OSI Systems Inc (OSIS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 OSI Systems earnings conference call. My name is Eric and I will be your coordinator for today. Now at this time, all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn your presentation over to Mr. Alan Edrick, Chief Financial Officer. Please proceed.

Thank you. Good morning and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. I'm here today with Deepak Chopra, our President and CEO; Ajay Mehra, President of our Security Division, Rapiscan Systems; Victor Sze, our General Counsel; and Jeremy Norton, our VP of Investor Relations. Welcome to the OSI Systems 2008 fourth-quarter and year-end conference call. We would like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please also note that this presentation is being webcast and will remain on our website for approximately two weeks.

Before discussing our financial and operational highlights, I would like to read the following statement. In connection with this conference call, the Company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements under the Act. Such forward-looking statements could include general or specific comments by company officials on this call about future Company performance as well as certain responses to questions posed to Company officials about future operating matters.

During today's conference call, we may refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results. For complete information regarding non-GAAP measures, the most directly comparable GAAP measures and quantitative reconciliation of these figures, please refer to today's press release regarding our fourth-quarter results.

The press release will also be filed with the SEC as part of a Form 8-K. The company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from any forward-looking statements made by the Company. These factors include the risk factors set forth in the Company's SEC filings. Any forward-looking statements made on this call speak only as of the date of this call and the Company undertakes no obligation to revise or to update any forward-looking statements whether as a result of new information, future results or otherwise.

With that disclaimer out of the way and before turning the call over to Deepak, I will provide a high-level overview of recent accomplishments. As highlighted on each of our conference calls over the past year, we have placed significant emphasis on specific initiatives to improve our profitability and we continue to be pleased with the rapid progress we are making. Our fiscal year 2008 financial results demonstrated significant improvement and provide clear evidence that the changes we embarked upon in fiscal 2007 and continue to build upon in fiscal 2008 are leaning to sustainable and proved earnings performance.

Q4 and fiscal year highlights are as follows. First, we reported a 12% increase in fourth-quarter sales. For the year, we achieved a 17% increase on the topline with all three of our divisions reporting double-digit growth.

Second, as mentioned on our last call, the changes we have made throughout the organization including the successful cost rationalization efforts are clearly paying off as our operating income excluding impairment, restructuring and other charges, increased 55% in Q4, on a 12% increase in sales demonstrating the leverage we have been speaking to. For the full year, our operating income increased approximately $29 million excluding nonrecurring amounts. Each division contributed significantly to this turnaround in fiscal 2008.

Third, excluding nonrecurring charges, the combination of increased sales coupled with our streamlined cost structure lead to EPS of $0.36 for the fourth quarter of 2008 compared to $0.16 last year. For the full year, coming off fiscal 2007 where we lost approximately $0.30 per share on a normalized basis, we provided aggressive initial earnings guidance last year of $0.60 to $0.75 per share for fiscal '08 excluding nonrecurring charges. We are pleased to report that we delivered EPS of $0.74 for fiscal 2008, again, excluding one-time charges which was at the high end of our initial range and an improvement of $1.04 from fiscal '07.

Fourth, we showed significant improvement in our goal of generating positive free cash flow. In the fourth quarter a fiscal '08, we generated over $9 million of operating cash flow and $5 million of free cash flow after generating $2 million in our third quarter. This was our strongest operating cash flow in our Company's history.

As the financial turnaround is in full swing, we have done so while continuing to position the Company for future growth including substantial R&D investment of 7.3% of sales. The year was also marked by strategic initiatives including the repurchase of 100% of Spacelabs, and its subsequent delisting from the AIM; the opening of a new healthcare manufacturing facility in China, which we will believe will open up new markets to our sales channel, as well as provide a low-cost manufacturing environment; successfully obtaining a new credit facility; and the launch of several new successful products by our Security Division.

We still have many challenges ahead of us, but we believe we are well situated to capitalize on our plan for both near-term and long-term earnings growth. I will be updating you further on the financial performance of the Company. But first, let me turn the call over to Deepak.

Thank you, Alan. Good morning and welcome to the OSI Systems fourth-quarter 2008 fiscal year and earnings conference call. This has been a very good year for the Company. 2008 was a challenging year. We committed to you good people over the last couple of quarters that we are focused to grow our topline wisely and putting more emphasis on the bottom line. We are happy to announce, as Alan has mentioned, that year-on-year revenue increased by 17% to a record $623 million. While excluding the impact of impairment, restructuring and other one-time charges, operating income improved by approximately $29 million to an operating profit of $24 million versus a loss for the year before. And earnings per share improved by approximately $1.04, resulting to $0.74 per diluted share on a normalized basis from the last year earlier.

