OSI Systems Inc (OSIS) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and year-end 2005 OSI Systems earnings conference call. My name is Cara and I will be your audio coordinator for today's call. At this time, all participants are in a listen-only mode. However, we will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). I would now like to introduce Mr. Victor Sze, General Counsel. Please proceed.

Thank you very much and good afternoon. First, I wanted to apologize to everyone for the delay. We've had some power difficulties here in Los Angeles, so I hope you have been able to bear with us. On the call today are OSI Systems' Chairman and CEO, Deepak Chopra; the President of the OSI Security Group, Rapiscan, Ajay Mehra; and 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 or 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 SEC.

For a limited time, we will make the web-cast 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 September 12, 2005. 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, Victor. I want to apologize to all of you for the delay. And I'm told that the news release still has not hit the street. So I want to again apologize because of this electricity problem and outages in Los Angeles. So when I'm talking about it and my guys, that we are hoping that we didn't want to keep you waiting for too long, that we'll start talking about it and it might be that you don't have the news release in front of you. But hopefully, by the time the question-and-answers are coming in that the news release will be out. Again, before I start, I want to apologize for the delay.

Again, wanted to welcome everybody for the Q4 fiscal 2005 and year-end earnings conference call. Revenues for Q4 were $100.7 million, and the net loss of Q4 fiscal 2005 was $0.25 per share. Mr. Anuj Wadhawan, the CFO, will cover the financial highlights. I'm going to cover the various business segments of the Company and how they performed in the quarter and give you a little bit of what's happening in those businesses, and the outlook.

Definitely, without question, this quarter has been a very challenging quarter for the Company. The optoelectronics group reported external revenues of 17.4 million for the fourth quarter. Intercompany revenues for the quarter were 3.5 million. For the year, the external revenues were 66.1 million and the intercompany revenues were 18.4 million.

We continue on our original statement of capturing more of the Spacelabs outsourced production in-house. As mentioned earlier, our plan is to capture close to the internal target of approximately 25 million from Spacelabs, which they outsource, and approximately $15 million from the security group by the late 2006. We are well on that way. The revenues were 18 million, reflected by a 3 million increase intercompany from last year.

Externally, the commercial sector continues to be healthy, especially in the medical sector. Defense electronics, as mentioned in our previous quarters' conference calls, has been weak, but we're very pleased to announce a $7.2 million order for that group just recently, which will complete shipping in its entirety by March 2007. Overall, the optoelectronics group should continue its profitability for each of the quarters next year and for the whole year.

Security group -- the security group reported revenues of approximately 32 million for the fourth quarter. For the fiscal 2005 ending June 30, 2005, revenues were approximately 123 million. The Company's people and parcel scanning product line continues to be profitable. We are fully committed to this product line, and as mentioned in the Q3 conference call, have increased our research and development spending on this product line, especially for the automated Rapiscan (ph) screening product line.

The two areas we believe that can have significant growth opportunity for OSI in this product line is the people screening Secure 1000, for which we announced an important order from BAA plc, formerly British Airport Authority, which runs seven British airports, especially Heathrow and Gatwick. As you know, TSA in United States have also decided to start live trials for this technology in the very near future.

We also announced in Q4 approximately $8 million of orders for this personal screening in the nonaviation sector. Our install base has grown significantly in this year for this product line. We remain bullish and are working with TSA to enhance its performance for the aviation market.

The other area of growth in this segment is the automated hold baggage screening. OSI, as mentioned previously, has no presence in this arena at the present time. We have two product lines being developed, all by our own internal funding. One is CT-based. Our product will be capable of doing approximately 1500 to 1800 bags an hour and is based upon electronic computerized tomography, which has the added advantage of not only speed, but smaller footprint, and compared to other units out there, insignificant interface cost with existing in-line baggage handling conveyor systems. It will compete head-on with the L-3 eXaminer and GE's formerly InVision CTX systems.

We're very encouraged with our progress and have received very positive feedback from some international customers, although this is very preliminary. We do not expect any revenue in fiscal 2006. This is targeted for fiscal 2007 introduction.

