OSI Systems Inc (OSIS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 OSI Systems earnings conference call.

(Operator Instructions)

I would now turn the presentation over to your host for today's call, Mr. Alan Edrick, CFO. Please proceed.

Good morning, and good afternoon, 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, and Victor Sze our General Counsel. Welcome to the OSI Systems fiscal 2009 fourth quarter and year-end conference call. We'd 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'd 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 call we may refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results.

For a complete information regarding non-GAAP financial measures, the most directly comparable GAAP measures, please refer to today's press release regarding our quarterly results. The press release has also been filed with the SEC as part of the 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 (inaudible) to update any forward-looking statements, whether as a result of new information, future results or otherwise.

Before turning the call over to Deepak, I will provide a high level overview of our financial performance during our fourth quarter and full fiscal year. We will again touch on several themes that we discussed during past conference calls. Specifically, despite a challenging economic environment, we continue to successfully execute a strategy to position the Company for long-term growth. This strategy is centered upon generating meaningful earnings, and free cash flow, while simultaneously investing in key sales markets, and research and development initiatives which will pave the way for sales growth. In the face of one of the most challenging sales quarters we have seen, we have nevertheless been able to achieve bottom line results that demonstrate the power of this plan.

Key data points for our fiscal 2009 fourth quarter and full fiscal year are as follows. First, although sales declined 5% for the year, we achieved a 23% increase in fiscal 2009 earnings per diluted share, excluding the impact of restructuring and other nonrecurrent charges and last year's one time tax benefit. Our earnings per share were right in line with our previous guidance. Improved operating efficiencies coupled with cost containment initiatives drove the solid increase. Although Q4 sales for our Security and Opto divisions came in about as we expected, albeit declines with tough year-over-year comps, the challenges in our healthcare intensified during the quarter. However, we are confident in our long-term sales growth strategies, and we will speak to the market outlook later on this call.

Second, we reported positive free cash flow for the sixth consecutive quarter. For the year, we generated a record $34 million in free cash flow, or approximately a $1.91 per share, thus reducing our net debt by approximately $22 million during the year, after factoring in $7 million of stock repurchases. Third, we divested the clinical trial services business of our Healthcare division. This business has suffered increasing losses and declining revenues for each of the past two years, and was not considered a core ingredient of our business. Although our sales experienced the negative effects of economic conditions at large, we are pleased with the fiscal '09 earnings and cash flow performance, and believe that we begin fiscal 2010 in stronger shape than we entered fiscal '09, poised for growth. I'll be updating you further with more Q4 and fiscal year financial details, and providing guidance on the outlook for the future, but first let me turn the call over to Deepak.

Thank you Alan. And again good morning, and welcome to the OSI Systems earnings conference call for the fourth quarter and fiscal year ended June 30, 2009. In light of the challenging economic environment globally, we continue to deliver positive results for our shareholders. I'll touch on the highlights. Highlights for the fourth quarter and fiscal year include non-GAAP EPS improved 23% to $0.91 per diluted share. Company reported record free cash flow of $34 million. During the fiscal year, we repurchased approximately 620,000 shares of common stock for approximately $7.4 million or at an average purchase price of $11.94 per share. We still have an active share buy-back program in place with adequate head room. Our balance sheet and liquidity position remain strong. Year-on-year, our cash balance has increased from approximately $18 million to $25 million, while our long-term debt has decreased from $49 million to $39 million. Our backlog remains strong at the end of fiscal 2009, our overall backlog was $203 million.

Today we announced our EPS guidance for fiscal 2010. We expect fiscal 2010 non-GAAP EPS to be $1.05 to $1.18 per diluted share, an improvement of 15% to 30% when compared to $0.91 for fiscal 2009. As previously discussed, this year we moved aggressively early enough in the year to address our overall cost structure in light of the global economic crisis. As a result, over the year we identified and implemented over $15 million of annualized cost savings, in line with the two-year program we have undertaken to implement organizational changes to reduce our cost structure and improve our overall operating efficiencies. These significant reductions to our cost structure coupled with our continued projects to improve our operating efficiencies while resulting in strong earnings growth and free cash flow in fiscal 2009 should see us position for improved profitability and cash flow going forward.