On a divisional basis, all three businesses finished the year on a very positive note. Security, our Security Division Rapiscan Systems, again reported solid revenue with revenues for the fiscal year increasing by approximately 20% to $226 million. Bookings for the fiscal year were strong as represented by the Company's backlog of $212 million at the end of the fiscal year, although down slightly [but for] the year the Security backlog was up.

Since June 30, 2008, we have announced the receipt of $4 million in checked baggage inspection systems, added $27 million contract for multiple Rapiscan Eagle Mobile Cargo and Vehicle Inspection systems. We believe our Security Division is on track to achieve strong bookings in the first quarter of fiscal 2009.

As you know, we have said before on the last year's conference call, that Q1, which coincides with the US government's ending year time, is a big thing for us for bookings. Obviously, during question-and-answer, we will take some questions. But again, like last year, we are very cautious and might not be very open to talk about it because it involves in trying to get a big share of this year-end money.

Bookings in fiscal 2008 were lead by a strong improvement in product sales for our Cargo and Vehicle Inspection product line. The market for this product line has increased with (inaudible) levels again at an all-time high, both domestically and globally, to some extent, as a result of the US government's initiative to provide 100% inspection of all inbound cargo by 2012. We continue to invest money in R&D. Our product line, we believe, is the broadest in the industry and we believe that we are positioned to continue to capitalize on this market.

During the fiscal year, we announced the introduction of many new products like the new Advanced Technologies Baggage and Parcel Inspection systems for carry-on. The Rapiscan 620 Dual View and the Rapiscan MVXi are the result of changing trends within the aviation security market with extra systems going from single to multiple view systems. These systems are expected to not only improve detection capabilities, but also will expedite the inspection process.

In August 2007, we announced the receipt of an indefinite delivery, indefinite quantity order from the TSA for a Rapiscan 620 Dual View. The TSA is currently going through a replacement cycle to upgrade the checkpoint inspection process. To date, we have essentially shared this replacement cycle approximately 50-50 with one other competitor. Looking to fiscal 2009, we expect to see continued replacement cycle business both from the TSA and also internationally.

In summary, the short-term catalysts that is driving the growth in this business for us is the continued growth in the Cargo Vehicle Inspection market globally; the continued deployment by TSA of the next-generation Advanced Baggage and Parcel Inspection systems; the US government initiative for 100% of air cargo to be inspected by February 2009; the US government initiative for 100% of inbound shipping containers to be inspected by 2012. All these, we believe, will continue to grow this market both domestically and internationally. Not to mention as we have said on the previous conference calls, that we are also getting a lot of success in the Department of Defense business for protection of their facilities in the international arena.

Lastly on the Security, we continue to invest in the high-speed CET, the real-time tomography product. As we have said before, we will start showcasing that product sometime in the late 2008 beginning 2009 calendar. We are very excited about it. That market will open up new opportunities, especially in the area of checked baggage worldwide.

Healthcare. Our Healthcare Division, Spacelabs Healthcare, also had a strong turnaround in fiscal 2008. Revenues for the fiscal year increased by approximately 10% while the division improved excluding the impact of impairment and restructuring charges from an operating loss of $3 million in fiscal 2007 to an operating profit of $15 million in fiscal 2008.

Our sales funnel remains robust indicating we expect to see continued growth in fiscal 2009. To date, we have not been impacted by slowing Medicare reimbursements here in the US market. However, as we have said on every conference call for the last two or three quarters, we continue to monitor the situation very closely, both domestically and internationally.

Our monitoring business reported growth in all regions of the world, meaning domestic, Europe sector and Asia Pacific. In February 2008, we announced the opening of our new manufacturing and R&D facility in China. The facility, once fully integrated into our manufacturing and supply chain operations, is expected to positively impact gross margins for the Company. One of the key initiatives of the facility is to develop a dedicated product line offering for the emerging markets.

This month, we announced the launch of the elance product line, a revolutionary change in the design of lightweight patient monitors. Its compact design is suited to a broad range of international markets providing connectivity and high performance in the critical care environment. It is the first product designed by the Spacelabs Healthcare global development team based at Spacelabs Healthcare's new facility in China. Short-term catalysts for this business going forward for 2009 are as follows.