Second product line is for in-line high-speed noncertified systems. We have started doing beta testing with some international customers. We believe our products will be well-received in the international market and our target is to start generating revenues by late fiscal 2006. Our goal always has been to be a broad player with a broad portfolio in this marketplace.

Cargo and vehicle inspection product line. This area has been a very big challenge for us. We continue to invest heavily in this product line, but with no current significant production traction. We are incurring losses every quarter. In Q4, our losses from cargo and vehicle inspection product line were approximately 3.4 million. Our vision has always been to have a broad product portfolio so that we can offer a total logistical solution to our customers.

We're very excited with today's news release, which I hope has come out yet, for new bookings of approximately $16 million for multiple systems of our high-energy Eagle product line. This confirms our continued commitment to this product line, and believe that we will get additional traction soon in this arena. We continue to await U.S. government's procurement decision regarding large cargo. We believe that we have a broad product portfolio which can deliver the optimum solution for U.S. government's needs to secure our ports and border crossings.

Our grant intake is healthy for this product line. We announced in Q4 early a $2.7 million grant from the U.S. government for the development of the radiological threat identification system. However, we expect revenue weakness to continue, with losses at operating income level for this product line for Q1 of fiscal 2006, but expect both revenue and improvement in operating income for the remainder of fiscal 2006.

Health care -- the health care growth revenues for Q4 were 51.1 million and for the full year was 195.7 million. We are very happy with the performance of this growth. This year has seen us grow from last year's revenue of 60.7 million to 195.7 million. Just to put in the right perspective, our revenues in the health care group for 2003 were approximately 11 million. We have accomplished to integrate Spacelabs into OSI, acquired Blease, an anesthesia device manufacturer in the UK in February 2005, and started bringing the outsourced manufacturing of Spacelabs to within OSI's other subsidiaries. Our margins remain strong, and we have had five consecutive profitable quarters. We are fully committed to grow this business, both from internal growth and by complementary acquisitions.

For the past year, the Company as a whole has been exploring strategic alternatives for its various business units. The Company has decided that it plans to pursue the listing and public offering of approximately 30 to 35% of the equity in Spacelabs Healthcare, Inc., a newly formed company, Delaware, Inc., which includes all its health care subsidiaries and businesses worldwide. In that respect, we have engaged Collins Stewart, a London-based investment bank, to pursue this offering in United Kingdom on the AIM Exchange, which is owned and administrated by the London Stock Exchange. Comparable companies of similar size and technology are valued at approximately one times revenue. The proposed transaction is expected to be completed in second quarter of 2006, which is by December 2005. But there is no assurance regarding the completion of any such listing or offering.

In conclusion, we are remaining very bullish and committed to this product line and plan to grow it. Health care group will continue to be profitable for every quarter of fiscal 2006.

Litigation and Sarbanes-Oxley -- as mentioned in our previous third-quarter conference call, we are involved in two very expensive litigations -- a patent dispute on gamma detection in our cargo and vehicle inspection product line with SAIC, and a business dispute with L-3 in the security group. These lawsuits together cost us approximately $2.8 million in Q4. Our expenses are going to be quite high for the next couple of quarters regarding these two litigations. We cannot predict what the legal costs for the coming quarters will be, but we do hope to reach a closure on these issues by the end of our fiscal 2006.

Our Sarbanes-Oxley implementation expenses for the quarter, as mentioned earlier, are also very high. There will be costs related to this even in Q1, but after which time it should taper off.

With this, I'm going to turn it over to Mr. Anuj Wadhawan, and I'm told that both the news releases have hit the wire.

Thanks, Deepak. Good afternoon, everyone. I will be giving you the financial highlights for the fourth quarter and fiscal 2005. The Company's revenues for the fourth quarter of fiscal 2005 were 100.7 million, compared to 95.8 million for the fourth quarter of fiscal 2004, an increase of 5%. Revenues for the fourth quarter of fiscal 2005 for the security side of the business were 32.2 million or 32% of our total revenues. Health care, 51.1 million or 51% of total revenues. Opto, 17.4 million or 17% of total revenues.