We remain committed to R&D. Though R&D spending year-on-year was down as a result of two factors. Firstly, our Security division received increased government grants. And secondly, we continue to reposition our healthcare R&D offshore to India and a new facility in China. Both the Security and the Healthcare divisions have significant product introduction planned. Let me go into the details of the divisions. Healthcare, Spacelabs, it's been a very tough and challenging year for healthcare just like some of our competitors. Sales for our healthcare division declined by approximately 28% and 17% in the fourth quarter and fiscal year respectively, when compared to the prior comparable periods. Sales for the year were adversely impacted by foreign exchange. Excluding this impact, sales declined by approximately 25% and 11% for the fourth quarter and fiscal year respectively.

As we have previously mentioned, our customers have faced unprecedented economic conditions starting some time in October, November of 2008, including lack of credit availability and increased focus on liquidity. Given this, certain customers have delayed planned purchases. To date, we can confidently say we have not lost any significant orders to our competitors or received any order cancellations. Additionally, internal estimates continue to show we have maintained our market share as all of our competitors are facing similar challenges. We continue to cautiously monitor the market conditions. Alan will touch a little bit more on what we have seen in the last two months. There is definitely some positive signals. It's a little bit too early, but we think that the bottom of the trough is pretty much near.

Despite the decline in sales of the division, excluding the impact on nonrecurring restructuring and other charges, our Healthcare division achieved an operating margin of 5% for the fourth quarter. This was a direct result of proactive measures we initiated throughout the year to address our cost basis, and have positioned us to benefit from strong operating margin expansions as sales improve in fiscal 2010. Though cautiously, we do expect Healthcare sales will grow in 2010. Despite headwinds in North America, the business continues to perform well internationally in the emerging markets such as Latin America, China, India, and the Eastern European side. We are encouraged by the strong performance for our newly introduced elance low acuity patient monitoring product line. Customer feedback, and response has been overwhelming. The division expects to have significant product launches in fiscal 2010 in all areas, namely monitoring, anesthesia and diagnostic cardiology.

Security divisions, Rapiscan. We are very pleased with the operating results for the security division in fiscal 2009. Operating income for the division improved from approximately 2% in fiscal 2008, to approximately 6% in fiscal 2009. Some of the highlights for Rapiscan in the year included, this year we shipped a record number of cargo and vehicle inspection systems. A record number for the division. In addition, we announced $67 million of new contract awards for our cargo product line, not including the multi-year procurement contract we received from the UK customs authority. The systems for UK are to be installed at various locations throughout the UK, replacing the incumbent systems. Government grant intake improved significantly compared to fiscal 2008. The highlight awards were $6 million grant for the TSA, for our next generation high speed inline certifiable CT hold baggage system, $3.6 million of grants received from the US domestic nuclear detection office for the development of advance radiation and nuclear detection systems.

In December 2008, we announced that we have been recognized by Frost & Sullivan as the 2008 North American Homeland Security Inspection & Screening Company of the Year. We continue to build a broad portfolio of scanning technologies throughout our four main product groups. People screening, baggage and parcel inspection, whole baggage screening, and cargo and vehicle inspection. As mentioned previously, in fiscal 2010 we have multiple new product introductions planned. Our installed base continues to grow, as a result our service revenue continues to expand. We expect this area (inaudible) as the cargo systems that we installed during fiscal 2009, come out of warranty in the future periods.

Overall, the quotation activity remains strong, both domestically and internationally. Just to give you a flavor, we feel over the last couple of months, the domestic activity level has never been as strong that we have seen today. Internationally, also it is quite strong. There are many factors driving it. One of them obviously is the stimulus package. Also the air cargo requirement for August 2010 for all packages getting on a passenger plane to get inspected is driving some of the activity. We expect the growth of the Security group to continue into fiscal 2010, and expect to do a repeat double digit growth for the division. I think because of the government year-end September, this activity, this growth is more skewed to the second half, compared to the first half.

