OSI Systems Inc (OSIS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the OSI Systems, Incorporated first quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time if you have a question, please press the 1 followed by the 4 your telephone. As a reminder, this conference is being recorded Wednesday, October 29th, 2003. I would now like to turn the conference over to Victor Sze, General Counsel for OSI Systems, Inc. Please go ahead, sir.

Thank you very much and good afternoon. On the call today our OSI Chairman and CEO, Deepak Chopra, who is on the phone today from London where he is traveling on business. We also have the President of the OSI Security Group, Ajay Mehra, who is on the phone from New York where he is attending the Maritime Conference. And we also have OSI's Chief Financial Officer Anuj Wadhawan. During our presentation this afternoon we will make forward-looking statements concerning upcoming events and our expectations regarding the company's financial performance. Each time we do, we will try to identify these statements with words such as expect, believe, anticipate and other words that indicate potential events.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Please consider the risk factors contained in today's press release and stated during this conference call as well as the risk factors described in our latest Form 10-K filed with the S.E.C. For a limited time, we will make the webcast replay of this presentation available on the Investor Relations section of our website.

Our website address is www.OSI-Systems.com. Please note that the date of this conference call is October 29th, 2003. Any forward-looking statements we make today are based on assumptions that we believe to be reasonable as of today. We undertake no obligation to update these statements as a result of future events. Finally, this conference call is the property of OSI Systems and any recording, reproduction or rebroadcast of this conference call without the express written consent of OSI Systems is prohibited. I'll turn the call over now to our CEO, Deepak Chopra.

Thank you very much, Victor. And I welcome everybody to OSI Systems' Q1 2004 conference call for earnings. I'm sorry I could not be there in L..A. I'm speaking from London. The weather is quite cold here. Revenues for the quarter were $38.6 million. EPS was 9 cents fully diluted.

These earnings per share include a one-time restructuring charge of 5 cents and a 1 cent for deduction in the market value of a previously disclosed strategic equity investment. This 1 cent charge is the last charge on this investment. Mr. Anuj Wadhawan, the CFO, will go more into the details on the financial numbers. The security side of the business continues to show growth. Both sectors, conventional and cargo, have a lot of quotation activity, as mentioned in the last conference call. There has been no slowdown in activity, especially in the international sector.

As mentioned in our press release, two large cargo systems got pushed from the September quarter for reasons unrelated to manufacturing or installation. This reduced the revenue from our September quarter. As of this date, one of the units has already been shipped, and its revenue will be recognized in this quarter, which is Q2 2004. The other unit is completed and pending customer's determination of the delivery location. We have in the past public statements discussed that the shipments of cargo inspection systems causes a certain degree of variability from quarter to quarter.

We have announced approximately $11 million dollars of new bookings for large cargo over the past couple of months. These have been both international and domestic . We're also very proud to say that they include different technologies, all the way from high energy x-ray, thermal neutron activation, called TNA, gamma imaging and hybrid combinations of high energy x-ray and TNA. As mentioned before, the company's strategy continues to be towards broad-based technology platform for cargo applications.

We continue to get very favorable reviews from the users of our new install base customers, especially in the international arena. The repeat order from the Romanian government for the mobile gamma imaging system is a good testament to this. The U.S. Air Force's decision to buy RVEDs, which stands for vacal explosive detection systems, and the industry's first hybrid technology-based thermal neutron activation and high energy x-ray mobile system for base protection is very significant for us. These orders, which were the culmination of side by side trials by the customer of various competitors' technologies and products over the past year lends credibility to our technology and success in penetrating the U.S. government market.

U.S. government sales, as we had mentioned before, has been an uphill task for us. And as we have stated in the past, we continue to address this and can confidently say that we are making progress towards the positive directions towards this from day-to-day. Overall large cargo business looks quite healthy. Our backlog has increased in this product line from the last quarter. Actual numbers Mr. Anuj Wadhawan will go with it. Last week we also had the ground-breaking ceremony at El Paso, Texas for the government-funded VFNA large cargo system, which is scheduled to be completed sometime in 2004.

