OSI Systems Inc (OSIS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2011 OSI Systems earnings conference call. My name is Chris and I'll be your operator for today. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Alan Edrick, Chief Financial Officer. Please proceed.

Thank you. Good morning and thank you for joining us today. I'm Alan Edrick, Executive Vice President and Chief Financial Officer 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 first quarter of fiscal 2011 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'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 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 the quantitative reconciliation of those figures, please refer to today's press release regarding our first quarter results. The press release has also been 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."

Before turning to call over to Deepak, I will provide a high level overview of our financial performance during our first quarter. We will again touch on several themes that we discussed during past conference calls. We continue to execute on our core strategy of generating meaningful earnings growth and free cash flow. Simultaneously, we continue to invest in key sales markets and R&D programs to drive bookings. As a result of these programs, which have led to an outstanding backlog, we anticipate seeing an acceleration of sales growth that when coupled with our demonstrated margin expansion, is expected to continue the strong earnings momentum. Highlights for our first quarter of fiscal 2011 are as follows. First, Q1 bookings of $196 million were outstanding, shattering our previous record of $175 million. This led to a record backlog of $308 million, a 28% increase from the June backlog of $240 million which it's self -- which in and of itself was a record. Leading the growth was our Security Division, Rapiscan, which posted a Q1 book-to-bill ratio of 2.2, resulting in a new record Security backlog of $205 million. Although a small portion of the growth in backlog was driven by the pushout of deliveries based upon customer requests which impacted Q1 sales, the vast majority of the growth was driven by very strong US Security bookings. We also saw growth in both our Health Care and Opto division backlogs, providing added visibility for sales growth over the remainder of our fiscal year.

Second, although sales declined 4% for the quarter, due in part to customer pushouts as just mentioned, we reported a 36% increase in Q1 diluted earnings per share excluding restructuring charges. This quarter's results marked the strongest Q1 EPS in the past eight years and the 13th quarter out of the last 14 that we generated year-over-year earnings growth. Continued improvement in operating efficiencies leading to gross margin expansion, coupled with the cost containment initiatives, drove the solid improvement.

Third, we reported positive free cash flow for the 11th consecutive quarter for an aggregate of over $82 million generated over this period. For the quarter, we generated approximately $8 million in free cash flow, representing approximately $0.40 per share.

And fourth, subsequent to quarter end, we announced the completion of a new $250 million credit facility on very favorable terms. Concurrent with closing the facility, we applied a portion of our existing cash balances to pay off a term loan of approximately $25 million, that was outstanding under the former facility. As a result, our debt now consists of about $4 million in real estate loans and capital leases. We believe this new year five -- this new five year facility positions us exceptionally well to capture growth opportunities. We enter Q1 with strong expectations for bookings. We are pleased to have surpassed our internal expectations of quarter end backlog and believe we are well positioned for strong top line growth and operating margin expansion. I will provide additional financial details and will discuss our fiscal 2011 guidance but first let me turn the call over to Deepak.

Thank you, Alan, and again, good morning and welcome to the OSI System earnings conference call for the first quarter of fiscal 2011. We are very excited to see the tremendous demand in the marketplace for our products. The strong bookings during the quarter resulted in an ending backlog of $308 million, which is a Company record. I would like to spend some time focusing on the highlights for the quarter and discussing each of our businesses. Let's start with our Security Division Rapiscan, where bookings increased 46% to $112 million, a new record. The Security backlog was $205 million at the end of the quarter, approximately 41% higher when compared to the first quarter of the prior year. Our sales were up 8% in Q1, and would have been higher if not for the timing of a few shipments where customers pushed out the delivery date to Q2.

In September, we received the largest indefinite delivery, indefinite quantity order in Rapiscan's history when we were awarded a $325 million contract by the US Transportation Security Administration, for the Rapiscan 620 Dual View Advanced Technology Checkpoint X-Ray Baggage Inspection System. We have already received a $35 million purchase order from the TSA under the terms of this five-year IDIQ. We anticipate additional orders in the future as the TSA continues the replacement of the present checkpoint systems. In addition, we received major awards to provide inspection systems that protect boaters, travelers and critical infrastructure. These wins are from government and commercial customers from a variety of geographic regions.

We also gained several new customers, both domestic and international, for our Eagle Mobile High Energy X-Ray Cargo and Vehicle Inspection Systems. Which can identify the presence of weapons, explosives and narcotics. The Eagle series is a road mobile inspection system that can be quickly deployed in minutes at a boat, checkpoint or border crossing and allows the customer the flexibility to optimize the system's usage and relocate it to another area of likely threat. We anticipate further growth in the cargo market segment with our Eagle product line for cargo and vehicle inspection products. As we have set the industry standard for detection excellence, throughput and reliability. Our Secure 1000 Single Port System, the world's most widely deployed advanced people screening body scanner solution, continues to be installed in new locations. Most notably, during the past quarter Secure 1000 Systems were installed at the Los Angeles International and Chicago O'Hare, some of the world's busiest airports.

