OSI Systems Inc (OSIS) 2022 Q4 法說會逐字稿

Hello. Thank you for standing by, and welcome to the OSI Systems, Inc. Fourth Quarter 2020 Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker today, Alan Edrick, Chief Financial Officer. Please go ahead.

Well, thank you. Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. Deepak Chopra, our President and CEO, could not join the call today due to an unavoidable last-minute conflict. Welcome to the OSI Systems Fiscal '22 Fourth Quarter Conference Call.

Let's review our business performance, financial and operational results. Earlier today, we issued a press release announcing our fourth quarter and fiscal year '22 financial results.

Before we discuss the results, however, I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information, and the company undertakes no obligation to update any forward-looking statements based upon subsequent events or new information or otherwise.

During today's call, references will be made to both GAAP and non-GAAP financial measures when describing the company's results. For information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release.

Let's begin with a discussion of our financial performance for the fourth quarter of fiscal 2022, provide an overview of our business performance, and then let's finish up with more detail regarding our financial results and a discussion of our outlook for fiscal '23.

We are pleased with our results last quarter, particularly given the macroeconomic challenges we faced, including supply chain delays, increased logistics costs, disruptive geopolitical events, the COVID-19 pandemic, inflation and rising interest rates. As we manage the current environment, we continue to prioritize delivering on commitments to our customers and partners and positioning the company for long-term success.

Now, let's go through a high-level summary of our financial results.

First, we reported record Q4 revenues of $337 million, a 1% year-over-year increase, driven by record security division sales. The strength in security sales was partially offset by a slight reduction in year-over-year Opto sales mainly due to certain supply chain constraints and a small reduction in Healthcare division sales.

Second, we reported record Q4 adjusted earnings per share of $1.96, up 27% from Q4 of the prior year, driven by productivity improvements, a favorable sales mix, tighter cost controls, a lower tax rate and a reduced share count, which outweighed higher supply chain logistics and labor costs.

Third, bookings were solid with a book-to-bill ratio of just above 1% for Q4 and 1.13 for the full fiscal year. We concluded the fiscal year with a record Q4 backlog of over $1.2 billion, a 15% increase over the backlog at the end of fiscal '21.

And finally, operating cash flow for the fourth quarter was strong as we generated approximately $22 million, while capital expenditures were approximately $5 million. We spent approximately $15 million in our stock buyback program in the fourth fiscal quarter.

Before diving more deeply into our financial results and discussing the fiscal '23 outlook, let's provide more detail of our business performance by division, starting with Security, where Q4 and fiscal '22 revenues increased 4% and 5%, respectively, year-over-year.

Security's Q4 book-to-bill ratio of 1.0 was solid, given record sales in the quarter. The Security division ended fiscal '22 with a backlog 10% higher than the end of fiscal '21. Q4 was highlighted by robust performance in ports and border security-related products and services with some notable bookings for these products, particularly with international customers.

We previously announced a few of these wins, a $12 million international contract to provide Eagle P60 ZBx drive-through cargo and vehicle inspection systems and related products and follow-on services, another $12 million international award for Eagle M60 mobile high-energy cargo of vehicle inspection systems, along with follow-on service and support and a $29 million international order to provide several cargo and vehicle inspection systems and various mobile and fixed configurations.

As international travel restrictions are gradually dissipating, we're capitalizing on opportunities where face-to-face sales and customer support are crucial. In the U.S., we began to deliver on the significant awards received earlier in fiscal '22 under the indefinite delivery, indefinite quantity contracts or IDIQs, from the U.S. Customs and Border Protection in Q4. These programs not only utilize our cargo and vehicle inspection platforms, but also our Certscan software and vehicle checkpoint lane control solutions from Gatekeeper, a business we acquired in the second half of fiscal '22.

We anticipate recognizing most of the revenue from these delivery orders over the next 3 years, which is somewhat longer than originally expected, mainly due to customer readiness timing. These were the first orders under the 5-year IDIQs, and there is opportunity to receive additional orders during this time frame as CBP continues to work towards their goals at the U.S. Southern border.

We continue to see traction with large U.S. customers for CertScan, our proprietary software platform that is cybersecure, can manage inspection image data, integrates with other IT systems at checkpoints that facilitates the automation of inspection activity. We're also working on international opportunities that would rely on CertScan as a key component, where equipment installation, image data management, systems integration and training are required.