Optoelectronics, and manufacturing. Sales in our Optoelectronics and manufacturing division declined in the fourth quarter, as we had a tough comp to compare to when compared to Q4 last year, which was positively impacted by strong shipments associated with the ENRAP program. Overall, our Opto operating margin in the quarter however, improved from approximately 7% to 8%. We continue to work to identify other programs to fill the production pipeline, and feel confident that fiscal 2010 would again be a good, solid performing division for the Optoelectronics and manufacturing. In conclusion, with that I'm going to hand the call back over to Alan to talk in greater detail about our financial performance before opening the call for questions. Thank you.

Thank you, Deepak. As mentioned on each of our conference calls over the past few years, we remain highly focused on driving earnings and cash flow improvement. This effort is paying off as reflected in our fiscal '09 results and provides a glimpse into earnings power we can achieve going forward. I will speak to our guidance shortly, but first let's review the financial results of the fourth quarter. Overall net sales for Q4 decreased 19% to $139 million in fiscal '09. For the full year (inaudible) 5% off from the prior year. As Deepak mentioned, and as the dollar strengthened significantly, our top line has been adversely impacted. Excluding the impact of foreign exchange, sales would have decreased approximately 16% in the fourth quarter, and 3% for the year. The softness in sales was felt throughout each of our divisions.

Our Security division sales for Q4 were down 5%, which after excluding the impact of the comparatively stronger dollar was roughly equivalent to prior year sales. Our Healthcare division however reported a 28% decline in sales for Q4 driven by soft US and Western European sales, as certain hospitals have delayed CapEx spending in light of the economic and credit environment. Based on our latest market data, we anticipate that the healthcare markets will continue to be challenged through at least our first quarter of fiscal 2010. Finally, as we communicated since the outset of the fiscal year, we expected our Opto division to report flat to slightly down third party sales for fiscal '09. Despite economic challenges, we succeeded in meeting this objective, as external Opto revenues were down 4% for fiscal '09, though the operating income increased by 11%.

For the fourth quarter of '09 our net income was $4.3 million or $0.24 per diluted share, compared to $5.5 million or $0.31 per diluted share for the same period of fiscal '08. However, after excluding restructure charges as well as other nonrecurring charges, our net income for the fourth quarter of '09 would have been approximately $5.1 million or $0.29 per diluted share, as compared to $6.5 million or $0.36 per diluted share for Q4 in the prior year. For the year, our normalized EPS increased from $0.74 last year to $0.91 this year representing a 23% increase in adjusted EPS. Our gross margin of 34.1% decreased 1% from last year, as lower revenues and change in product mix meant that we were not able to achieve the same economies of scale. Specifically, the significant year-over-year decline in sales by the Healthcare division, whose products and services and that carry the highest gross margins of the Company, contributed most significantly to this variance.

Our gross margin typically varies from quarter to quarter, as a result of a number of factors, including our product mix, unit volumes, pricing, foreign exchange, inventory reserves and capacity utilization. Looking forward, we anticipate margin improvement, as a result of our on-going efficiency initiatives and an increased top line. During Q4, we realized additional operating efficiencies continuing the momentum evident over the past two years. With strong cost controls in place, our Q4 SG&A expenses decreased 18% from the prior year, reflecting the full impact of the actions we undertook earlier in the year. During Q4, R&D expenses (inaudible) of sales, which is about the same percentage as we reported in the prior year, but up sequentially in absolute dollars as we spent more in order to achieve significant progress on a number of important programs. We continue to invest significant resources in technologies to add value to our Security and Healthcare product offerings. As a result of these programs, we believe that the Company is well positioned to capture major opportunities in our core marketplace -- in our core markets in the future.

Our Q4 net interest expense was down 43% compared to the prior year, primarily due to lower weighted average interest rates and reduced average borrowing,s as a result of our strong fiscal '09 free cash flow. And our effective tax rate for the quarter was 30%, compared to 31.2% in Q4 of last year. Our provision for income taxes is dependent on the mix of income from US and foreign locations, due to tax rate differences amongst those countries, as well as the impact of permanent taxable differences. Moving to cash flow. We generated operating cash flow of $4.4 million during the fourth quarter, driven by our continued focus on working capital management and improved profitability. Capital expenditures were $1.5 million, while depreciation and amortization was $5 million. For the year, we generated free cash flow of $34 million, representing an impressive $46 million improvement over fiscal '08. As mentioned in previous conference calls, generating strong cash flow will continue to be a top priority. And we are very pleased with the significant, sustained progress we have made in this effort.