Our conventional parcel scanning business, which we also sometimes have said is the inventory tons business where we book and ship almost in the same quarter, continues to be strong. Our margins are also holding, which we also said in the last conference call. We are also unveiling new products in this product line in November 2004 at the ABFAC conference in Athens, Greece. The opto electronics business, we have announced two small strategic acquisitions. One of them is in the defense electronics sector. We bought the defense electronics assets of Schwartz Electro-Optics in Orlando, Florida.

Their forte is in laser weapons training systems, similar to what our subsidiary Rapid Tech makes. Their customer base, Lockheed, Raytheon, science applications, Department of Energy, et cetera. This acquisition gives us better penetration and focus in the laser weapon training arena, which is more than a billion dollar market with both domestic and international customers. The other acquisition is in the electronics contract manufacturing located in Camarillo north of Los Angeles.

We bought the assets, which include state of the art surface mount high-speed assembly equipment, together with the technical know-how, tooling, customer list and a backlog of approximately $10 million dollars. The majority of that backlog is shippable in our fiscal year ending June 2004. This strategic acquisition broadens our reach to support our customer base and follows in line to our continuing strategy of value added strategy. We can reach further into supporting our customers' outsourcing needs.

This allows us to offer box build, which is the next step forward of making sub assemblies and electronics PC board assemblies and harnessing for our customers. In addition, this acquisition was done to solidify our position to be able to supply more of the product to our own internal needs to the security and the medical group companies. We classically continue to be a vertically integrated company. The medical group, we continue to make progress in signing more distributors, both internationally and domestically for our non-invasive oxygen monitoring pulse oximetry product line. Medical group's revenue is up sequentially from Q4 2003 to Q1 2004.

Finally, in the operational area we have started consolidating some of the operations in both Opto electronics and medical products lines. This restructuring will start affecting positively to our bottom line by the fourth quarter of fiscal 2004, which is the June ending quarter. Our plan is to keep looking at operational efficiencies. And with the two new acquisitions, we intend to continue moving forward to integrate them into our existing business units and squeeze productivity improvement. With that, I will hand over to Mr. Anuj Wadhawan, the CFO, to give you the financial picture.

Thanks, Deepak. Financial highlights: The company's revenues for the first quarter of fiscal 2004 were $38.6 million compared to $37.1 million for the first quarter of fiscal 2003, an increase of 4%. Revenues from the security and inspection side of our business for this quarter were $33.7 million or 61% of total revenues. Revenues from opto electronic and medical side of our business were $14.8 million or 39% of total revenues.

The net income for the quarter was $1.3 million compared to $3.2 million for the first quarter of fiscal 2003. Diluted earnings per share were 9 cents compared to 24 cents for the last year's first quarter. This includes a pretax restructuring charge of $1.1 million resulting from the consolidation of manufacturing processes and facilities of certain opto and medical businesses and $247,000 for the write-down of an equity investment. These charges resulted in a 6 cent deduction in our diluted EPS for the quarter.

To give you the breakdown, the security side of our business, revenue decreased by $400,000. First quarter of last year included shipment of $6.4 million to Envision compared to $347,000 in the first quarter of fiscal 2004. The decrease in Envision's revenues was offset by increased sales in conventional business in the U.S. and international markets and inclusion of [inaudible] revenues.

Excluding shipments to Envision, security revenue grew 32% this quarter compared to first quarter of last year. On the opto side and medical side of our business, revenue grew 15% to $14.9 million this quarter from $13 million for the last year's first quarter. The increase in opto and medical side of our business was mainly due to increased sales to the defense industry and increased sales of medical products. Gross margin for the quarter was 32.5% compared to 35% for the first quarter of last year and 32.2% for the fourth quarter of fiscal 2003. The change in gross margin was due to a change in product mix.

R&D for the quarter was $2 million or 5.3% of revenues compared to $1.5 million or 4.2% of revenues for the first quarter of last year. The increase in R&D was largely due to increased R&D spending on the securities side of our business. SG&A for the quarter was $7.5 million or 19.5% of revenues compared to $6.8 million or 18.4% of revenues for the previous year's first quarter and $8.1 million or 15.9% for the fourth quarter of fiscal 2003.