The net loss for the quarter was 4 million, compared to a net income of 2.2 million for the last year's fourth quarter. Diluted loss per share was $0.25, compared to diluted earnings per share of $0.14 for the last year's fourth quarter. Revenues for fiscal 2005 were 385 million, compared to 247.1 million for fiscal 2004. Diluted loss per share for fiscal 2005 was $0.20, compared to diluted earnings per share of $0.65 for fiscal 2004.

On the security side of our business, revenues increased for the fourth quarter by 900,000 or 3% to 32.2 million from 31.3 million for the last year's fourth quarter. The increase was due to higher sales of people and parcel screening products, partially offset by decrease in revenues of domestic and international cargo and vehicle inspection systems.

Revenues for the people and parcel screening products increased by 3.3 million to 25.8 million from 22.5 million in the fourth quarter of last year, primarily due to increased people screening systems sales -- that is our Secure 1000 system -- while the revenue of domestic and international cargo and vehicle inspection systems decreased by 2.4 million to 6.4 million from 8.8 million in last year's fourth quarter.

Security sales for fiscal 2005 increased by 5.4 million or 5% to 123.2 million from 117.8 million in fiscal 2004. The increase was primarily due to an increase in the sales of our people scanning systems and an increase in service revenue and was offset in part by lower sales of baggage and parcel inspection systems to the TSA.

Revenues for the health care group of our business for the fourth quarter of fiscal 2005 increased by 5.7 million or 11% to 51.1 million from 45.4 million compared to last year's fourth quarter. The increase in revenues was mainly due to inclusion of revenues from Blease Medical, a company we acquired in February 2005. Revenues for the health care group for fiscal 2005 increased by 135 million or 222% to 195.7 million from 60.7 million for fiscal 2004. The increase was primarily due to inclusion of revenues from Spacelabs Medical, a company we acquired in March 2004, and inclusion of revenues from Blease Medical.

Revenues for Spacelabs Medical and Blease Medical for fiscal 2005 were 178.5 million, compared to 47.2 million for fiscal 2004. Revenues from opto side of our business for the fourth quarter of fiscal 2005 decreased by 9% or 1.7 million to 17.4 million from 19.1 million for the last year's fourth quarter. The decrease in revenue was primarily attributable to lower sales in our defense optoelectronics business.

In addition, our opto group captured 3.5 million of intercompany revenues from the security and health care groups for the fourth quarter of fiscal 2005. This has been eliminated in the consolidation. Revenues from the opto side of our business for fiscal 2005 decreased by 2.5 million or 4% to 66.2 million from 68.6 million for fiscal 2004.

(technical difficulty) family, due to lower sales of defense optoelectronics and was offset in part by increased sales of commercial optoelectronics. In addition, our opto group captured 18.4 million of intercompany revenues from security and health care groups in fiscal 2005, compared to 15.4 million in last year's fiscal 2004.

Gross profit -- gross profit for the fourth quarter of fiscal 2005 was 38.2 million or 37.9% of revenues, as compared to 36.6 million or 38.2% for the last year's fourth quarter. The gross profit for the fourth quarter was favorably impacted by approximately 2.1 million due to a change in the estimated warranty provision because of lower-than-expected warranty claims on a specific product of our health care group and was partially offset by lower gross profits from the sale of cargo and vehicle inspection products and defense optoelectronics.

SG&A -- SG&A for the fourth quarter was 35.7 million or 35.4% of revenues, as compared to 26 million or 27.2% of revenues for the fourth quarter of fiscal 2004. The increase in SG&A in the fourth quarter of fiscal 2005 compared to last year's fourth quarter was mainly due to increased SG&A spending in our corporate segment due to higher litigation and Sarbanes-Oxley expenses of 4.4 million, plus legal settlement costs related to the litigation with the former President of Spacelabs Medical, an increase in SG&A due to inclusion of SG&A of Blease Medical of 1.1 million, which was acquired in February 2005, and higher SG&A expenses by our security group related to efforts aimed at developing a broader market for cargo and vehicle inspection products and hold baggage screening systems, and outside tax consulting related to research and development tax credit study.