Our turnkey service programs continued to perform well in Puerto Rico, Albania, and Guatemala, and we are actively pursuing additional turnkey services opportunities. Our revenue growth in ports and border security was offset to some degree by the lower revenues in our aviation-related business. Within this sector, there were bright spots during the year as we worked with global logistics carriers such as DHL and FedEx to address their demands for air cargo screening as passenger aviation-related sales were more modest.

We anticipate that we could see an overall improvement in the aviation sector in calendar '23 and forward as demand in international airports is anticipated to increase for servicing and upgrading passenger and baggage inspection infrastructure. I should note that while aviation is an important market for us long-term, it accounted for under 10% of the total company revenues in fiscal '22. These percentages will fluctuate year-to-year based on upgrade and replacement cycles, among other factors.

Looking ahead, with a significant backlog and a strong pipeline of opportunities, the Security division enters fiscal '23 in a good position to drive revenue growth.

Moving on to Optoelectronics. The Optoelectronics and Manufacturing division generated total revenues, including intercompany, of $367 million for fiscal '22, representing a 5% increase over revenues in the prior fiscal year and a new record for the division. The Opto division had strong bookings, finishing the fiscal year with a book-to-bill ratio of 1.2 and a record yearend backlog.

Opto continues to support a wide variety of OEMs in aerospace, defense, health care, test and measurement, automotive and consumer technologies. Supply chain constraints, longer lead times and rising input costs adversely impacted us in fiscal '22 and continue to adversely impact us today. We have been proactive, however, and increased our inventory of certain materials to help mitigate the impact of supply chain disruptions and in continuing to serve our customer base while adjusting our pricing to reflect the increased material costs in this division.

During fiscal '22, we broadened our global operational footprint and improved our ability to handle heightened demand with the addition of a new Indian manufacturing facility that is now nearly fully operational. It has necessary regulatory approvals and customer acceptance, particularly from health care customers.

We also further vertically integrated our flexible circuit manufacturing operations, by adding a wet etch processing operation, reducing our reliance on outsourcing to an already constrained global electronic supply chain, which is expected to increase operating margins as well.

Opto started fiscal '23 with a large backlog and a global customer base that continues to rely on suppliers like Opto, that can execute in a tough environment. We believe that we are well-positioned in the Opto division for a strong year, although supply chain constraints are expected to push certain planned Q1 revenues into a subsequent quarter.

Moving to Healthcare. The Healthcare division's fiscal '22 revenues were 3% below fiscal '21 as expected. The lower revenue level in fiscal '22 resulted primarily from reductions in pandemic-related health care spending. We continue to invest significant resources in R&D in our Healthcare division to enhance our core offerings and to develop new products in patient monitoring and diagnostic cardiology that align well with the trend in the marketplace for enhanced digital connectivity to enable hospital-to-home patient care.

Looking ahead in the Healthcare division, we will focus on the continued growth of our cardiology and remote monitoring business and also drive recurring services, supplies and accessories revenues to counter the drawdown of the elevated purchases of patient monitoring products during the pandemic.

Now let's go through the financial results for our fourth quarter in greater detail. So as mentioned, key revenues were up 1% compared with that of the prior year Q4. Fiscal fourth quarter Security division revenues were up 4% on a very challenging comp given the division's exceptional performance in Q4 of fiscal '21. This increase was primarily driven by our cargo and vehicle inspection offerings. While both product and service revenues increased, we saw a more notable increase in service revenues.

Aviation-related sales were again down year-over-year. However, we are seeing increased activity levels in this area. Opto third-party sales decreased 1% year-over-year for the quarter, while Opto's total sales, including intercompany sales, decreased 2% year-over-year. Though we entered Q4 with a then record Opto backlog and now enter fiscal '23 with a new record Opto backlog, supply chain constraints have led to delays in production and shipments of certain orders.

The Healthcare division reported a 3% reduction in Q4 year-over-year revenues. While patient monitoring and cardiology sales decreased in the quarter, there was an increase in services, supplies and accessory sales, which tend to be recurring in nature. The fiscal '22 Q4 gross margin was 36.4% compared to 35.5% reported in Q4 of fiscal '21. The increase was driven primarily by a 9% increase in service revenues, which tend to carry a better gross margin than product sales as well as the mix of sales within the Security and Opto divisions.