The increase in SG&A compared to first quarter of last year was primarily due to increased legal and professional fees and increased headcount in sales and marketing and increased administration expenses and inclusion of SG&A expenses of Encorp. The decrease in SG&A expenses compared to fourth quarter of last year was primarily due to lower legal costs in connection with [inaudible] litigation. The impact of our OSI electronics acquisition and defense business would be EPS neutral to slightly accruative for this fiscal year. During the quarter, we had a restructuring charge of one $1.1 million resulting from the consolidation of manufacturing processes and facilities of certain opto and medical business. As we continue our consolidation, we expect an additional restructuring charges in fiscal 2004 in the range of $500,000 to $1 million. We expect to realize cost savings from these consolidations starting fourth quarter of fiscal 2004.

Our tax rate for the quarter was 30.3% compared to 33% for the first quarter of last year. Our tax rate is dependent on the mix of income from the U.S. and foreign locations due to tax differences between countries. Our balance sheet remains very strong. We have over $94 million in cash and marketable securities. Our receivables are down from June 2003 due to good collections and inventories are pending shipments of large cargo.

Our backlog has increased from $53 million at the end of June to $64.5 million at the end of September. Large cargo backlog has also increased from $7 million at the end of June to over $17 million at the end of September. In addition, we have booked $2 million of large cargo contracts from the Romanian government in October 2003. Our guidance from the last conference call has been revenues for the year to be at $180 to $185 million. We are revising our guidance for the year for revenues to be $190 to $195 million. And revenues for the second quarter to be $48 million to $49 million. Gross margins to be at 30% and EPS to be in the range of 18 to 20%. With that, I will now open it up to questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. The first question comes from the line of Steve Murphy from CIBC World Markets. Please proceed with your question.

Hi. Good evening, everybody. It sounds like that the contract manufacturing business that you acquired is going to contribute most of the incremental revenue that you added to guidance. I guess, first of all, is this true? And secondly, should we be looking at gross margins of around 30%, I guess, you know, indefinitely due to the change in mix?

Yes. Definitely the increase in the guidance of revenue is due to the contract manufacturing. We have acquired over $10 million dollars in backlog with this acquisition, and we are holding onto gross margins on the base business, existing business we have. And the gross margin is going down primarily because of electronics acquisition. And it has lower margins.

Well, Steve, just to clarify what Anuj said, we bought the business on October 1. So, it's only three quarters into it. So, there is some growth in addition to what we said in the last conference call that will come from the base business, but primarily the guidance that we're giving you, you're right, comes from the contract electronics manufacturing. Regarding the margin, just to clarify what Anuj said, the base business model of $180 to $185 million, we are quite comfortable and I think we're going to maintain the original guidance we gave of the margin of about 32%, which is a repeat of the Q4 of last year. The additional incremental revenue that we get from contract manufacturing, which, as you know, inherently tends to be in the low teens gross margin, so the blended margin in the guidance that Anuj has given you for this quarter brings it down to about 30%.

All right. Got it. Okay. And I guess when these restructuring charges or restructuring activities start to produce benefit, will we see margins getting back up to prior levels, or is that too ambitious?

Well, I think that as long as you didn't use the last word to prior levels, we expect by the fourth quarter of this fiscal year, the June quarter, that some of the synergies as we consolidate these operations will start benefiting the bottom line. Would it bring it up to 32% or will it bring it up to 31%? It will have some contribution to the positive, but we just don't know, this is too early, that will it get it all the way up to give the guidance of another additional $10 million dollars and hold onto the 32% margin on the base business of $180 to $185 million.

All right. Fair enough. You had talked about on the last call operating expenses; that is, SG&A plus R&D together, looking to be at about $10.5 million per quarter. You came in at about $9.5 million this quarter. How should we think about it going forward?