SG&A for fiscal 2005 was 116.2 million or 30.2% of revenues, as compared to 54.2 million or 21.9% of revenues in fiscal 2004, an increase of 62.1 million or 115%. The increase in SG&A for fiscal 2005 was primarily due to inclusion of SG&A expenses from Spacelabs Medical, acquired in March 2004, Blease Medical, and inclusion of SG&A expenses of Rapiscan Systems High Energy Inspection Corporation, previously known as ARACOR.

The SG&A for these three subsidiaries for the year totaled 61.8 million, as compared to 17 million in fiscal 2004. The increase was also due to higher sales and marketing expenses for our security group and establishment of bad debt reserve of 2.5 million for an international cargo and vehicle inspection systems receivable. The increase was also due to increases in SG&A expenses in our corporate segment, due to higher legal expenses related to two legal proceedings, expenses related to Sarbanes-Oxley implementation.

The litigation and Sarbanes-Oxley implementation costs for fiscal 2005 were 6.6 million, compared to 600,000 for fiscal 2004. In addition, we incurred higher administrative headcount, legal settlement costs with the former President of Spacelabs Medical, and outside tax consulting charges related to research and development tax credit study.

Research and development -- R&D for the fourth quarter of fiscal 2005 increased to 9.5 million or 9.3% of revenues, compared to 6.7 million or 7% of revenues for the fourth quarter of fiscal 2004. The increase in R&D spending for the fourth quarter of fiscal 2005 compared to last year was due to increased R&D spending in our automated hold baggage screening and cargo and vehicle inspection systems. The increase was also due to inclusion of R&D spending for Blease Medical of 500,000, which was acquired in February 2005, and increased R&D spending in the health care group.

R&D expenses for fiscal 2005 were 30.5 million or 7.9% of revenues, as compared to 14.6 million or 5.9% of revenues for fiscal 2004, an increase of 15.9 million or 119%. The increase was primarily due to inclusion of Spacelabs Medical, Blease Medical and OSI LaserScan, a business we began to operate in November 2003. R&D expenses for these three businesses were 15.1 million for fiscal 2005, compared to 4 million for fiscal 2004. The increase in R&D spending was also due to increased spending on automated hold baggage screening and cargo and vehicle inspection systems in the security group.

We had a tax benefit of 4 million in the fourth quarter of fiscal 2005, compared to a tax expense of 774,000 in the fourth quarter of last year. Also included in the tax benefit for the quarter was a benefit of 3.5 million, due to the outcome of a study conducted with the assistance of the Company's outside tax consultants to determine the Company's availability of R&D tax credits.

Our total backlog at the end of June 2005 was approximately 94.7 million. Included in that, backlog for cargo and vehicle inspection was approximately 17 million. Our total backlog at the end of August 2005 was approximately 118 million, and included in that, backlog for cargo and vehicle inspection at the end of August 2005 was approximately 29 million.

We expect our revenue guidance for the first quarter of fiscal 2006 to be 101 to 103 million. Due to significant increases in litigation expenses and continued Sarbanes-Oxley implementation expenses and continued weakness in the cargo and vehicle inspection business, the Company expects loss in the first quarter of fiscal 2006.

With that, I will open it up to questions.

(Operator Instructions). Tim Quillin, Stephens Inc.

It's kind of an eye-popping spending on Sarbanes-Oxley compliance last quarter. Are you going to be able to file a 10-K on time?

Victor, do you want to take that?

Yes. We are expecting to file for an extension for this 10-K.

But if it is an extension, Tim, it's only a couple of days.

It's an automatic extension.

Yes, but if you're talking -- a couple of days.

Yes, we're talking about a few days.

