Good day, ladies and gentlemen, and welcome to the OSI Systems, Inc. Third Quarter 2018 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 conference call is being recorded. I’d now like to turn the call over to Alan Edrick, Chief Financial Officer to begin the call. Sir, you may begin.

Well, thank you. Good afternoon, and thank you for joining us. I’m Alan Edrick, Executive Vice President and CFO of OSI systems. And I’m here today with Deepak Chopra, our President and CEO. Welcome to the OSI Systems fiscal 2018 third quarter conference call. We would like to extend a warm welcome to anyone who is a first-time participant on our conference calls. Earlier today, we issued a press release announcing our fiscal 2018 third quarter financial results. Before we discuss our results, I would like to remind everyone that today’s discussion contains 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 under the securities laws. These forward-looking statements are based on management’s current expectations and are subject to uncertainties, risks, assumptions and contingencies, many of which are outside the company’s control. Such statements include, without limitation, information regarding the expected financial and operational performance of the company and its operating divisions; the company’s expected revenues, earnings and growth; and expectations regarding the effects of the new tax legislation. Please be advised that actual results could differ materially from our forward-looking statements due to numerous factors, including factors described in the company’s periodic reports filed with the SEC from time to time. 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 results. For information regarding non-GAAP…

Thank you, Alan, and again, good afternoon and welcome to the OSI Systems earnings conference call for the third quarter of fiscal 2018. We are pleased with our performance this quarter, led by our Security and Opto divisions with each delivering strong revenue growth and solid profitability. These divisions strong performance more than offset Spacelabs’ performance and the impact from the lower revenue level under the renewed two-year Mexico turnkey services contract, which was in line to our expectations. Company’s revenues grew by 9% and ended the quarter with a strong backlog approaching approximately $1 billion. Also, our Board of Directors authorized a new stock buyback program for an additional 1 million shares. And as Alan mentioned, the company bought back approximately $60 million worth of stock in the quarter. Reviewing the highlights for the quarter for each division starting with our Security division. Security revenues were $170 million, an 18% higher than the prior year. Our security bookings during the quarter were $270 million, more than twice the level in Q3 of the prior year and include approximately $130 million from the renewed two-year contract to continue the screening services operation in Mexico. Non-turnkey bookings were also very solid for the quarter. For checked baggage screening, we continue to achieve market penetration in the European Union with our Rapiscan RTT 110 explosive detection system. To address a similar need for higher threat detection capabilities at the checkpoint, during the quarter, we launched the Rapiscan 920CT checkpoint security scanner. The 920CT is the company’s first dual energy CT scanning technology for checkpoint security screening. To accelerate its time to market, the 920 scanner uses Analogic’s advanced CT imaging technology and threat detection software. This new platform is currently being evaluated by the ECAT for certification in Europe. Shortly after the…

Well, thank you, Deepak. Now I’ll review the financial results for the third fiscal quarter in greater detail. As mentioned previously, our revenues in Q3 of fiscal 2018 increased by 9%. Q3 revenues in the Security division increased by 18% year-over-year, driven by strong performance across much of our product portfolio, especially in our cargo and vehicle inspection product line in our recently acquired trace product line. Q3 revenues also increased in our Opto division, driven by growth and intercompany sales to our other two divisions and the impact of the small acquisition in January 2018, as Deepak mentioned, which contributed $4.7 million in Q3 sales. Revenues in the Healthcare division decreased 8% on an organic basis, as the strength we saw in U.S. markets in the first-half of the fiscal year was not maintained this past quarter. Our Q3 gross margin came in at 36.5%, compared to 35.1% last year. Each of our divisions contributed to the solid gross margin expansion. The greatest impact was attributable to performance in the Security division, which exhibited favorable product and channel mixes, along with economies of scale, resulting from higher revenues and operational efficiencies. As mentioned on previous calls, our gross margin will fluctuate from period-to-period based on product mix among other factors. Moving to operating expenses. In Q3 of fiscal 2018, SG&A was up $10.4 million, which included costs associated with the acquisitions previously mentioned and investments to support higher sales level. R&D expenses in Q3 were $15.9 million, up from $14.4 million in the prior year, primarily due again to acquisitions in the Security divisions that brought a higher mix of products in the development stage. We remain focused on innovative product development, which we view as vital to the long-term success of our business. Impairment, restructuring and other charges…

[Operator Instructions] Our first question comes from Brian Ruttenbur with Drexel Hamilton. Your line is now open.

Yes. Thank you very much. Great quarter by the way. So a couple of quick questions. In terms of book-to-bill, can you give us some kind of bookings number ex-Mexico, because I think Mexico came in there during the period?