As I said earlier, this quarter we are -- SG&A was lower, primarily because of lower lead costs in connection with L3 litigation. We expect that the legal costs are going to go up. And also, in addition to that, our SG&A is going to increase with the acquisition of Westside Electronics. And we expect $10.5 to $11 million going forward SG&A per quarter.

Okay. Great. And I guess you may have just asked this -- answered part of this. But can you give an update on what's going on with L3? Has there been the summary judgment that you're anticipating?

Yes, I could answer that. L3 has filed a motion to dismiss, and we are awaiting a judgment on that motion from the judge there in New York. That's the latest.

Basically, Steven, just to add onto what Victor said, we committed to the street that every quarter we will disclose the expenses. This quarter relatively was quite low because there's a lull waiting for the judge to decide whether the summary judgment of L3 is proved. In that case the case disappears. On the other case we think we have a strong case. So, we add a little breathing room into it. But we are awaiting any day to get the decision what the judge is going to decide. We on the other hand have now actively started putting the list together to start getting depositions because the indication from the judge was why are you guys waiting, all of you? Start getting your case ready, which comes into play by the initial court date, Victor, of December, which we are still hoping that is the date. But it all depends on the judge.

Got it. Okay. And last question, a quick one. You mentioned $64.5 million in backlog. How much of that was from the acquisitions in the quarter?

It does not include $10 million of backlog which we acquired with the acquisition.

It does not include that?

It does not. Because the -- just to clarify, that acquisition was done after September 30th. So, the real backlog as of the conference call day should be increased by the backlog that we inherited on top of that. So, it's $64 million plus $10 million minus whatever they have booked since October 1 minus whatever they have shipped.

Got it. Okay. Thank you very much.

The next question comes from Jeff Rosenberg of William Blair. Please proceed with your question.

Hi. First off, could you give us an update on what you shipped this quarter to the TSA?

A. J., do you want to take that question, or Anuj, whichever has the right number?

Anuj, do you have that number in front of you?

Approximately $2 million dollars.

Okay. And is that -- should we expect that? I think the original schedule was to ship the remaining seven or so in the September quarter and the current quarter. So, should we expect more than $2 million this quarter, or has that been pushed out some? What's happening there?

I think, Jeff, you're gonna see a pretty level amount. You're probably gonna see it shipping about the same this quarter and maybe some next quarter at this point. Obviously we're talking to them about any follow-on orders, as well.

Okay. And then I don't think you gave the number on the -- you talked about the cargo backlog, but the cargo revenue during the quarter.

I think Anuj gave a backlog. Did you give the back log number for cargo?

Yes. It's about 17 million end of September. And since then we have booked another $2 million dollars for the Romanian contract, and the shipments for Q1 was a little over $2 million dollars in large cargo.

Okay. Yeah. That was the number I was looking for, $2 million in large cargo. And then switching to the EMS business, the backlog, I don't typically think of the EMS business where the backlog is a good proxy for the 12-month revenue. But you seem to be implying that so I want to be sure that's right. So, should we think of this as a business that adds $10 million dollars of annual revenue, or is there a great other number there that this might contribute to sales?

Well, that's one thing more that you analysts have to learn about the company's dimension of difference. Jeff, it's a little too early. We inherited a backlog, and it's all shippable in the next three quarters, as we mentioned. Obviously it's tied up to the economy.

Fortunately the customer base is more in the medical, not in the computer peripheral area. We think that depending on as we get our hands around it, a little bit too early, by next conference call we plan to expand and grow that business. At the same time it's a strategic acquisition for us to also get more -- squeeze more margin out into our own shipments to our own sister divisions in security and medical.

Jeff, just to clarify, the backlog of $10 million, a large portion of it is shippable in the next 9 months. Most of it is shippable in the next 12 months.

Okay. EMS business are often pretty customer concentrated. In smaller businesses like this it can be one or two customers that make up a third or half the business. Can you talk a little bit about the customer profile? It sounds like the end market mix is weighted towards medical, maybe a little bit more flushing out of exactly what sorts of end markets they address?