Finally, turning to our guidance for fiscal 2010. As our sales demonstrate, market challenges were present throughout the year. And the outlook for our first quarter indicates continued challenges. However, beyond our first quarter, we believe there's reason to optimism. In fiscal '09, we undertook decisive and meaningful actions to right size our business in response to economic conditions. These actions produced strong fiscal 2009 earnings performance, and positioned us for significant earnings leverage when sales rebound. Therefore, we anticipate that our EPS, excluding the impact of restructuring and other charges, will increase at a healthy 15% to 30% in fiscal 2010, compared to fiscal 2009 which grew at 23%.

During the last two years, we transformed our Company into a sustainable organization and a consistent performer. The impact of the economic issues notwithstanding, we also build a strong foundation for significant, future earnings power. Given the operational improvements that we have implemented over the past two years, coupled with the restructuring activities that have reduced our cost structure, we believe we are well-positioned for significant margin expansion in the coming years. Thank you for listening to this conference call. And at this time, I would like to open the call to questions.

(Operator Instructions)

Your first question comes from the line of Brian Ruttenbur of Morgan Keegan. Please proceed.

Thank you very much. First question deals with revenue growth in fiscal '10. You -- I think you guys mentioned on the medical side that the up slightly optical would be flat. Is that correct?

That's true.

Okay. And what was Security that was going to be growth?

We've said, Brian, this is Deepak, here. Double digits.

Okay. So that means overall growth should be roughly what? 7%, 8%?

Well, I think that's a good statement, but at the same time I would like to caution it. We did not put the guidance number specifically because of what we are seeing in the healthcare. We want to watch for a little bit longer. We'll be in much better shape to look at it after the first quarter is over, on our first quarter call. And secondly, with all the year-and government activity happening in September, as you know, and the stimulus package which even makes it more unknown, we basically feel at this stage, that we are going to be in a much better shape to give more clarity on -- for the year after the first quarter. But at this stage, by the double digit in Security, growth in Healthcare, and flat in Opto, I think that is a good assumption that you are making.

Okay. And then, can you tell us what the Security backlog was at the end of the year?

Sure, Brian. This is Alan. The Security backlog was approximately $116 million.

$116. How much was that large cargo? Is that primarily all large cargo, right?

It's a break down between cargo and our baggage and parcel inspection products, but as you know we don't provide a further breakdown beyond the total backlog for Security.

To add on, Brian, we, sitting in August end, we are quite confident that we will have a positive book-to-bill for this quarter. That means that the backlog will go up by our first quarter call.

Okay. Do you anticipate a positive book-to-bill on the year, fiscal '10?

I think that's a true statement.

Okay. And then operating cash flow on the year Alan, on what do you -- you gave us kind of earnings guidance. So maybe you can give us some kind of cash flow guidance. What do you anticipate your operating cash flow, and then also your cash and debt situation, assuming no acquisitions at the end of fiscal '10?

Yes, our operating cash flow in fiscal '09 was $44 million, which was an outstanding year. We were able to benefit from some tremendous working capital improvements we made, throughout all of the divisions in the company. As we looked at fiscal 2010, there are so many factors that can impact that based upon different growth projections and uses for the working capital, that I'd be reluctant to give a number at this point, though we do believe it will continue to be significant and meaningful, and will be a big contributor to again paying down the significant portion of our debt in fiscal 2010.

Can you give us a directional? Will it be as good as '09 or --

I believe we benefited to some extent in '09 on a cash flow basis, by the decline in sales. As you know, as we improve sales, it will -- it'll require a use of working capital, so as a result we wouldn't anticipate it being as strong as fiscal '09.

Okay. And last question. Any sign of stabilization or recovery in the Healthcare side of your business?