Launch of the elance product line in selected markets globally, especially the emerging markets in Asia Pacific and Latin America; build out of dedicated product offerings for the emerging markets; continued growth of the anesthesia business within the US market; and continue to work on our R&D to launch our next-generation products in the near future.

Optoelectronics and Manufacturing Division. Our Optoelectronic and Manufacturing Division, OSI Optoelectronics, performed well in fiscal 2008 with external sales increasing by 25% year-on-year while operating income excluding the impact of impairment and restructuring charges also increased by approximately 25%. Intercompany sales during the fiscal year also increased by approximately 24%. The growth in external sales in fiscal 2008 was primarily a result of contract awards for electronic subassemblies for the US Department of Defense, MRAP, mine resistant ambush protected armored vehicle program.

After the conclusion of the fiscal year, we announced a further contract award of $10 million bringing the total value of contract awards to date for this critical program to approximately $65 million. As mentioned in our previous conference calls, one of the segments in the Optoelectronics (inaudible) group that was dragging us down was the loss generating Orlando-based weapons simulation business. That business finally we can announce we have put it behind us. It has been closed, and as of today, we have zero employees left in Orlando on this business.

In conclusion, as mentioned, bookings in fiscal 2009 have been positive for the Company as evidenced by the Security Divisions has become the year positively with our recent announcements. This has provided us with good visibility for the remainder of the fiscal year to achieve our fiscal 2009 earnings guidance of $1.07 to $1.22 with revenue in $660 million to $680 million.

With that, I am going to hand over the call to Alan for financial details. After that, we will take the questions.

Thank you, Deepak. Consistent with the message from each of our calls this past year, and our management team remains highly focused on driving earnings and cash flow improvement. I will speak more about this shortly, but first let me review the financial results of the fourth quarter.

As previously mentioned, net sales for the fourth quarter increased 12% to a record $171 million in fiscal '08 from $153 million in fiscal 2007. On a divisional basis, our Security Group reported another solid quarter with 10% growth in sales coming off a strong Q4 in the prior year leading to 21% growth for the full year.

Our Opto Group had another outstanding quarter reporting a 45% increase in third-party sales led by strong shipments on a contract associated with the US government's MRAP program, as Deepak mentioned. And as expected, our Healthcare Division reported Q4 sales in line with the prior year's strong performance and for the full year, saw 10% topline growth.

Our bottom line for the fourth quarter 2008 markedly improved as we reported net income of $5.5 million or $0.31 per diluted share compared to $4.3 million or $0.24 per diluted share for the same period in fiscal 2007. Excluding certain nonrecurring items in both '08 and '07, primarily impairment restructuring and other charges, and normalizing the tax provision, net income for the fourth quarter of fiscal 2008 would have been approximately $6.4 million or $0.36 per diluted share compared to net income of approximately $2.8 million or $0.16 per diluted share for the comparable quarter of last year.

For the fourth quarter of fiscal '08, our gross margin decreased 220 basis points prematurely due to significant growth in our Opto Group sales. As our Opto division reported a 45% increase in sales which inherently carry a lower gross margin than our other two divisions, our consolidated gross margin is adversely impacted. While our gross margin will vary from quarter to quarter as a result of a number of factors including product mix, unit volumes, pricing, inventory reserves, and capacity utilization, we do expect to see overall improvements in fiscal 2009.

During the fourth quarter and fiscal 2008, we realized the operating leverage that the organization worked so hard to achieve. Our SG&A expenses as a percentage of sales decreased by 360 basis points for the fourth quarter and 410 basis points for all of fiscal 2008. For the quarter, SG&A expense declined to 21.7% of sales from 25.3% compared to the same period last year. And looking at it from a slightly different perspective, despite a 12% increase in Q4 revenues, we actually decreased SG&A expenses by 4% in absolute dollars compared to the same period last year.

Research and development. Our expenses for Q4 2008 were $11.9 million or 6.9% of sales, compared to 7.2% of sales in the same period last year and in absolute dollars such costs increased $0.9 million from that of the prior year. We continue to make significant investments across many technologies in both our Security and Healthcare product offerings. We believe these programs position the Company to capitalize on major opportunities in the future which address large global markets and as such, anticipate that our investment as a percentage of sales in fiscal 2009 will be comparable to this year.