Brian, this is Alan. I’ll take that. So the bookings – the Mexico bookings were approximately $130 million. So if we subtract that out, that would give us our overall bookings for the quarter.

So what was your book-to-bill then ex-Mexico?

It was much closer to a 1 to 1 ratio.

Okay, great. And then can you talk about going forward and you had a very good quarter in terms of Security. Can you talk about what you see going forward in terms of growth with this new lower Mexico contract? Can you sustain this, because I think that the majority of this quarter was without the Old Mexico contract, is that correct?

Brian, this is Deepak here.

Okay.

Our pipeline looks very robust, especially in the cargo space and we continue to be very positive on the continuing the RTT in the European Union and the trace business that has done well. So we’re very optimistic. We feel good about it. And as the – as what we look at it from the new budgets that are also coming out from Washington, it’s very favorable for our kind of products, both domestically and in the international sector.

Okay. And if I could add one more question on that. In terms of that you mentioned the new turnkey project in Asia. Can you give us any color maybe starting time, size, you don’t have to give us exact numbers, but bigger or smaller than a breadbox would be great or something along is that Puerto Rico size, or is it Albania size, something along those lines?

Good question, Brian, and you can also appreciate our answer is going to be the same way to answer that. It’s in Asia. We’re very, very excited about a turnkey integrated solution project. It’s smaller than Puerto Rico. It’s a multi-year contract, and we’re going to start doing the civil works and start working on it. It will start showing revenue sometime a year from now.

Okay. And then last question, you’ve had lots of changes with healthcare and you’re making another change here. Is there plans on the horizon, is this the last time you’re going to take a swipe at this, or is it – if this doesn’t work, you’re going to sell it. What do you think is this a fixable problem? Is this an end market problem? Is this the products problem?

Brian, firstly, I think the way you have to look at it is, this was a – Sujit had done a great job. About a month ago, he came over and came forward that he wanted to try other things. So it’s – at his best, he done a good job. We wanted to make sure that we filled the place. And I’ll be very fortunate Jim Green is a fantastic person, who comes from the industry has a lot of knowledge. Regarding the other subject you’re asking about is, we’ve had four quarters – three, four quarters of good revenue, especially in U.S. So I mean, I – we look at this, there’s nothing wrong about it. Basically, it slips from one quarter to the other and there were large programs that we’re chasing and some of them didn’t happen in time. So we are very – we’re feeling good about it. The change has nothing to do with any drastic things along with it. Regarding your second question, we still believe that we are focused that healthcare is very important. As Alan has mentioned many times, when the revenue is there, it’s got the best margins. So we think that Jim Green’s addition and the focus on technology and what other add-ons we can look at it now, we want to complete focus on it to grow the – all the businesses.

Thank you.

Thank you. And our next question comes from Greg Konrad with Jefferies. Your line is now open.

Good evening. Just on the Optoelectronics, I mean, with the product line acquisition in the quarter, I mean, would you view that segment as maybe a platform to expand further? And maybe, if you have any type of color, you mentioned the business has been strong in terms of different end markets?

Greg, this is Deepak here. Our focus has always been we want to differentiate ourselves from just being a generic contract manufacturing PC board electronic assembly. We have bought couple of technology platforms. Flex is a very good platform we bought this other company also adds onto it. We want to continue to look at niche areas, selective customers, both in healthcare in aerospace and in defense kind of businesses, where we bring something to the party. And that’s the fundamental strength we look at it and we basically continue to look at opportunities, both in the U.S. and also internationally, where we can be next to our customers and be a provider to a customer as a vendor, as a partner, not just as a generic board manufacturer. So we look at it. And as Alan has mentioned couple of quarters before, at one-time, we have been very selective and revenues important. But we also want to make sure that we have good margin products. And we have been able to sip through it and we’re very proud to say that that business has done very well.

That’s helpful. And then just to follow-up on the integrated security services business, I mean, is that a big opportunity or any thoughts on how big a market that is or is that more about brand awareness for the product lines?

Well, we said it before for many, many calls. We think it’s a very big market and it’s combined together with our standard sales processes. So we have to tried to explain to all of you. It can be a sale of a cargo product, it could be an integration of something add-on, training, image analysis or it could be a complete turnkey. So we look at that and global awareness is getting more and more. And we have said it before that our three major projects that we have, have been very successful. We have taken lot of customers international to look at some of these sites we have and people are very happy about it. So we’re very confident about it and this is a very big growth opportunity. And it has one of the big things in the cargo business, it has been – it’s a lumpy business. These kind of models do get a longevity. It’s a multi-year contracts and your customer is committed for a long-term investment with you.