As I mentioned, Brian, last -- we've been watching it very cautiously. Obviously -- the quarters have been -- Q4 is down, but we see a little bit. We see that -- and I'm sure if you follow that industry, there seems to be some bottoming out. There is some positive signs. People are getting -- customers are getting a little bit more confident obviously with the administration looking at making some major overhaul in the healthcare. That has some uncertainty. But we think if it is not close to the flattening out of the bottom, it is already there within a couple of points. And we, as I've said on the call before, we anticipate that 2010 we will project revenue growth in Healthcare.

Thank you very much.

And your next question comes from the line of Tim Quillin from Stephens Inc. Please proceed.

Good morning.

Good morning.

What was the book-to-bill in the Healthcare business in 4Q?

One moment, Tim. This is Alan, and I'll get you that number.

As you look that up, maybe I'll move on to the next question. Is in terms of your belief that the Healthcare business will grow in fiscal '10, I think maybe you are seeing a little pickup in bookings right now. But as hospitals make their capital spending plans for next year, I guess my understanding is that we could be looking at lower hospital spending in their fiscal '10 versus fiscal '09. Fiscal '09, so in that environment, are you looking for -- I guess first of all, do you believe that to be the case? And then second of all, how do you grow in that type of an environment? Thank you.

Number one, keep in mind that our international business, our emerging markets business, even in 2009 grew. European business, it's a little mixed bag, the Western Europe definitely later, especially Q4, started seeing some weakness, but more than that offsetted by growth and robust activity in the eastern side of Europe. Middle East has been quite good. So you -- when we look at 2010, the way we project growth is, that there were lots of 2009 spending stop kind of a thing because of uncertainty. The US hospitals, even if they had the money or something, everybody just went on a holding pattern. And now the thing -- the hospitals though overall would spend less, but the kinds of thing, they have made a wing, and they have to equip that with it, they have to make the replacement, things are sort of settling down. People are sort of getting more used to and not having the uncertainty.

So we believe that overall the spending will be lower, at least the spigot will start opening up to what is necessity, combined with our aggressive launch of new products, we think we'll make some headway into penetration into new accounts. and we have a very good portfolio for the emerging markets. We expect that to grow. We think that we'll do well in the Middle East and Eastern European. We have some new initiatives in Europe. So overall, wherever we have looked in the last couple of months, and why we are sort of hedging it, by saying maybe after the first quarter we'd be a little bit more ready for it, we feel quite good about it -- from the symptoms we are seeing, that there is going to be a growth. Everybody is saying second half, and that's the way it's going to be. But we think that --we can predict that. Alan, do you want to add something?

I think that is a very fair statement. And I would say Tim, returning to your initial question, the book-to-bill ratio for Healthcare in Q4 was approximately 1 to 1.

1 to 1. Okay, and do you have a rough breakdown of Healthcare revenue international versus US?

We don't break that out, Tim, for competitive reasons, but the majority of our revenues continues to be in North America.

Sure. Okay. And you talked -- I think you called the guidance, the EPS guidance for fiscal '10 a non-GAAP guidance. Do you expect further restructuring charges in fiscal 10?

We are not presently anticipating any significant restructuring charges. We will continue to look to optimize our business throughout the year, and we'll take advantage of opportunities to do so as they become present.

Just to add on to it. I think the other thing that we continue to plan on it depending on the mix, how much product we continue to move from Europe and US, to our other facilities in Asia.

Okay. And just lastly, Alan, did you mention what your tax rate assumptions are for fiscal 10? I know it's a little bit difficult on the mix, but how are you planning on that?

Yes, our effective tax rate for fiscal '09 was 32.5%. We believe we can continue at that rate or do even a little bit better for fiscal 2010.

Brilliant. Thanks much.

Your next question comes from the line of Rick Hoss of Roth Capital Partners. Please proceed.

Good morning, gentlemen. Alan, question for you, SG&A, pretty big reduction sequentially. How much of that is permanent? And how much, assuming that you have say a flat revenue going into the first quarter of fiscal '10, how much of it is a permanent reduction, how much can we expect has been permanently removed from the cost structure?