The small reduction in health care division sales, which has the highest gross margin among the 3 divisions, partially offset the increases just noted. We also experienced increases in certain component and freight costs in each division. These increased costs are expected to impact overall gross margin in fiscal '23. Our gross margin will fluctuate from period to period based upon revenue mix and volume, among other factors.

Moving to operating expenses. We continue to work diligently across each of our divisions to improve efficiencies and to prudently manage our SG&A cost structure. Our Q4 results again demonstrate the success of these efforts. Q4 SG&A expenses were $66 million or 19.5% of sales compared to $68 million or 20.5% of sales in the prior year Q4.

Research and development expenses in Q4 of fiscal '22 were $14.6 million, representing a year-over-year increase of 5%. We continue to dedicate considerable resources to R&D, particularly in Security and Healthcare as we remain focused on innovative product development, which we view as vital to the long-term success of our businesses. In Q4 of fiscal '22, we recorded $2.7 million of restructuring and other charges as compared to $2.2 million in Q4 of the prior fiscal year.

Over to interest and taxes. Net interest and other expense in Q4 of fiscal '22 decreased to $2.4 million from $4.1 million in the same prior year period, primarily due to the adoption of accounting standard ASU 2020-06, which eliminated the noncash interest expense associated with our convertible debt, as we previously discussed. However, our cash interest expense increased approximately 17% in Q4 of fiscal '22 compared to Q4 of the prior year.

I will further discuss interest expense in the context of our fiscal '23 guidance later on this call. On the tax side, our reported effective tax rate under GAAP was 9% in Q4 of fiscal '22 compared to 12.9% in the prior year Q4. In Q4 of fiscal '22, we recognized a discrete tax benefit of $4.9 million as compared to $4.0 million in Q4 of last year. Excluding the impact of discrete tax items, our effective tax rate in Q2 of fiscal '22 was 22.3% compared to an effective tax rate of 26.3% in Q4 of fiscal '21.

I will now turn to a discussion of our non-GAAP adjusted operating margin. Overall, our adjusted operating margin in Q4 of fiscal '22 increased 150 basis points to 13.7% compared to 12.2% in the same prior year period. This operating margin expansion was driven by an improved gross margin, highlighted by increased service revenues and strong SG&A expense management.

We were particularly pleased with the increase in the non-GAAP adjusted operating margin in our Security division, which expanded to 19.7% in the last quarter of fiscal '22 from 18.0% in the prior fiscal year fourth quarter, driven by increased service gross margin and lower operating expenses.

We were also delighted that the adjusted operating margin in our Opto division increased to 12.7% in Q4 of the 2022 fiscal year from 11% in the prior fiscal year fourth quarter despite slightly lower revenues, due in part to gross margin expansion on a favorable product mix. And with lower revenues and a less favorable revenue mix, the adjusted operating margin for our Healthcare division decreased to 8.9% from 11.8% in the prior year.

Moving to cash flow. Cash flow provided by operations was $22 million in Q4 of fiscal '22 compared to $8 million in the same prior year quarter, driven by higher profits and certain working capital improvements. CapEx in the fourth quarter was $4.6 million, while depreciation and amortization expense in Q4 was $9.7 million.

We continued to be active in our stock buyback program in the quarter, during which we spent approximately $14.8 million to repurchase 177,336 shares, leaving approximately 1.25 million shares available to repurchase under the current authorized share repurchase program. Our balance sheet is solid with net leverage under 1.5 and significant capacity for acquisitions and additional stock buybacks. Our convertible notes mature next month. We increased our credit facility in December of 2021 in contemplation of retiring the convertible notes.

We expect to utilize $100 million from our delayed draw term loan and $142 million from our revolver to retire the approximately $242 million of convertible notes outstanding. We anticipate having over $300 million available under our credit facility, following the retirement of the convertible notes, including the outstanding letters of the credit. In this rising interest rate environment, we anticipate our borrowing costs will approximately double in fiscal '23 at the current level of debt outstanding.

Finally, turning to guidance. For fiscal '23, the company anticipates revenues in the range of $1.240 billion to $1.275 billion and adjusted earnings per diluted share in the range of $6.02 to $6.25. The non-GAAP diluted EPS range excludes potential impairment, restructuring and other charges, amortization of acquired intangible assets and noncash interest expense and their associated tax effects as well as discrete tax and other nonrecurring items.

Given the current rising interest rate environment, the adjusted EPS guidance reflects an impact of approximately $0.30 per diluted share of expected increases in interest expense resulting from the utilization of our credit facility to retire our maturing low interest rate convertible notes as well as higher costs on the existing outstanding borrowings.