During the fourth quarter, we had an income tax expense of $2.6 million compared to a benefit of $3.7 million for the same period last year. For the full year, though, we had a total income tax expense of $600,000 which included a tax benefit of $4 million as a result of nonrecurring items impacting the tax provision, the largest of which was a $4.3 million tax benefit associated with the repurchase of the minority interest of Spacelabs Healthcare.

To normalize things, excluding the impact of these nonrecurring items, the effective tax rate for the current year was 31.3% compared to 42.3% in the prior year. Our provision for income taxes is dependent on the mix of income from US and foreign locations due to tax rate differences among such countries as well as due to the impact of permanent taxable differences.

Moving to cash flow, during the quarter, we generated operating cash flow of $9.2 million as a result of improved profitability coupled with our continued focus on working capital management with notable improvement in inventory turns on a sequential basis. Capital expenditures were $4.3 million and depreciation and amortization was $4.7 million. While we are proud of reporting the strongest quarterly operating cash flow in our history, we believe this provides just a glimpse of what we can produce in the future and generating strong operating cash flow will continue to be a top priority in fiscal 2009.

Now moving to our fiscal 2009 guidance, as Deepak mentioned, we anticipate fiscal '09 sales will be between $660 million and $680 million. While we do not provide guidance by division, we do anticipate continued strong double-digit Security sales growth. Our guidance is inclusive of the significant sales windfall we benefited from in fiscal 2008 in our Opto division from the previously mentioned government contract. As a result, we anticipate that our Opto sales will be relatively flat but will have stronger operating margins.

We expect to continue to demonstrate significant operating leverage, resulting in 45% to 65% earnings per share growth equating to $1.07 to $1.22 per diluted share excluding the impact of impairment restructuring and other one-time charges. Fiscal 2008 was an important year for OSI as we transformed our financial profile from three consecutive years of losses to one year of meaningful earnings and created a sustainable organization that paves a path for significant future earnings power.

Building long-term shareholder value, through increased financial performance is our highest priority. We made important progress in fiscal 2008. We are optimistic about our future prospects and we look forward to reporting our results in the coming months. Thank you for listening in on this conference call and at this time, I would like to open the call to questions.

(Operator Instructions) Joshua Jabs, Roth Capital.

Good morning, guys. Nice quarter. So if I look at the cost savings impact, operating expenses actually came right in line with our expectations for the quarter. I know the improvements on the gross margin side take a little longer to materialize, but can you give us a little color on where the margins are currently between the divisions and where that is likely to go over time, maybe excluding the impact of the (inaudible) borders?

Alan, do you want to take that?

Certainly. Josh, while we don't give gross margin detail by division, let me kind of give you some high-level perspectives. I think as we look forward, I think we could anticipate that we could see up to a 200 basis point improvement in fiscal '09. We think that can be generated by a number of initiatives. One, as Deepak mentioned, the pure closure of the weapons simulation business, which was a drag on our gross margin will clearly help in fiscal '09. We couple that with the growth in our business that we are projecting for next year is highly focused to Security and Healthcare, which have higher margins than the Optoelectronics business.

So this year's gross margin was dragged down a little bit by the strong sales in our contract manufacturing group within Optoelectronics, which while it provided nice operating margin and a nice contribution to our earnings per share, adversely impacted our gross margin. So we think those things coupled with some supply chain initiatives that we are doing, the closure of certain facilities in Healthcare, which currently while we are operating multiple facilities while the closure is taking place, negatively impact our gross margin on the short term, will all contribute nicely. And those closures are essentially done now.

So as we move into fiscal '09, we feel pretty confident that we are going to see some nice gross margin improvement.

Okay and then on the backlog it seems that $212 million which looked pretty good given the revenue, but you've had some pretty big orders here the first part of this quarter. Where does the backlog stand today?

Well, you know, it's in the middle of a quarter, but approximately it is end of July, the backlog was close to $240 million and the big increase is in Security. And keep in mind that this is the quarter where it is not over yet and this is a very important quarter for the Security and we believe that Security backlog at the end of the quarter would be higher than it was at the end of June -- significant.

Okay and then last one here, Alan, do you have the headcount? And maybe by division versus what it was a year ago?

Sure, maybe kind of give you a broad sense. Overall from a headcount perspective, year-on-year, we are down 2% compared to last year. And if you kind of look at it on a Security Division basis, with some of the cost savings that we did this year, we are down about 6%. Opto, we are down about 4%. And in Healthcare, we are up slightly given the new manufacturing facility that we opened in Suzhou.