Okay, that's understandable. And maybe I'm -- but these -- what kind of Sarbanes-Oxley expense do you expect in this quarter?

It's for the audit and some left over from the last quarter because of the testing, internal evaluation, and the consulting costs and outside audit for the SOX-related expenses.

And what was the amount for this quarter?

For Q4?

Q4 is approximately $1.7 million.

Tim, the answer to your question is we don't know exactly for Q1, but it should be quite a lot lower than Q4. And then what I said was it should start tapering off significantly after the first quarter.

Okay, okay. A lot of questions, I guess, out of these press releases, but I will ask a couple and let somebody else jump in. But why are you filing an IPO in London? What's the financial reason for doing it there as opposed to in the U.S.?

Well, Tim, as you know that for the last year, you know, you guys have been asking -- we've been doing our strategic analysis. And we did talk about the various segments, including the security group and the medical group. We talked to numerous bankers in U.S. and UK, and we came to the conclusion that the present scenario or the present time, an IPO of this size in the health care industry was not quite positively giving to us a comfort feeling from the U.S. side, whereas when we went and looked and did our due diligence in the UK side, it looked like a complete opposite, where that size of discount of offering and in the medical space would be very well-received. And after carefully analyzing, it basically looked like that made a lot of sense.

And secondly, you know, we always have the option at a later time to come back into NASDAQ and have dual listing. So looking at all our options, looking at what we were faced with and the size and the valuation, looked like that this was the best thing available to us.

Okay, fair enough. And can you give us a little update on what's happening in El Paso and also in Houston?

Ajay, you want to take that?

Yes. Basically, we've completed the test in El Paso. DoD has come up with their report. We did not meet some of the specifications in El Paso. But DoD believes very strongly that this technology should go forward. As you know, the El Paso funding was pretty much completed, so what the DoD has decided that through TSA in Houston, we're going to go forward with PFNA, but at this point, we're not going to do anything more on El Paso.

Just to add onto Ajay's comments, Tim, as we have mentioned to you in the past, the Company's position is that if there is going to be additional monies required, OSI basically has said to you and to the street that we're not going to put any more money in El Paso. So that with that, the other additional development that's going on is for the air cargo in Houston, and the government decided that instead of putting more funding into the El Paso, that let's wait and look at how the Houston does.

Well, since Houston is already funded.

Since Houston is already funded. So we as a company just took that stand that whatever improvements are needed in El Paso, we're not going to put any more Company money.

And so it's a facility sitting idle right now? It's no longer operational?

I think that there might be a skeleton crew, but I don't know what the government is going to do. My gut feel is that it's active, but it will remain there till the Houston is completed. And then depending on the results of Houston, it might get reactivated with the funding. But whatever that funding is going to be required for El Paso, it has to come from the government. OSI is not going to put any more money.

Okay. Can you just give us a sense of the technical issues involved and how solvable they are?

Well, there are technical issues of the -- what are they called -- the EGVs? AGVs -- those robots that run around, which, by the way, we don't make; it's from a vendor. There are some issues on the LINAC and the uptime of the LINAC, and there are some issues of -- that more software collaborative analysis has to be done, now that more images and light cargo has been done. Nothing insurmountable, nothing that basically doesn't prove that the technology, as in the report that Ajay is talking about -- by the way, we have not seen it. But it says that that's the only technology available for material specific, and they would recommend it to go forward. But like I said, we are at a point where I don't want to subsidize it.

Okay. Fair enough. Thank you for your time. I'll let somebody else ask questions.

Drew Jones, Morgan Keegan.

This is Drew Jones for Brian Ruttenberg. I guess the question we had was just to get a little more explanation on the listing on the London Stock Exchange, and does this signify a breakup of the Company? We're just kind of looking for a little more explanation. Thanks.

Well, you know, I wouldn't call it breakup. I guess that our intention has always been the same -- which is the same kind of intention from all of you guys -- that at a certain time, when there's critical mass, the businesses when they can stand on their own might make a lot of sense. And we believe that with the present uncertainty in the cargo side and the losses in the security side, and on the other hand, the medical business is approaching $200 million in revenue, and has had five consecutive quarters, and if you could get the right valuation, this is the right thing to do to grow that business.