Well, again, it's so new we have not analyzed the concentration onto it. Basically it's box build, it's medical. It's a little bit of computer automation. I would say that the best way to look at that is there is no one customer which is, like, 80, 90% of the business.

And it tends to be more localized . The customers tend to be more into the Southern California, little bit into the Arizona time frame, and the whole strategic reason of looking at that, Jeff, was in addition to acquiring the product line to get us more efficient to supply our own products and to be able to be more attractive to our own value-added strategy to our own customers is to sort of cater to the local fast turn-around, which tends to have a little higher margin than what you might think about like the flextronics, which operates at a razor thin margin. We are more looking at a middle market, fast turn around, smaller volume, which needs to be U.S.-made product line. And maybe in some cases localized made for fast turn around.

Okay. So, given that kind of higher mix, lower volume profile, is it an operating margin that's pretty comparable to what, say, you reported this quarter, or is there work that needs to be done to get there? What's the profitability kind of on the pretax level look like?

Well, we mentioned that our guidance is that the base business without this acquisition we are holding the guidance to the low 30s, about 32%. We said last conference call that it is a repeat of Q4, which was about 32% and change. We came a little higher than that in the base just because there was no electronics contribution in the September quarter. Forward guidance we are giving about 30%. That means we'll drop 2 percentage points for the increase in revenue.

I think it's a little bit too early for us to really put a model together long term, but we think that the modeling that you look at is the $180 to $185 million of the base business guidance. We have not changed our guidance to the 32% margin. And then, depending on how fast these guys ramp up for the business on the OSI electronics side, and obviously that tied up the economy, they tend to be in the low teens, double-digit gross margin. So, when we blend it up, at least for Q2, our guidance is about 30%.

Okay. That's helpful. Last question, Anuj, what is the tax rate? Should we look at the first quarter number as being a good number for future quarters, or what would you say there?

As I said, it's dependent on the mix, but I think between 30 and 31%. I think it will be for next quarter.

Okay. Thanks.

Our next question comes from the line of Brian Ruttenber. Please go ahead with your question, sir.

A couple quick questions, guys. On the restructuring that you took the fee, can you tell us why you did that and what exactly you've done? You know, how many people have you let go? What have you shut down? Maybe you can give a little more detail on that.

Let's try to take that in two different versions. Anuj can follow it up by details that he has, but I'll give you the macro sketch. We moved for Synoptics, which is our component manufacturing, which supports a lot of the inside sales, from a large, inefficient facility to hopefully an efficient, smaller facility in Biloxi, Mississippi. We also took the combination of Centervision, which we acquired last year, and UDT, which is similar kind of businesses, and started consolidating in California some of the manufacturing.

We also took some of the products of Centervision and UDT and focusing them to move towards Malaysia manufacturing. We also had a research and development center for OSI Dolphin Medical, the pulse oximetry medical line in Orlando, Florida where the original company we bought into got started. And we started dismantling that research and development group and started moving them to Hawthorn, California because the climate is better than Florida. It's less humid. So, these are the basic things we have done. And Anuj can give you more details.

And what he mentioned, over the next couple of quarters, between $500,000 to a million dollars is the next phase that we planned to do as we assimilate our PC board electronics business between OSI Electronics in Camarillo, which is about 50 miles north of UDT Hawthorn and the OSI Electronics that we have in UDT for the PC board electronics and look at it and see whether we can even move some of the stuff to Malaysia. So, conceptually on a macro level this is what we are planning to do and have done. And the specific numbers of people and equipment and stuff, Anuj, maybe you want to handle that.

Brian, the majority of that is -- what we have is obsolete equipment with the move and leasehold improvements as we are moving it. And there's very little amount on the severances, very few people we have let go. But we are in the process as they go forward and that number will have some people. But the majority of that $1.1 million is our property and equipment and leasehold improvements.

Okay. Great. The other question I had was on the equity charge. Is that images? Is that the investment you had that you're pretty much writing off?

That's right. And with this I think we're pretty much done with that.