And with the dual facilities running, you had to close them down, will that number come down on the Healthcare side?

Yes, we anticipate it will.

Just to add on -- this is Deepak. Just to add on it, one of the other things that you should look at is not just the headcount, but where the headcount is. Obviously, the headcount in the Western world and United States costs more money than the same comparable headcount in China or India. So as we move those people around, the total payroll costs may be a much bigger impact than the headcount reduction.

All right, and then, Deepak, I guess one last question for you. I know there is some diversification going. Any chance we get on a [thorough] plan there?

I have been talking to Victor. The answer is yes. I think the first time you dive into it it is more difficult. Keep in mind that I am still the largest stockholder and over the last couple of years, my holdings have not sort of changed, I am not running to the hills.

Yes, I think that is a good move. It should get rid of some of the noise here. So -- all right, thanks, guys.

Brian Ruttenbur, Morgan Keegan.

Thank you very much. Where was backlog in Q4 '07?

$209 million.

$209 million? Okay and litigation with L-3, is that dead? Is that something that is just totally in the past now and you are just pressing on?

Hi, Brian. It's Victor. You know, the Court of Appeals has remanded the case for further proceedings at a trial level, and that is where it stands right now.

Okay, very good. So does that mean that you are going to have more expenses and how much do you expect in 2009 in terms of legal?

Well, you know, it is sort of in between proceedings right now, and it is sort of live, pending litigation, and it is difficult, as you can expect, for us to make any firm comments on that. But you know, we have got all options open to us.

Okay, so is it automatic appeals process? What all -- are you going to have to consult outside legal advice for?

So where it stands right now is that the Second Circuit has made its initial ruling. We filed a petition for rehearing. Obviously we disagree with their results so that is a petition that is pending right now. But as I mentioned earlier, the initial ruling was to remand the case.

Okay and on a worst-case scenario, what does that mean for you guys?

There is no as usual. This is Deepak.

Yes, so I mean, do you pursue things on a worst-case and ask for a retrial? Or what?

Like I said earlier, it is live pending litigation and you know you are asking for some strategic questions here, but it is difficult, as you can imagine for us to make any firm statements on live, pending litigation.

Brian, just to add on to it is, we are looking at all other options. But we don't think about it. We have got a business to run and our focus is on running the business. But this is one of those things that will continue and we look at it as the next hand is dealt to us.

Okay. Can you talk a little bit about -- maybe this is for Alan -- cash generation in fiscal 2009? What the plan is? You're at roughly what -- $49 million of debt? Is the plan to generate -- can you talk about what kind of cash you expect to generate to the balance sheet in 2009 since you gave revenue and earnings guidance?

Yes, we don't give cash flow guidance but what I can say, Brian, is coming off five straight years of generating negative free cash flow, we are very optimistic. I think the plans that we have been putting in place for the better profitability and greater focus on working capital initiatives such as DSOs and inventory turns, is going to lead to -- we are optimistic it is going to lead to positive free cash flow next year.

We think the Q4 and even Q3 was some indication of that. So we are very positive on our operating cash flow, sort of projections and internal projections for next year in free cash flow, overall, but we don't give free cash flow guidance.

Okay, maybe you can tell us CapEx expected in 2009?

I think it will be what sort of our historic over run rates which tend to be in that $15 million to $17 million range.

Okay. Let me just back into cash flow. We are expecting operating -- according to your guidance, operating income or even net plus a D&A you are talking about $20 million to $30 million of -- I probably used a broader brush there -- $20 million to $30 million kind of cash flow. And then you subtract out CapEx. Is there anything else that I should be looking at in there that I am missing in terms of cash flow? Is there something else going on?

I think you're in the ballpark. I mean I think as we grow, particularly within the Security Division, there's different inventory requirements that take place. But I think generally speaking, it is in the ballpark.

Okay, and then the last question is target model. As you stand now, kind of two to three years out from now, you expect to grow your top line at a -- what -- 7% to 8% total revenue and gross margins should go 100 basis points up a year and net should go up 100 basis points. Can you give us some kind of broad brush on business model where it should go and over what period of time?