Regarding your question about does that mean that the Company is going to split? I guess the way you should read it, that the two businesses, if they can't get a better value for the stockholders and can hold in different separation, we are going to look at it. Right now, the ending results if we are successful in the offering to complete, OSI Systems will still own 65 to 70% of this UK-listed company. And we have the option to bring it back. And if we can get a 1X revenue valuation, approximately $200 million, up to 30, 35%, that's about $70 million.

(Operator Instructions). Tim Quillin.

Not a lot of people here, I guess, had hung on for the hour. Just to set my mind, were the problems putting out a press release solely related to the power outage, or were there other reasons for having a delayed press release?

I guess honestly speaking into it, this year end has been a tough as far as tax issues I've gotten. You're going so many moving parts into it, and so we've -- getting our heads together to come up with the numbers, and every time something changes, the tax numbers change quite a lot. But we were ready 30 minutes before and we just couldn't get it out.

Okay, and then to understand the tax -- the $3.5 million R&D tax credit, I guess it's a credit. So what you're saying is with your auditors, you determined that you can take that $3.5 million now, or is that -- could that be reversed later? I didn't quite understand where that stood right now.

That we have already taken in fiscal '05, and also we're going to go back and get a refund from prior years.

We fully expect to get a refund on that. That's basically what that --

Okay. And is this in a particular geography? Where are the R&D tax credits arising from?

This is from all the different companies, and we had a full-blown study. It's particularly for U.S. and for last few years combined.

Okay, that's helpful. And I missed the number -- what was the total backlog at the end of June?

June was approximately 94 million, and now end of August is about 118 million.

And of that 94, 17 million was large cargo?

Tim, just to add onto it, it's a significant fraction for us with the $16 million for our High Energy Eagle product line, and we are very, very happy what that because what it does is it starts the production flow again, and we in addition continue to wait for U.S. government's decision on their side.

And can you tell me about that order that was received -- I haven't had the chance to look at the press release -- what it pertained to exactly?

It's an undisclosed customer for competitive reasons, but it's not the U.S. government -- for $16 million or high-energy multiple excess systems for our Eagle product line.

And when you say you are awaiting what the U.S. is going to do, can you just elaborate on that? And you say in your press -- and I'm looking at the press release now, that Port of Baltimore has been very happy with it. Are you thinking there's going to be a wider spread deployment of the Eagle systems in the U.S.?

Victor, do you want to comment on it?

Well, you know, we've been talking to the U.S. government back and forth, and we're hopeful that any procurement they do in the future, that we're part of it.

You all have I think a facility in Southern Mississippi. What was the impact of the hurricane there?

We had some minor damage, but the facility has been up and running for the last week or so. Minor flood damage, mostly in the office area, but production-wise it's a nonevent. (multiple speakers) But from a -- okay, go ahead.

All the people are accounted for. We are very relieved, and everybody is safe, and their families.

That's the important thing, definitely. Also, on the Secure 1000 and the personnel scanning market in the U.S., I know there they are going into wider spread evaluations of that technology, but the DHS Secretary has been pretty vocal, I guess, about the potential rollout of this technology. And so what is your expectation of the market size? In other words, have you run models and kind of said if this is used for secondary screening, how many systems would that entail in the U.S. for U.S. airports?

We have not gone through in detail, but if you just look at the number of U.S. airports, there are over 400 U.S. airports, close to a couple of thousand check points. It would be very hard for me to sit here and speculate what they are going to do, which secondary checkpoints they are going to choose, which airports. I think we're in the early stages right now.

Okay. And then just lastly, what was the operating cash flow in the fourth quarter and what was the CapEx?

In the fourth quarter, we spent about US$3 million for operating, and the CapEx was about a couple of million dollars.

Okay, and I lied about that being the last question. Do you have any outlook or any help for us on your fiscal '06 sales -- what your fiscal '06 sales targets might be?