Okay. Great. And then if I can just talk about the revenue mix going forward, if looks like you reported about a 60/40 revenue mix, 60% percent security, 40% optical/medical. Can we expect that mix going forward? As I do kind of the back of the envelope, that's what I come up with. Is that consistent on a quarterly basis?

Well, I think that as long as the base model that we've been working with before we bought OSI Electronics, I think it's a good model to use. Ajay and Anuj, would you add onto it?

I think the uncertainty is how fast the economy makes an impact on the OSI Electronics. That might change a little bit. But we are not, and I want to emphasize we are not changing any way that the base business continues to show strength and growth.

I think just to add on there, Brian, you know, historically it's been, I think, last few quarters, about a 64, 65 to 35 split. And security continues to be very strong, but obviously with another acquisition that's going to add some dollars there, you might see that number go down a little bit. But I think 60, 65% without any further acquisition is what we're gonna look at.

Just to add to it, Brian, keep in mind that this quarter and we want to emphasize, two cargo scanners dropped out at the end of the quarter. So, when you do your ratios, the base business, you need to think about it that maybe that needs to be back into that kind of number with some kind of portion of a little bit of variability from quarter to quarter.

Okay. And then last question is kind of going forward I think we're all modeling progressive improvement on the EPS line from quarter to quarter. Is that realistic? You know, that's the kind of guidance you're giving from first quarter to second quarter. Can we expect incremental improvement from quarter to quarter?

I think, Brian, you know, we've given the guidance for the year for the revenues. We've given you the guidance for this quarter. Its's going from, I guess, 15 cents or 9 cents if you take into account the one-time charge is 15 cents, to 18 to 20. And I think that's really all we're going to comment on when it comes to EPS at this point.

Great. Thank you very much.

Ladies and gentlemen, as a reminder, to register for a question press the 1 followed by the 4. Our next question does come from Mr. Tim Quillan of Stevens. Please proceed with your question.

Good evening. I've got a couple, few questions. One is what was the revenue from Ancor during the quarter? Was that included in the $2 million in large cargo?

That's right.

Okay. Was there any other revenue or was Ancor all of the $2 million?

As we have consulted and as I have stated in the last conference call, Ancor has been consolidated in the cargo group. But the majority of that [inaudible] coming into that, the small portion of non-grants.

Gotcha. What kind of revenue do you expect from the small defense electronics business that you bought, the Schwartz business?

Well, Anuj, do you want to comment on the present quarter, what was the contribution from OSI defense?

OSI defense was very insignificant. It was less than, I think, a couple of hundred thousand dollars, with break even at the bottom line. And on the electronics we acquired in October, so it was nothing in September quarter.

So the answer to your question is that the present quarter has almost no contribution from any of the two acquisitions we did except a couple of hundred thousand dollars from OSI defense. OSI defense basically is in the miles program weapons and simulation training with customers like FAIC and Lockheed and Department of Energy. I think that you're gonna see -- I don't think that you're gonna see much significant contribution in both revenue and EPS in the next quarter or two, but they are working on large programs which, as Lockheed gets ramped up, we will see what I would say is incrementally significant improvement in both revenue and EPS. But it's a little bit too early in this stage to look at anything. And our guidance in our Q 2 doesn't make much contribution by the defense electronics business.

Yeah. And maybe I wasn't real clear, but I was just wondering what they're doing on an annual basis. Surely they must be generating some revenue.

Keep in mind that we bought the assets of the defense side of Schwartz Electro Optics. We didn't buy the total company. Prior to that, their primarily contract was with FAIC and with Lockheed for the weapon training system business. And as you know, if you follow that industry, that cubic is the incumbent, but the new order for the next generation was given to Lockheed. So, it's been a lot of that in the development mode. So, no ramp up production has started.

Okay. That sounds good. And what -- and I may have missed this earlier in Anuj's comments, but what should we expect the tax rate to be for the remainder of the year?

Between 30 to 31%.

And then finally, Ajay, I'm just kind of curious what you're seeing there, what the tone of the conference is. But I'm also curious what you're seeing in terms of potential orders from international customers to comply with the container -- the U.S.'s container security initiative.