Thank you.

Thank you. And our next question comes from Larry Solow with CJS Securities. Your line is now open.

Great. Thanks. Just a few follow-ups. But on the healthcare side, it sounded like Jim wasn’t as I brought it to – correct – the problem, but opportunistically maybe you can improve things. Just – but specifically, on the quarter itself, anything in particular – I realize one quarter, like you said, impact doesn’t make a trend, but you have been doing pretty nicely and growing and sort of step back $7 million, $8 million on an absolute basis. You mentioned sluggishness in many regions. Is this something that – is it more a macro thing? Is it – you said there were a couple modules you went for that 10-K, or are there is still others out there, do you expect without being specific just to rebound in the next quarter or so, or any thoughts there?

Well, you have basically said, answered your own question. One quarter doesn’t do anything. Jim was brought in not for anything that has anything wrong.

All right.

Sujit did his two years and he decided to move on to try other things. Jim comes from an environment, he’s in very different than Sujit’s. We’re looking forward to more innovation. We’re looking at more broader-based look at it. And we think that long-term, we’re completely committed to this, yes, Q3 and it happens, three quarters in a row, it’s grown. So, and some of these things didn’t pan out. Regarding the other thing is, yes, we’ve been saying it that the outside U.S. has been a challenging business, but we see some room to improve. We think that things are stabilizing and we continue to focus on it. U.S. has been very good to us and one or two orders got pushed out. So I look at it that as a – that we need to continue to focus ourselves and Jim will help us.

Okay. So it sounds like, so you view as a short-term bump – speed bump in a road or whatever it may be without actually saying, you’re not quantifying the growth to follow, but you expect yourself to grow?

Yes.

Fair enough. And on the – just on the Security side, so just to confirm, the Mexico, the renewal actually would have been effective January 1. I was probably retried. So you actually had a full quarter at that lower rate, is that right?

Larry, this is Alan. We had nearly a full quarter.

Okay.

The initial contract went through mid-January…

Okay.

…close to 2.5 months of the new contract.

Got it. And it was also, I think, I don’t know if you qualified in the last quarterly call, but there was also a little bit of pull forward that went into Q2 from this quarter, right? So you hitoutside of Mexico, right, just in the general security side, I hope, I’m not mistaken, is that right?

You’re saying some of what would have been in Q – we went into Q 2?

Right, exactly. I think your Q2 is part of the upside. In the last quarter, we attributed to some sort of pull forward that you had pulled some forward into Q2 from – yes, from this quarter, is that right?

Yes, we tend to sometime see that, based upon customer requirements. And yes, despite that, you’re absolutely right, what you’re leaning towards that, the Q3 revenues were still strong, despite…

Yes, it was like 6% organic growth. And then just on the trace business, obviously, it’s done better. It sort of ramped up since you purchased it and [questioned some new tire] [ph] restrictions that happened essentially right and the same time you guys acquired it. Does that sort of put the annual revenue at a – little over higher level, or was this just sort of a one-time short-term left?

Well, in this quarter, trace did very well. We’re very satisfied. We continue to see a lot of opportunity and we have ramped up R&D in it. We look at it, that – it’s a great product line. It’s a high-margin product line, and we want to focus on it, continue to grow.

Fair enough. Great. Thank, guys.

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

Thanks. Hi, Deepak. Hi, Alan.

Hi.

Hi, Jeff.

I was curious if you could go into a little bit about security from a broader perspective in terms of its growth, I mean, you outlined a bullish demand outlook. Do you feel that fiscal 2019, you’re going to be able to grow security and what type of growth rate is a reasonable assumption as we look to update our 2019 numbers?

Jeff, as you know – this is Deepak here. We are not prepared to talk about 2019 yet, we have focused. But we see generally speaking, all our product lines are – look for growth. The pipeline is very, very strong and we continue to look at it. And obviously, Alan has been very careful to talk to you guys that – the Mexico program is lower, but we are very bullish about the Security business.

Okay. And then could you give us an update on the portfolio sales approach and now that it’s got a more robust product line than ever before. Are you seeing benefits from that? Is that a big initiative? Is that something that is still kind of percolating?

Yes. In the security side, we are very proud to say that, we have the broadest portfolio and definitely the two acquisitions, the AS&E acquisition and the trace has made us a very broad product portfolio. Automatically, we can cater to more demands of the customer plus we have a lot of experience now more than six-plus years of doing a turnkey services. And as your product portfolio increases, we can give a better service to our customers. RTT continues to be looking at their check baggage initiative that we’ve been talking about it, trace is a new add-on to it. So all in all, we are very, very confident that we have a strong broad product portfolio. And our solutions and our ability to satisfy the customers, both domestically and internationally is better than anybody else, I think.