Our earnings guidance also contemplates increased costs associated with certain products already in backlog, which we do not expect to pass on to customers, most notably in the Security division. In fiscal '22, our performance was heavily weighted to the fourth fiscal quarter.

Based on what we are currently seeing from our backlog and pipeline of opportunities and factoring in customer timeline preferences for deliveries and supply chain limitations. We currently anticipate revenues and adjusted operating income will be strongest in fiscal quarters 2 through 4 in fiscal '23.

We currently believe this revenue and adjusted earnings guidance reflect reasonable estimates, the actual impact on the company's financial results of the pandemic supply chain disruptions and increasing costs and rising inflation and interest rates is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance.

Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings. In the face of these challenging times, we continue to remain focused on the growth of our businesses and continued management of our cost structure. We believe our efforts in these areas will enable OSI to continue providing innovative products and solutions.

We delivered solid results throughout fiscal '22 in a dynamic and challenging environment. We continue to navigate effectively through uncertainty while gaining traction in key strategic growth areas and positioning the company to capitalize on improving end markets.

We would like to take this opportunity to thank the global OSI Systems team for its continued dedication in supporting our customers and contributing to the creation of value for our stockholders and other stakeholders.

And at this time, we'd like to open the call to questions.

(Operator Instructions) Our first question comes from Brian Ruttenbur with Imperial Capital.

A couple of quick questions. First of all, on the quarterly breakdown, you mentioned that it's going to be weighted to second, third and fourth quarter is going to be your strongest. Can you talk a little bit about first quarter? Are we going to be looking flattish year-over-year, first quarter 2023 versus first quarter 2022?

We had some strong sales in our Q1 of fiscal 2022. So as we currently look out, although we provide annual guidance, we're currently anticipating that Q1 will be down a little bit from what it was a year ago. The nice thing for our whole year was while we were very backloaded in fiscal '22 to Q4, we think it will be a little bit more evenly distributed between Q2 and 3 and 4, while Q1 just becomes a little softer based upon customer delivery preferences and some supply chain limitations.

And that's going to be primarily the Security division is going to be weighted that way or is it all divisions in that first quarter?

I think we're seeing it throughout our business.

Next question is in terms of cash flow for fiscal 2023. The last year or so, because of building receivables and a variety of other things, cash flow hasn't been as strong as historically it's been. Can you talk a little bit about cash flow, what you anticipate in 2023 or give us a proxy?

And you're right, Brian, when we look back fiscal '19, '20, 2021, our free cash flow, our operating cash flow was outstanding. Generally, we had a conversion above 100% of net income. In fiscal '22, we made the intentional decision to increase our inventory levels in order to mitigate some of the risks in supply chain and the plan for some of the growth and the strength in the backlog. So our cash flow was a bit lower than we historically see.

As we move to fiscal '23, as we sit here today, we're anticipating a nice rebound and returning to some of the historical cash flow levels that we've typically seen. And then we can see that potentially even accelerating from there. So we're looking to a strong free cash flow year in fiscal '23 for us.

And then one other just follow-up and I'll give the line to somebody else. On the Opto side, you're probably more exposed to economic factors in that division maybe than others. Can you talk about what you're seeing in terms of backlog bookings specifically in the Opto division?

Yes. Yes. So we're really, really encouraged by what we see in the Opto division. We have had 10 consecutive quarters in Opto with a book-to-bill north of 1. And we entered fiscal '23 with an all-time record backlog in Opto. We do not have any exposure to any concentration in any particular industry. We deal with aerospace and defense and medical technology, automotive, test and measurement, industrial just to name a few. We're continuing to see strong order flow. And with our strong backlog, we think we're going to be continuing to deliver quite nicely. The biggest challenge we have in Opto is just getting some of the components in order to finish off some of the products in order to deliver to our customer base. But the nice thing is we are seeing still strong demand and are anticipating a very solid year yet again in Opto.

Our next question comes from Larry Solow with CJS Securities.

Great. Just a couple maybe on the quick follow-ups on the CBP orders and delivery timeline. So it sounds like you mentioned stretched out a little bit over a 3-year period. Can you just give us an idea as you previously think they would be done more like in the next year or 2 years? How much -- just trying to get a better scope on how far out extended they're becoming? And does that maybe suggest that future orders might be sort of in the back half of that 5-year timeline if some of these deliveries, if they're not ready for certain deliveries yet today?