I think as we mentioned, you know, international activity for us remains very strong. I think they're still waiting to see what the U.S. government decides, what rules they come up with as far as CSI initiative is concerned. But we are seeing some activity. With the U.S. side, we have had some success with some of the new technologies, especially our TNA, thermoneutral analysis technology.

As we announced, we sold a couple of these to the Air Force. We are getting a lot of interest because, as you know, all the technology used out there right now, whether it's gamma or x-ray, is all operator-dependent, and this is the only technology that can actually without an operator can detect for explosives or other weapons of mass destruction. And as Deepak mentioned, El Paso, we did have the grand-breaking. We expect to have that complete sometime middle part of next year. And again, that is generating a lot of excitement and a lot of questions at this conference, as well.

Just to add onto what Ajay said, I think from your perspective -- well, from the analyst's perspective, from the last conference call to this we have had a flurry of activity that has converted into orders. I mean, we have, after all, increased our backlog in cargo from what Anuj mentioned at $5.-something million to $17.5 million in cargo. Mostly international, but there's also a domestic content. I mentioned that we have finally started making progress. I think that the backlog maybe is not an indication of the progress we made.

The real issue is that we have said from day 1 that we believe very strongly that the broadest product line in the end will win. And what I mean by that is that a lot of applications need different products. And if you are a single product company, like some of our other competitors, you basically have to sort of focus and keep hammering the customer to buy your product because that's the only one you've got. We've always said that we want to be a broad-based company.

And the impact that's happened of completing our installation of various technologies all the way from relocatable 9 million electron volt systems in Korea to what would be called the state of the art, most modern, 9 MVP [INAUDIBLE] in Hong Kong, China border, to the industry first x-ray combined TNA system at Taiwan for air cargo to the Air Force success of a VEDs, Vacal explosion detection system, to a hybrid, that system of DNA x-ray mobile ordered by the Air Force, it sort of says what we've been saying that there is no standardization in this industry. There is a lot of product that every competitor thinks is better than the other person's, and we've taken the approach that we want to be a broad stroke, broad-based vendor to the customers because it's easier to sell the product if we know the customer's needs and we can fine-tune the product to customers' needs and for the budget.

We are not restricted with what we have and force the customer to buy. And because there is a lack of standardization, we want to be up there to be able to offer to both international and domestic a broad stroke of our technology, and in a working mode so they are not just paper designs so that when finally there is some kind of standardization or matching a customer's needs to the technology that's out there we have a pallet of different colors to offer to the customer.

And I think it's a credibility issue, as well. When you go to a customer, you know, somebody's out there trying to sell gamma or x-ray or something else, we're basically saying we have a combination of the technologies, gamma, x-ray. We have a mobile relocateable, fixed, and we now we have the combined technologies and obviously the next step is PF&A. So from a credibility standpoint, it's much easier for us to approach customers and explain to them the advantages and disadvantages of the different technologies.

And just to add on, you know, without rambling, we are the only company in this space that can offer a freight forwarder $70,000 machine to an x-ray machine in a LAN $250,000 to a 450 [INAUDIBLE] scanner single view of three, four hundred thousand dollars to a dual view $800, $900 thousand dollars, to a gamma system for a million, two million, three to a mobile system for two to three million dollars to a relocatable 9 MEV system with high penetration of 400 millimeters, which, by the way, we have the best penetration that anybody's offering for about $4 to $6 million dollars, to a state of the art high throughput system of 9 MEV, to $8 to $10 million dollars to TNA systems that hybrid technologies for [INAUDIBLE] specific optic imaging to a PFA system in El Paso.

I mean, it is such a broad stroke that in some cases people have this feeling how can a company be so broad? On the other hand, we've had successes. We haven't had any unhappy customer. We've had very good rave reviews from our international customers. And we are proud to say that diligence and patience, we are slowly identifying our weakness and continue to go forward for the U.S. government, which is a very important customer for us.

I appreciate the feedback. Thank you.