Okay. And then you’ve got a new product going through ECAT certification analysis. Curious if you could highlight timing and impact you see from that market if you have any visibility into that?

Well, keep in mind that Checkpoint CT, there’s a lot of talk – a lot of people are talking about it. I’ve said it in my calls for quick to market. We went in together with Analogic’s technology, and it’s been tested for certification. I think it’s not going to be an overnight. Everybody would say differently. We believe it’s a very seat what’s happening today. Some of the high throughput lanes at a certain point when it’s tested well and the ConOps gets tested in the airport will happen. But it’s not going to replace a broad-based Checkpoint all over. So, we again feel very good about it that now we have another broad product line. So that we can offer our standard checkpoint machines and our ability now to have a checkpoint CT. So we can offer our solution, including the [indiscernible] systems.

Okay. And then could you give us some perspective from a competitive standpoint, if you’re early to the market on this? if you’re entering it, where there’s incumbents that are putting in for additional certifications as well, or kind of where you are in line with the submission?

One of the Checkpoint CT, there is absolutely no market right today of anybody, who can be called an incumbent. Everybody is doing some testing. everybody is being looked at it some various pilot places, so are we. So we continue to work with them and this is not something that’s like somebody has already qualified. And frankly, even the specifications and the operations is not well-defined yet.

Okay, that’s helpful. And how much is remaining on your current repurchase authorization?

Jeff, this is Alan. We have a 900,000 shares remaining under the current authorization.

Okay, great. Thanks for taking my questions.

Thank you. Our next question comes from Austin Drake with B. Riley FBR. Your line is now open.

Yes, good afternoon, guys. So the sports stadium and event security that you had mentioned, which products where we’ll see at those? And just any other color that you can add to that opportunity?

Yes, this is Deepak here. Most of these events basically is, what I call, basic security that you see a guard with a wand. We think that with all these instance – incidents that are happening all over the world, we think that it’s going to go to a higher level. So it’s our metal gauge, it’s our X-ray machines, it could – it can also be some of the other add-on products that we have that the many see check in the trunk of a car, it could be the trace products that we have. So all those products and we were very, very happy that we will use this event at Biloxi to show the people who were there. There were hundreds of people from the security guard company of all these sporting event people, we showed our whole product portfolio. So we are looking at it forward looking to upgrade the requirement and the need for security at these events, where there are lot of people.

Got it. That’s helpful. And then the abandonment of the – taken out of your division, you mentioned, will that affect the segment sales much going forward?

Austin, this is Alan here. No, we’ll not have a material impact. The sales from that technology were quite limited in the first nine months of this fiscal year.

Okay. Thank you.

Thank you. [Operator Instructions] The next question comes from Brian Ruttenbur with Drexel Hamilton. Your line is now open.

Yes, thank you. Just a couple of quick follow-ups, plans for repatriation of cash. I believe you have $194 million in cash. And is there any plans to repatriate that, or are you going to keep that all offshore most of it there, I believe is offshore?

Yes. Brian, this is Alan. Good question. We initiated certain repatriation already in the March quarter. So we had a – we done about $32 million last quarter in a couple of the different countries that we operate in. We’ll be further evaluating now for some of the larger ones in this fourth quarter and beyond. So big picture basis, yes, our goal is to repatriate a significant amount of those funds. So we are planning for that at this point in time.

Okay. And then another housekeeping in terms of tax rate in the fourth quarter, which we would be modeling and then as we go forward tax rate on a yearly basis would be helpful?

Yes. So our effective tax rate for fiscal 2018, we forecasted to be in the neighborhood of about 28% plus or minus. So I think, that would be pretty good for you to be modeling for fiscal 2018. And we can offer some more insights for fiscal 2019 and beyond on our next call.

Okay. And then last question, I don’t believe it’s been touched on is the FCPA. I assume, there’s no update, is that correct?

That’s true. The investigations are progressing. We are cooperating fully. What I can tell you is that OSI is very proud to do business with honesty and transparency, and that we have very strong compliance programs to address the legal requirements we operate under. That is how we have earned the trust of leading security, defense, and healthcare agencies around the world and here in the U.S. More than that it’s an active thing going. We’re working it out and there’s not much more to add to it.

Great. Thank you very much. Thank you. And I’m showing no further questions in the queue at this time.

Ladies and gentlemen, thank you, once again, for attending our conference call. We look forward to speaking with you all in August and we will discuss our fourth quarter and full-year performance. Thank you.

Ladies and gentlemen, this does conclude your program, and you may all disconnect. Everyone, have a great day.