And you're right on point on the first point, the -- we were initially anticipating that the couple of hundred million dollars of orders that we received about a year ago would be primarily delivered in our fiscal '23 and '24. So there was a bit more front-loading to it. Based upon customer request, they've asked us to elongate that process a bit.

So now we're currently anticipating that most of it will be delivered over a 3-year time period rather than 2. We're ready. We're prepared to do it faster if they want it faster, but it looks like it will be about that time frame. In terms of when the next orders would come on these IDIQs, always difficult to say, but I would imagine that they'll be wanting to see some deliveries of the products of a more substantial nature.

And then we should see some potential new orders, and there's significant balances left on those IDIQs for them to make further purchases.

Okay. And all in, your backlog, obviously, is book-to-bill, I guess, trailing is 1.1. I know you don't sort of guide to the quarter, I mean, to the segment, but do you think in security have you grow year-over-year or is that tough to say on a top line basis?

We're absolutely expecting to grow year-over-year in the security business in fiscal '23, and that's what's implied in our guidance.

And what about just in terms of inflation and stuff, I think you kind of suggested that you don't have -- I mean, obviously, once you sell -- your contracts are fixed at the time, I guess, that the deliveries are signed on, but do you raise prices over time? How do you sort of offset some of these inflationary pressures that you're not passing on to your customers at all?

It really can vary by division, Larry. In the Opto business, we're able to pass on a good portion of those material cost increase nearly immediately to most of our customers as they well understand it. In the security business, which tends to be longer lead time backlog, if you have an order in the backlog, particularly to a government type customer that has been there for a while, it's difficult to pass on costs as they move up with that particular contract.

And we think that will impact us a little bit, which is embedded in our guidance. But as we come out with new orders and new awards, the pricing that we do factors in that new cost structure for us. At the same time, we're always trying to counter some of those increases in some of those input costs with more efficiencies and productivity improvements, which the team has been very good at achieving.

Okay. Great. And if I can maybe just switch gears and squeeze one more question just on the health care front, what's going on in terms of next-generation monitors, is that still in the queue and is that more of a fiscal '24 event?

Yes. So developing a new patient monitoring platform and some of the new products is very much in the queue. It's where we're investing a sizable portion of our R&D in our Healthcare division. So the team is making progress in those efforts. We won't see any of that impact here in fiscal 2023 on the top line. But we do look at that as a long-term growth driver for the health care business. So a very important element for us.

Our next question comes from Jeff Martin with Roth.

Wanted to get a sense for what the increased free cash flow in fiscal '23, at least relative to '22, how are you looking at use of that cash flow and share repurchases, acquisitions or debt reduction?

You really hit on all 3 areas that we focus on for capital allocation. In fiscal '22, we did some small acquisitions but we invested pretty heavily in stock buyback throughout the year. As we look at fiscal '23, we think all 3 of those options are available to us. While we'd like to grow organically, we'd like to give a bit of a boost to that with an acceleration factor through M&A, which has been part of our DNA and our history. So we'd like to continue to do good strategic acquisitions that add some nice shareholder value. Supplementing that, we'll always look at stock buyback and residual cash that we have in paying down some of our revolver balances. So all 3 are at play for us.

Yes. Okay. And then in terms of gross margins for this year, how should we think of them relative to fiscal '22? We've got the materials cost increase in some of the areas of the business that you'll have to absorb. You're offsetting that, I would think you've got higher software and services concentration that partially offsets that. But what -- how should we think about gross margins this year relative to fiscal '22?

Yes, Jeff, you've hit the nail on the head again with some of the puts and takes. Generally speaking, as our sales rise, we would look at some economies of scale and look to have expanded gross margins. I think with some of the higher costs, given some of the supply chain challenges and some of the costs has already embedded in some of the backlog we have.

I think we're currently anticipating that our gross margin will be relatively comparable to what we saw in fiscal '22 on a full year basis. It will bounce around a little bit based on the mix of revenues and the level of revenues from quarter-to-quarter but on an annual basis should be comparable, give or take a bit.

Okay. And then last question. I was curious on the aviation market in the Security segment. Are you seeing increased engagement on the client side in terms of building some sales pipeline? What gives you a suggestion that, that market may be turning around this year?