The next question comes from the line of Steve Gish. Please proceed with your question.

My questions have been answered. Thank you.

The next question comes from the line of Jeff Rosenberg. Please go ahead with your follow-up question.

Hi. I just wanted, Ajay, to ask when we look quarter on quarter in the security business, I think you shipped a little bit less in the both aviation area and a lot less in the cargo area. So, that implies you had a real pickup in the turns business. I just wanted to clarify that that's the right read, and maybe for you to elaborate a little on where the strength is coming from there, and do you expect it to continue, et cetera?

I think, you know, the strength is definitely coming from the turns business. It's coming both internationally to a large degree as well as domestically. Frankly, if I look at one area, there's really not one area. It's coming from a lot of different areas. People are more aware of security. And we have not seen any slowdown. We continue to see the turns business being very strong going forward.

Okay. And then my last question is the cargo went from a -- it ramped to a very high level and then came down and you demonstrated the lumpiness that can happen in this quarter. Any kind of a gauge on how much of a pickup in cargo we should look for between what you did last quarter and what you did this quarter in Q2?

I think you're gonna see a pickup definitely this quarter from where it was last quarter, because as Deepak mentioned, we already shipped one machine. Another one is pending customer location. So, you'll see a pickup.

And I really don't want to get into any specific numbers what it might be for obvious reasons, because I don't want to have to answer next time why it was down or up. We've given you a guidance on $48 to $49 million and I think that's the number we should focus on.

I think just to add onto what Ajay said, Jeff, we're intentionally not being evasive for competitive reasons. We don't want to talk about which technology we're talking about. But the very fact that we are upping the guidance and with the pushout from first quarter, cargo definitely is moving up. And we're also increased significantly our backlog and we are also saying to all of you that the quotation activity both internationally and domestically continues to be very strong in cargo.

Okay. Thanks.

Once again, ladies and gentlemen, if you do have a question, please press the 14 on your phone. Our next question comes from the line of Tim Quillan. Please go ahead with your follow-up question.

I just wanted to make sure I understand fully the restructuring charge that you took in the third quarter and the one that you plan to take here in the future. The question is, and it may be a total of $2 million that you intends to spend to get future cost benefits. Can you quantify what the annual cost savings you're looking for from the restructuring, what that will be?

Whole, first before Anuj answers, you mentioned Q3. We have never taken any restructuring charge in Q3.

I'm sorry. That's's just an analyst being confused about fiscal and calendar quarter. I meant the first quarter.

Okay. Basically you're right. We estimate between $1.1 that we've already taken and half a million to $1 million is our estimate. When we get the OSI electronics and the PC board electronics that we have at UTD to start combining together. I think it's too early for us to be able to quantify what's the impact gonna be in dollars and cents except that we have said in this conference call that by Q4, which is the June quarter, we would start seeing some of the benefits in our EPS. Anuj, do you want to add anything to it?

Yeah. Tim, the savings that we're going to see is as we have acquired our electronics business we have some of these in-house electronics business. We're going to consolidate that. Centralvision, we don't have. We have a couple of less facilities, we have some less people and less (inaudible ]. All those are savings which we are in the process of. We have realized some. We have done some restructuring and we are in the process. And these are the savings that we are getting. Now, the total destruction charge of $1.1 and another about $8, $9 hundred million dollars, combined together with obsolete equipment, termination of the leases and the [inaudible] of some people.

Okay. We'll just stay tuned for those cost benefits. Thank you.

Gentlemen, at this time there are no further questions. Please continue with your presentation or closing remarks.

Well, thank you very much for taking the time at this late hour to listen to our Q1. To summarize it, our guidance for this coming quarter is 18 to 20 cents on $48 to $49 million in revenue. Our security business continues to be strong. We've done some strategic acquisitions. We continue to squeeze productivity out of it.

And we believe long-term that the broad-based stroke that we are trying to build, especially in the security business, will pay off with the technology platform that we are building. Our backlog is strong. Our balance sheet is strong, and we continue to move forward for [inaudible]. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.