Sure. It's a good question. The mixture in the reduction of our SG&A expenses is a combination of the restructuring charges -- of the restructuring activity that we have undertaken, coupled with variable cost reductions. So items, given the lower sales in Q4 of course, variable cost such as commissions were considerably down. So as we look going forward, I think the actual expenses that we took out of the organizational structure, in large part are permanent reductions. However, as we look into fiscal '10, we expect to see increases in the variable cost items such as commissions, as our salaries increase, as well some key investments that we'll be making, and some market initiatives, or some of the product launches that Deepak was mentioning in his earlier remarks.

So as a whole, assuming conservatively assuming say revenue growth 5%, based on the permanent reduction that you've made, considering the variable cost component on commissions, et cetera, can we expect to see about the same year-over-year rate SG&A, on a higher revenue, 5% higher revenue?

You mean as a percentage of sales?

No. I mean as a gross dollar amount.

Oh, gross dollar amount. I would say if our sales go up by 5%, you would anticipate that our SG&A will increase on an absolute dollar basis based upon those variable costs, and typical other increases that take place during the year. But I believe that will continue to be to leverage to an overall SG&A as a percentage of sales.

Okay.

I -- this is Deepak. Just to emphasize again, the kind of cuts that we've done, they are not like temporary, that we would like to redo it. We have looked at it very carefully, and sized the operation. And if the opportunities come where we might do add-ons, we don't expect much it to move much -- except for the variable cost as Alan mentioned.

Can I get your feedback on the speed of allocations for the stimulus? Has it been on track? Would you say it has been disappointing? Slower than expected, or probably not faster, but can you give us a little bit of insight as far as that goes?

This is Ajay. I think what we are hearing really is that the government is trying to move as fast as they can. And we expect that over the next two to four months that there's going to be a lot of activity going on on the stimulus side. So whether it's faster or slower, I'll leave that up to you guys. But I think they are moving as fast as they can, and trying to get everything done over the next two to four months.

Just to add on to what Ajay was saying. It's difficult to say it's fast or slow. There are a lot of moving parts. It's something new. Normally there is a lot of activity at the end of the year, come the end of September. It puts on another burden on them to spend wisely, the stimulus money. It just puts a lot of extra workload on it, and there are a lot of moving parts. But whatever happens, like Ajay said, in the next two to four months, all of that is going to happen.

Okay, and a last question. R&D, looks like you benefited, and as you stated on the prepared remarks from government grants. Are those grants extending into fiscal '10. and under the assumption that you are going to continue to develop your Healthcare segment products as stated previously, the assumption here is that R&D trends upward?

Let me answer the first part as far as the grants are concerned because most of that is on the Security side.

Right.

We have a very strong pipeline, and yes, they do extend into next year, and we feel very good about some of the proposals that we've made and are very confident getting some grants next year as well.

On the Healthcare side, we have quite a number of new launches of product as I mentioned, in both monitoring, anesthesia and cardiology. I think that the R&D pretty much is going to be -- from quarter to quarter, it might change, but we are looking at it and we have moved a lot of the R&D functions to the areas like in China and India and we continue to monitor it. I think that we are watching carefully, and we have sized our R&D spend quite wisely.

Okay. Thank you for taking my questions.

Your next question comes from the line of Michael Kim of Imperial Capital. Please proceed.

Hi. Good morning. With regards -- going back to Rapiscan, and your expectation for fiscal 10, can you talk a little bit, in maybe more detail, what the drivers are behind that expectation? Is it primarily on the domestic side? Or cargo opportunities? I think Deepak, you mentioned earlier, some very good quotation activity on the international side. Any color would be helpful. Thanks.

Ajay, do you want to take that question?

I think first of all, on the domestic side, the activity that we are seeing is across the board. We have activity on the cargo, on our conventional checkpoint systems, and we believe there's going to be activity the -- on all other areas as well. Internationally, we are seeing very strong activity, whether it's in Middle East and parts of Europe. I think things in Asia, because of the economic crisis were a little slow ,but we are seeing pickup over the last couple of months. So we think that, we really think it's across the board and across all product line right now.