Yes. We're definitely seeing more activity on the aviation side. The level of RFPs, the customer visits that we're having. We don't anticipate that will drive a material amount of increased revenues in the first half of the year. But as we move into the second half and into calendar '23, we think there's a nice opportunity for growth in aviation, and we're hearing good things from our sales and marketing teams in that regard and remain optimistic that will be the case.

Our next question comes from Josh Nichols with B. Riley.

I guess like I'm trying to get a little bit better handle on. So some of the large security orders from the CBP, right, those are now going to be filled over 3 years. I think that's fine. But how much of the $1.2 billion backlog do you think is going to be flowing through to revenue in fiscal '23, given like the extension of that CBP award.

Yes. Our estimate, Josh, at this point would be something north of $700 million would likely flow through to fiscal '23. That number could be a little bit higher, a little bit lower, but our best guess is a little bit north of $700 million at this point. So what that means is we've got some pretty good revenue visibility as we start out here in fiscal '23.

Yes, it sounds like I'm thinking -- just looking at here, the service revenue levels that you did this quarter were higher than, I guess, anything I could recall, right, at least in the last few years. Is that expected to be sustainable or what's a little bit more detail on what's driving that? And are those gross margin impacts going to likely flow through into next year as well?

Yes. We are really pleased with the work done by our service team and increasing both some of the service orders and the revenues and the slowdown to margin. Q4 was very strong on the service side. As we look forward outside of Q1, which is historically a little bit softer on the service side as parts of the world seem to be more indication during the summer time frame. We would anticipate that we'll continue to have strong service revenue levels, particularly in Q2, Q3 and Q4.

And we'd like to see that continue to flow down and expand our margins in that arena. So we look at that as a great opportunity. Embedded in that is also some of the recurring revenues that we're doing in Certscan, some of our software and some acceleration and some turnkey revenues that we're doing. So yes, we believe there's a nice opportunity to continue to show strength within the service revenues as part of our consolidated revenues.

Last question for me. I know you've mentioned CertScan the last couple of quarters, right? And I think most people are aware of the existing turnkey contracts you have. But in terms of new opportunities on those 2 higher margin fronts, is the stuff that you mentioned that you're pursuing kind of incremental or are some of these like larger 8, 9 figure potential opportunities if you are to secure them?

Yes. I think some of the near-term opportunities are incremental that are a nice level of revenues at nice margins. And I think more in the kind of the medium term and long term, there are some very, very substantial opportunities that we're pursuing that will be in our pipeline, always difficult to estimate when that actually might hit. But very exciting opportunity pipeline on the service side for us, including in CertScan and including in turnkey.

Our next question comes from Ellen Page with Jefferies.

Just looking at health care margins, you mentioned some mix in that, but they were down almost 600 bps sequentially with a decremental over 100% by my math. Can you discuss the drivers of an improvement in that margin and when you expect to get back into the mid-teens?

So while our Q4 revenues were in line with our expectations in health care, the margins were lower, as you've noted. This really was due to a less favorable mix of revenues in the quarter. And we also had some operating expenses that exceeded some of our expectations. The margin in our Healthcare business is highly sensitive to the top line. So it will bounce around from time to time because the incremental margins and the contribution margins are so strong, when revenues go up, there's a big flow-through to the operating margin.

And similarly, if revenues are down, you can't change your cost structure enough to mitigate that. Our team is highly focused on delivering strong operating margins on an annual basis. So we're optimistic that as we move forward, the team will continue to improve operating margins in the Healthcare business, again, like much of the rest of our business focused beyond the first quarter.

Great. And then on security, margins are well above where they've been. Should we think of high teens at a sustainable level as you continue to execute on some of these larger contracts?

Yes. We're always focused on operating margin expansion in security as well. It will also move from period-to-period based upon the level of the revenues and the mix of the revenues with some of the recurring revenues and some of the new programs that we're moving into, we think there's opportunities on a longer-term basis to absolutely expand those margins.

On a shorter-term basis, we do have some headwinds with supply chain and some of the strong backlog that we have that has some locked-in pricing while some of the input costs have gone up. So we think the margin expansion opportunities will move forward, probably more in the medium and the long-term.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Alan for any further remarks.

Well, thank you very much. It's been an interesting year. Overall, I think our team proved that it could really deliver to customers and operationally execute in an incredibly challenging environment. I'd like to lastly thank all in attendance for joining this call, and we look forward to speaking to you in a couple of months on our next quarterly call. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.