Thank you.

And our next question comes from Jeff Martin from ROTH Capital Partners. Your line is open.

Thanks. Good afternoon Alan, Deepak. How are you?

Thank you.

Hey, Jeff.

Deepak, could you expand on your comments on the Innovation Lane Program with TSA, hadn't heard of that before. Curious how that came about and what you think the opportunity there is?

Yes, you might have travelled off lately. If you're travelling in U.S., you'll see that some of the airports even at Los Angeles Airport, I think its Terminal 7, Atlanta and some of other places, they have started doing some innovation Tray Return Systems to increase the throughput. And this basically is quite prevalent in Europe where you got to like U.K. Airport or Paris Airport. So, this is a new innovation to bring more through -- some of automation at the checkpoint. It's called the Innovation Lanes and it's a combination off a Tray Return System where people put their bags -- efficiently three or four people can stand together, put their bags in and it goes faster through and the other side gets less crowded. So, we are involved in talking to TSA and the airports to look at it since we acquired a small product line in U.K. couple of quarters ago and we're working diligently with that and also in European airports and in Middle East and in Asia on these Tray Return Systems together with X-Ray machines. So, it’s the new way of what I call not a box sale, but integrated checkpoint and it does improve the throughput and is very well received.

Okay. And that dovetails into my next question is, what's your visibility in terms of the next replacement cycle with the checkpoint screening equipment in the U.S.?

Well, I mean I can't comment what's going to happen with the new government administration, but the most of these X-Ray equipments that are out there at the checkpoint, ours and Smith's, they are not in their replacement cycle, there's no replacement as such. And frankly speaking they are more looking at how to automate and be better and upgrade them. So, I don't think so there's a replacement cycle that I know of at the checkpoint today

Okay. And then Alan, could you give us a sense of what your total company manufacturing footprint looks like on a global basis? And the reason I asked the question is, if free trade gets turned on its head what could happen there?

Sure Jeff. We do -- we manufacture throughout the world. We do quite a bit of manufacturing here in the U.S. We do manufacturing in low-cost jurisdictions such as Malaysia, Indonesia, India. We manufacture in the U.K. Those are really our principal areas of manufacturing, and we have some smaller locations elsewhere. We're in the process of doing some modeling for some what-if analysis in the event that some of the things that have been raised by the new government were to take place. We think we're in a good position overall with sort of flexible manufacturing environment that we might be able to take advantage of certain changes that take place. But at this point, a little bit premature until we know what those changes might be.

Right. Okay. Thanks for taking the questions.

And at this time, I'm showing no further questions.

I would like to thank everybody, ladies and gentlemen, for participating in our conference call. Wishing you all a Happy New Year and look forward to talking to you in April for the third quarter. Thank you very much. Good day.

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