As a background, in fiscal 2010 the TSA awarded Rapiscan $173 million IDIQ contract to provide advanced imaging technology, AID systems, such as Secure 1000. Because of Secure 1000's superior imaging capabilities, we are also receiving strong interest from non-aviation customers. We have developed the Secure 1000 Man Portable, a ruggedized model that was developed specifically for applications that require rapid deployment, mobility and durability, as well as superior threat detection. The Secure MP is an ideal portable solution for military, police, corrections, event security and protection of critical infrastructure to detect concealed threats and contraband items. We own a lot of IP, intellectual property, in this product line. In the screening services segment, the construction phase has begun by the Port of San Juan, Puerto Rico, for this project.

As you know, in fiscal 2010 we received a 10 year cargo scanning services contract with the Port of Puerto Rico, Port Authority. We anticipate that the operation will start for this contract towards the latter part of this quarter as construction activity has commenced at the port to ready the site for screening. Our equipment has started arriving in Puerto Rico. We continue to see strong interest in the marketplace for a turnkey approach to meet screening needs. Our broad portfolio of screening platforms makes us an ideal partner for customers that have diversified screening requirements and seek a full service solution.

A key to success in the programs mentioned above has been our relentless focus on R&D and working closely with our customers to develop versatile solutions to address the evolving threats to public safety. Because of our strong capabilities in research during the quarter, we were awarded a multi-year contract valued at up to $12 million if all options are exercised by the Domestic Nuclear Detection Office to develop advanced methods to detect nuclear materials. In addition to an established security customer base in the US, Europe and Latin America, we continue to gain new customers in eastern Europe, India, Middle East, and Africa for our advanced personal screening checkpoint and cargo solutions. Our quotation activity has never been as strong as today. After the quarter ended in early October, we also announced the high energy mobile cargo order from customs and border patrol for approximately $24 million.

Let's go to Health Care. Despite a challenging environment, our Health Care division continues to perform admirably. On a sales base in the quarter that was lower by 2%, Health Care delivered 90% higher operating income when compared to the first quarter in the prior year. As Alan mentioned, this was the best Q1 profit performance in the Health Care division's history. In order to become more efficient, US hospitals continue to make strategic technology implementations, including upgrading patient monitoring and data connectivity systems. As an example, during the quarter the Health Care division won the opportunity to provide the patient monitoring and connectivity solutions to a prominent Florida hospital. The equipment will be installed throughout the hospital's cardiology and cardiovascular units. Our connectivity solution ICSG2 enables the seamless transfer of critical patient data to the hospital information system.

We continue to implement a strategy to meet the needs of smaller hospitals and clinics in the US and focus on developing solutions that target emerging markets. As examples of international growth in Health Care, we received a contract from the Indian government to provide advanced anesthesia workstations which integrate our Ultraview patient monitoring and Blease ventilation technologies. We also provided patient monitoring and ICSG2 connectivity solutions to 14 hospitals in Romania. This was a world bank project where we worked closely with the ministries of health and finance of Romania. These activities are the latest examples of our exciting progress in countries that have a growing need for cost effective health care solutions. As mentioned in a previous quarterly call, for the next 12 to 18 months we would have the largest introduction of new products in the Health Care division.

Optoelectronics division. The Optoelectronics division delivered an operating profit of $3.4 million on an 8.2% operating margin on a sales level which was actually 8% lower when compared to the prior year. Operating margins improved from the prior period and the lower revenue in the quarter was expected as the prior year quarter sales were favorably impacted by a major defense OEM contract.

OSI has exciting prospects where we can grow through strategic investments in all our divisions. To that end, we recently entered into a new five year, $250 million revolving credit facility. We are pleased to have entered into this larger credit facility that provides OSI with additional access to capital and enhanced features as compared with our prior credit facility. The facility combined with our strong balance sheet positions us well to continue to implement our plan of growth, both organically and inorganically to deliver further value to OSI shareholders. I am proud of our team and its ability to manage the business, provide quarter-over-quarter growth in earnings and stay focused on a strategic objectives. With our robust backlog and abundant prospects in each division, I am confident that we will continue to meet or exceed our objectives for 2011. 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 continue to focus on growth initiatives and operating improvements throughout the Company, in order to drive significant earnings growth and free cash flow. We are pleased with both the earnings momentum and free cash flow generated during what has been a challenging sales environment. This disciplined approach, coupled with a very strong backlog, provides us with a great deal of confidence about our potential earnings power as revenues increase. I will speak to our guidance shortly. But first, let me review the financial results of the first quarter.