Well, you know, one of the things is that we have been so focused on to the bottom line for the last couple of quarters, 2008 has been a challenging year. We focused on 2009 and frankly speaking, all through the Company, bottom line is more important than topline. Not that topline is not important. But I think that our internal targets are close to the double-digit growth, continue to improve a point or so on the gross margin as we move production over, as we look at repeat orders and Cargo and other things. And continue to look at the SG&A to keep it down, R&D spend wisely, and that famous thing from Tim Quinlan, that 5% net is the 2010 target. That is the target we are working towards.

Okay, very good. Thank you very much.

Michael Kim, Imperial Capital.

Good morning, guys. In regards to the Security Division, can you talk a little bit about the sales mix in the quarter, the fourth quarter and the relative growth between cargo and vehicle and your other Security products, baggage, parcel and people products?

I think -- this is Ajay. I think what you are seeing, really, is everybody talks about cargo. We are seeing growth over there from a sales standpoint, obviously, we have always said that depending on when the products ship, it is going to make a difference. So we have had some very good bookings. We expect to have good sales. I think on the conventional side, we've also seen very strong sales, not just for the quarter but for the year as well and we are looking at double digits on both sides.

And just based on the commentary, it sounds like you are starting to see a stronger momentum on the Cargo side or would you still characterize it as pretty much across the board?

Well, you know, I think Cargo side is definitely very strong for us, but we are seeing growth in other areas as well. So there might be a little different in terms of what percentage growth we are seeing, but we are seeing good growth in the entire Security product line.

And just to add on to it, this is Deepak here. Keep in mind that the ticket for Cargo is a much bigger number. So as those systems get shipped out, the number start looking very big. So we think that both areas will continue to grow, but we also want to emphasize that longer term, not this year, but longer term, we also have the checked baggage product line coming online. We already have the MVX systems, the RTT systems, hopefully we will start generating revenue in 2010, 2011. So we look at it that all sectors we can look at very significant growth. But right now, you're absolutely right, Cargo is driving much faster growth than the other sectors.

And in terms of the margins with Cargo tracking higher, would you expect that from a mix perspective to drive margins along the lines of the progress we have seen in the last several quarters?

The answer is yes. As production, repeat orders get shipped out, we continue to look at improved margin in Cargo. One of the things that -- we are trying to put a model together, it is not just a gross margin of a product line that we look at. It is what the net contribution to the bottom. Cargo might have a little lower margin than some of the other products, but they also might require less R&D. They might require less support. So it might drop significantly the same or better to the bottom line.

Okay, and then switching gears on the Healthcare Division, can you talk a little bit about the contribution from international growth in the quarter versus domestic? And also your expectations for the growth in newer products versus sort of existing products? It sounds like you are pretty excited about the entry-level products going into next year. If you think that will drive the majority of the growth for '09?

Well, for 2008, all three sectors, Alan also mentioned, the emerging markets, the Western Europe, and United States, all had increases. The elance or the new product launch of the lower-cost products, specifically for the emerging markets, has zero contribution today in 2008. In 2009, it will start showing some contribution and we believe that since that sector's economies are growing faster than the rest of the world, that we will see more growth coming out from that product line.

Keeping in mind that has nothing to do with our other R&D for the next-generation launch of our higher end products which will start coming online somewhere in the near future. We can't give you a date for competitive reasons. The other contribution as from the anesthesia product line and the cardiology product line. They have all shown significant growth in all sectors geographically.

Okay, great. Thank you very much, guys.

Josephine Millward, Stanford Group.

Good morning. How much of the bookings for MRAP and Opto have you shipped and do you expect additional orders from ITT in the future?

Well, I mentioned that our booking to date is about $65 million. And yes, we expect more bookings. Regarding shipments, I don't think so. We have an exact number, but Alan, would you take a macro level, whether it is 20% shipped, 30% shipped, 40%, 50% shipped.

Yes, I would venture to say, Josephine, it is roughly two-thirds of that amount was shipped and fiscal '08 with the balance to be shipped in fiscal '09.

Okay, that's very helpful. Alan, you talked about the 200 basis point improvement in gross margin driven by changing your product mix. Are you also planning on more cost-cutting initiatives? Can you give us more color on what to expect in terms of one-time charges and what areas you will be focused on?

Yes, as you know, Josephine, over the past two years, we have been highly focused on some of the efficiency programs and some of the cost rationalization efforts. While that will always be a continuing process, I think a lot of the heavy lifting is behind us and now it becomes more fine tuning of the business operations, focusing more on some supply chain initiatives and continuing to optimize sort of our product portfolios and manufacturing methods.