Just to fill in to Ajay. You mentioned drivers. A, stimulus package. 2, government year-end anyway, replacement cycle in aviation, checked baggage, the air cargo 2010 requirement for 100% inspection of (inaudible) and the big, what I call the big challenge for 2012, container scanning initiative. All of them, as the time clock is running are the initiatives driving the what we call -- the activity. So we think that there is a tremendous amount of activity going on all over, and what I said in my conference call, we have never seen such strong activity. Obviously, this has to result into bookings, and we believe that we are well placed.

And just on the international side, is the activity primarily on the cargo side, or is it also across the board?

Across the board.

I know you guys don't generally break out the Security revenues, but was it weighted more towards check point or more towards cargo? Any directional sense you can give us?

It carries from quarter to quarter, but I would say in our fourth quarter it was a little bit more weighted to conventional.

We normally don't break it down, but we did say in the conference call, and I think one of the things that we can say, we placed north of 50 plus large cargo systems into installation in 2009, which is a huge growth. And we expect that as those systems come out of warranty, the service revenue will continue to go up. And so it's a given, that one of the strongest points in 2009 was the cargo growth, and we see a similar kind of activity continue in 2010, '11, and '12.

Just turning on Opto, with regards to third party sales, and I think Deepak you also mentioned some other programs that you are looking to get into, and perhaps driving towards a flat year in fiscal 10, what are some of these other opportunities that you guys are focusing on?

Number one, we are not going to specifically talk about programs. It's a given fact that ENRAP, we had a peak in 2009, and we still have a healthy backlog in that. What I meant by saying in -- my remarks were, that everybody's concern was that as the ENRAP program winds down, do we have other alternates to fill in the gap. We are happy to announce that we feel comfortable that we have filled those gaps.

Is that more federal government opportunities or commercial opportunities or where is that leaning towards?

Well, again I don't want to comment for competitive reasons, but the best way to answer that is across the board.

Alan, I don't know if there's anything to read into this. Inventories that have been edging up a little bit. Is that primarily in Opto, or what is the driver behind that?

I think the primary driver, its a couple of drivers. One, with the change in sales in Q4, it left us with a little bit higher inventories than we would ordinarily anticipate. Two, filling some of the products for the strong backlog that we have both in Rapiscan and Opto. But three, suffice it to say, that I think it's an opportunity as we head into fiscal 2010 to continue to improve our inventory turns, which is also a cash flow driver for us.

Okay. Great. One last housekeeping question for you. What was depreciation and amortization?

It was $5 million in the quarter.

Great. Thank you very much.

Your next question comes from the line of Josephine Millward from Dougherty & Company.

Good morning.

Good morning.

Most of my questions have been answered. I just have one quick follow up on Optoelectronics. Alan, how much of the 33 million ITT EDO jammer orders have you shipped, or do you expect to ship most of that in fiscal year 10?

I guess as Deepak just mentioned, Josephine, we still continue to have a significant backlog with ITT on the specific order that you are referring to. We generally don't speak about how much we have in backlog per customer order, but you are right. That it remains to be -- or remains as a significant number, and gives us a good visibility into the next few quarters of our Opto sales.

Can you give us a rough industry exposure, a breakdown exposure for Opto? Because I think mostly it's Healthcare and Security and a little bit of industrial. Is that right?

Could you repeat that again?

Your sector exposure for Optoelectronics, the industries that you sell to.

Oh, the Opto -- the three big segments in which they sell is aerospace and defense, medical, and general purpose infrastructure.

Okay. So the general purpose infrastructure, I would imagine it's negatively impacted by the economy. And the aerospace and defense, a lot of that goes to your own Security division and other defense companies, and Healthcare mostly to Spacelabs. Is that the right way to think about it?

No. All the sales is external sales.

Okay.

The inter company gets eliminated. So, when we talk about the sectors, it's medical (inaudible) other people besides (inaudible) is to other customers than Rapiscan.

You are absolutely right. I think I misspoke. But you have the same macro exposure in those -- the same exposure as your own Healthcare and Security business. That's what I was thinking. A little clarification on healthcare. You are projecting growth for fiscal year '10. And if I remember correctly, I believe about 70 to 80% of your medical sales comes from north America which continues to be very weak, and you are looking for sales outside of the US to drive growth. Can you expect medical revenues in the US to be flat, or do you expect that to grow for the year?