Well, we haven't given yet, especially you can understand the uncertainty in the cargo side -- just one order is 16 million, which is unshippable this fiscal year. And if we get any more traction from the U.S. government, it can change drastically.

But I think the better way to look at it is if you just look at Q1 comparison of our guidance to what Q1 a year ago was, basically, Q1 tends to be quite weak. So that if it looks like that our guidance is about 101, 103 million from 87.6 million a year ago, being the weakest quarter, and as you know from last year, Q2 is significantly strong for the health care side. So that if we can get some traction in cargo, we are quite bullish today than we were a month ago, and the health care growth, we believe that the year should show some healthy growth from this year. And we also are saying that after Q1, from what we know right now, Q2, Q3, Q4 for the year would be profitable.

Michael Bartlett, William Blair.

I couldn't find this in the details anywhere. Did you have a breakdown of the Blease Medical revenue for the quarter?

No, we haven't given it, but I think it's approximately, what, 4? 4.5?

4.5 million.

About 4.5 million. Earnings neutral.

Okay, earnings neutral. And is there going to be any opportunities to bring any of that manufacturing in-house, like you -- like what's going on at Spacelabs?

Absolutely. We said it when we did the -- it was basically the Company's motto. Keep in mind that their revenue for the outsourcing is relatively -- well, they're not as big as SpaceLabs. So it's only a couple of million dollars, but the answer is yes, but not -- the advantage is that since they outsource everything and they were just an independent company, we have some ability to also get some price benefit off our size, not only that we can bring whatever we can internally to do our own manufacturing, but we can also squeeze some manufacturing cost synergies from the outside procurement.

Okay, thank you. Just recently, I came across a mention of PFNA being installed at the Ted Stevens Airport in Alaska. Is that still accurate given the El Paso news?

We are looking -- we are installing a system in Houston, which is air cargo, and we have talked to various other airports, and Alaska is one of them.

I think just to again emphasize, El Paso is for cargo, Houston is for air cargo -- two different applications, two different specs, two different requirements. And I won't call El Paso all negative. Basically, what we're saying about El Paso is it's an R&D system. It's finally to push commercial outside deployment beyond the lab for that system, and maybe the expectations for everybody were too high.

The question really is that, A., the government likes the technology, they have put it even in their reports, this is the only material specific technology that works for cargo. But we as a company are saying that if there is more improvements to be done to that, the funding has to come from the government. OSI is not going to put any more funding. But it doesn't mean that El Paso technology for cargo is not a viable technology. It needs more money.

Gentlemen, you have no further questions. I'd like to turn it back over to you for any closing remarks.

In closing, this year has been a tough year. No doubt about it. We are still committed to all three segments. We have great opportunity in the security area, both in the people and parcel scanning and the hold baggage automatic detection, which we are continuing to invest our own dollars, and we believe that we'll get definitely traction in that product line.

The big news is cargo, and we haven't changed, though we're watching cautiously what the U.S. government does. But we have a healthy backlog, we're building our backlog, we're talking to the U.S. government, and we feel that we have the right product mix, we have the right product portfolio, that whatever solution is required to secure our borders, that OSI will have a product that will match to it.

In the health care area, we think that we have reached critical mass. We have a charter to grow the business, both from organic internal growth and by complementary acquisitions. We believe that a successful completion at AIM to raise money to grow the business is the right thing to do, and we plan to continue to look at that business and look at all opportunities available to both grow the business.

On the other hand, we do have two litigations, which hopefully we can bring to a closure by the end of this fiscal year. We hope to look at our SG&A, and if you look at the losses from the large cargo and the litigation and Sarbanes-Oxley implementation, that's where all the losses for the year have come from. So we have a challenge. We're going to grow this Company. We're going to return to profitability in Q2 and we're committed to be profitable Q2, Q3, Q4, and for the whole year. Thank you very much.

Thank you for your participation in the conference. This concludes our presentation. You may now disconnect. Have a great day.