So as a result, I don't believe we are anticipating at this point the impairment restructuring charges to be as significant. We will see them going on for at least the first few quarters of fiscal '09, particularly within the Healthcare Division where some of the closures of a facility that we have been in process gets completed, and due to just accounting rules we can't -- we couldn't accrue for all of that in fiscal '08. So we will see them, but we believe the magnitude will be less than fiscal '08.

Just to add on to it, Josephine, as we introduced the new product line, new R&D initiatives, launched the new products, they command higher margins. So that is another variable that should help us in getting our margins better as the new products come online.

Okay, that's helpful, thanks. Deepak or Ajay, can you talk more about the TSA Air Cargo opportunity? Do you expect the TSA to pilot your [Advanced Actuary] system for that sometime soon or is that in the works already?

I think -- you are all aware -- you are aware of what TSA is doing. They have had some hearings, gone through and talked about our Cargo. We are involved with the TSA. We are involved with talking to them. We have some products they are looking at and really for me to comment any further would be inappropriate at this time. But we are definitely involved with the TSA and working with them closely.

All right, thank you.

(Operator Instructions) Tim Quillin, Stephens, Inc.

Hey, guys. I apologize, I missed the first part on the call, but I know you don't give quarterly guidance, but I think you have had a loss in the first quarter in the past over the past couple fiscal years. Could you just comment on whether you expect to be profitable in the first quarter of fiscal '09? Thanks.

Sure, Tim. This is Alan. You are right, we don't give quarterly guidance and the trend you have seen in the past is to -- is that the first quarter has generally been our lightest quarter. That being said, all of the changes that we have been making, our goal and our intent is to be profitable in each and every quarter of the year, which includes Q1 as well.

Okay, thank you.

Joshua Jabs, Roth Capital.

Alan, just a follow-up here on the tax rate. What are you looking at for consolidated tax rate going forward?

Really depends a lot on the mix of where our profits are generated, Josh, but I think what we are using as a model is roughly 35%. We think we might be able to do a little bit better than that next year, but 35% is about where we are going.

How big do you think that range is based on mix? Have you looked at that?

Yes, it can be -- it really can be plus or minus as much as 4%. I would say not so much the plus but through some tax strategies, it could actually be less. But we would say 35% is probably a pretty good number to use and we would hope to do a little better than that.

Okay and then just looking at the way that you reported the pro forma numbers, it was $0.36 for Q4. If I just run the numbers straight through without the tax adjustment and take out the one-time costs, I get $0.38. So that sort of starts to back into that tax adjustment but that also means I guess if you are getting to $0.74 for the year that some of the prior quarters would have been bumped up a little bit?

It may just be a little bit of a rounding issue between quarters when you look at the whole annualization, but I think you are on target.

Okay, all right, great. Thanks.

[John Zaro], [BCM].

Hey, Alan, I have a quick question and I missed part of the call. So if it has already been asked, I apologize. The manufacturing cost savings, just over and above sort of closing duplicate plants and things like that, can you talk about that? I know when I had met with you before, you had talked about implementing some new manufacturing -- new people on the manufacturing side and potential cost savings there?

Yes, certainly. I think that the manufacturing opportunities for us are really multifold. One, as we have introduced the new Suzhou, China factory, we think that will help and as we finalize the closure of our UK-based Healthcare facility, that will certainly contribute because as of Q4, we were still operating two manufacturing facilities in that regard and that is ending in Q1, more or less.

In addition to that, we have brought on some new talent throughout the organization on the manufacturing side that we think will greatly improve the supply chain, the manufacturing processes themselves, that really will allow us to expand that -- expand the margin and expand our ability to manage our working capital as well. So we are optimistic in that regard and that is across the board, from Security, Healthcare, and Optoelectronics.

Okay, great. Thanks.

We are currently showing no more questions in queue at this time. I would like to turn the call over for closing remarks.

Thank you, everybody. In conclusion and summary, we think that 2008 was a very good year for us. The management, the employees of the company worked very hard. We focused very much over the last couple of quarters of delivering predicable results to the street. We are going in 2009 with a very good visibility. Our backlog is up. Security, Healthcare, Opto, all feel very good for the year. Obviously, we have to put a proviso (inaudible) this, though we have not been impacted yet by the economy, we continue to look at it both domestically and internationally. But we will rise to the challenge.

Our focus is to grow wisely the topline but keeping in mind that predictable earnings is very important. So we continue to do it and hope to talk to you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.