Number one, we have never talked about the mix of separation. All I can tell you is that -- you are a little bit too skewed to North America.

Okay -- so that percentage is too high. Okay.

Secondly, our growth, as we have said, in emerging markets continues. And we think with the new product introductions, and a little bit of stability in the North America sector overall, healthcare in 2010 will show growth.

You've had some your competitors are seeing high single digit or double digit growth in emerging markets for medical equipment. Can you give us a little color in terms of what kind of growth you are seeing from emerging markets?

We are definitely in the same or higher.

That's very helpful.

(Operator Instructions)

And your next question comes from the line of Steve Emerson of OSIS. Please proceed.

Congratulations on your excellent performance in a very tough time.

Thank you, Steve.

Could you update us on progress with your next generation luggage scanner, how the tests -- the field tests are going, and would you hazard some new dates or -- in terms of when you expect to achieve certain milestones?

Steve, two things. One, it's a known fact that we have the unit working in Manchester April port for a couple of months collecting data. That was successful. We had a lot of visitors, including TSA and some of the international bodies who looked at it, very positive feedback. The unit now has moved to our Northern California facility where we are fine-tuning it and gathering more data. And we feel (inaudible) we feel right now that before this calendar year is out, we hope to get the unit over to TSA. And it might slip by a couple of months, but that's where -- what the plan is right now.

Okay. Now, at TSA would that be a certification test? Or just another round -- another iteration of testing?

Basically it's a whole sequence of events, and most of the other previous competitors that have gone through this route takes multiple attempts. And it's an ongoing test/fine-tuning and test/fine-tuning, and ultimately both TSA and us feel we are ready for certification, and then the final testing does happen. And it's difficult to pin a certain time on it, so we think that it's somewhere in the 2010 calendar year that we hope to get certification.

Excellent. In terms of healthcare, can you give us an approximate geographical breakdown of revenues? For instance, is emerging markets now 25% of revenues, and US down from 75% to 40%? Or can you give us some flavor?

Well, Steve, Josephine asked the same thing. We have never broken it down for competitive reasons. The thing you are talking about emerging markets and US. Also, keep in mind that there's also what we call Europe. So there are three segments, and we have never broken it down. The ideal situation for a company in our domain, should be 50% US, 50% rest of the world. We definitely have not reached that yet, but our target is what that is. More than that, I feel very uncomfortable saying, but we have made significant progress in 2009, some by design, and some of it the US was weaker than the rest of the world.

Okay. And about how much of your goods are now made or assembled in China at your new facility, and what is your objective percent and when?

Again competitive reasons, we can't talk about it. We have said in the previous conference calls that the operations in US and Western Europe will not grow. The operations in Asia, namely China and India (inaudible).

Okay. Thank you very much.

I'm showing there are no further questions at this time. This concludes the question-and-answer session. And I would now like to turn the call back over to you gentlemen for closing remarks.

Thank you very much. In closing, I would just like to reiterate the bullet points of the positive results we were able to achieve in the fourth quarter and fiscal year ended June 30, 2009. It's no doubt, it is a true statement that 2009 has been a very, very challenging year for us. I'm sure you've heard it from other companies too. In this challenging year, we took preemptive actions much earlier in October, November 2008. Our non-GAAP fiscal 2009 EPS improved 23% to $0.91 per diluted share when compared to fiscal 2008. We generated record free cash flow for the fiscal year ended June 30, 2009, of $34 million. We are confident in the outlook for the future as we have provided guidance for fiscal 2010 of EPS growth of 15% to 30%. We, though have not given any revenue guidance for the year, and we'll be better prepared after the first quarter. We definitely think that there will be growth.

We have wisely sized our operation for the future. And the most important emphasis that I want to make is both areas are good for us, Security, we have never seen the activity as strong as this. We have a whole pipeline of new products coming out there both domestically and internationally. We are well positioned with a broad product line. In Healthcare we have sized our operation well. And whenever there is a growth and bounce back in this marketplace, because of the high margin product, we'll be leveraged and have a very good growth in the gross margin. In closing, I would like to thank our employees. This has been a very tough year for them, for their dedication and continued hard work. Thank you very much.

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