As Deepak mentioned, net sales in our Security Division increased by 8%, led by continued strong demand for and shipments of our people screening products. Bookings increased 45%, driven by growth in our baggage and parcel inspection and cargo product lines. Health Care sales were again soft, declining by 2%, and OPTA sales, as expected, decreased 8% as the prior year quarter was favorably impacted by heavy sales on a large defense industry contract that we have said would decline in volume going forward. Due to ongoing lean and global supply chain initiatives as well as the product mix, our gross margin improved significantly. We achieved a 330 basis point improvement in gross margin during the quarter, to 36.5%, from 33.2% in the prior year. As our gross margin improved in all three divisions. Our gross margin typically varies from quarter to quarter, as a result of a number of factors including product mix, unit volumes, pricing, inventory reserves and capacity utilization. With strong cost controls in place, our Q1 SG&A expenses were comparable to last year, decreasing about 1%.

We continue to invest significant resources in R&D to enhance our Security and Health Care product offerings. To this end, our R&D spending increased 16% in the first quarter to $9.2 million, with such incremental investment this quarter occurring in our Security you business. We continue to invest resources and technologies to add value to our Security and Health Care product offerings. As a result, we believe these efforts will enable the Company to capture major opportunities in our core markets in the future.

Our effective tax rate for the quarter was 30%, compared to 30.2% in Q1 last 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 the impact of permanent taxable differences. As a result of the improved financial metrics, we reported a significant improvement in our diluted EPS of $0.18 per share, compared to $0.14 in the comparable prior year period. Excluding the impact of restructuring charges, our non-GAAP normalized EPS for Q1 would have been approximately $0.19 per diluted share representing a 36% increase over last year.

Moving to cash flow. We generated operating cash flow of $9.6 million during Q1, driven by our improved profitability as well as our continued focus on working capital management resulting in strong collections, which were partially offset by a buildup of inventory to support the backlog. Capital expenditures were on the lighter side this quarter totaling $2 million while depreciation and amortization was about $4.5 million. We paid off approximately $7 million of debt during the quarter, and subsequent to quarter end retired $25 million of our term debt concurrent with entering into our new credit facility. Overall our net cash position increased 64% in Q1. As mentioned in previous conference calls, generating strong cash flow continues to be a top priority and we are pleased with the sustained progress we have made. With strong top line growth forecasted over the remainder of the year, investments in working capital are expected to be required.

Finally, turning to our fiscal 2011 guidance. With the strong backlog, providing improved visibility, we are anticipating sales growth of 12% to 15% over the remaining three quarters of our fiscal year. As mentioned on our last call, and consistent with our prior year fiscal 2010 results, we expect that fiscal '11 sales will be more heavily weighted towards the second half. That being said, we're anticipating strong sales growth during the December quarter. We remain confident in the outlook on earnings. By leveraging our infrastructure on higher sales volumes, we anticipate continued net margin expansion. With the strong Q1 performance and record backlog, we are increasing our EPS guidance to $1.70 to $1.82 per diluted share, excluding restructuring and other charges, representing a 22% to 31% increase over fiscal 2010.

During the past few years, we have transformed our Company into a sustainable and consistent performer. The impact of the economic issues notwithstanding, we have also built a strong foundation with significant future earnings power. Given the operational improvements that we have implemented over the past three years, coupled with the restructuring activities that have reduced our cost structure, we believe we are well positioned for continued operating 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.

Our first question comes from the line of Brian Ruttenbur of Morgan Keegan.

Thank you very much. Good quarter. Questions, first of all -- Puerto Rico, can you tell me where they are? You said they started construction process. It should be a relatively short process. Is there anything else that would hang this up besides moving the dirt?

No, Brian, this is Deepak here. You said it. It is moving the dirt. It's putting some concrete pads, building some walls around. We are watching it day by day and we still think that it will start and go live sometime this quarter.

Okay. And so there's no other government approval that once the construction is started, there should be -- unless there's some kind of labor strike, there should be -- everything should move forward there, is that correct?

I don't think so, except if there's a tsunami.

Okay, very good. Next quarter, moving on over to Alan. A couple questions. Gross margins were real strong this quarter, first quarter. Do we expect that trend to be in the 36 plus percent gross margin going forward for the next couple quarters?

We do, Brian. I mean, certainly depends on our mix of products, but with the economies of scale associated with a larger revenue base and increases projected in the various product lines that we're thinking, we do anticipate that margins will be at or higher than the amount you mentioned.

Okay. G&A, R&D were a little bit less than we anticipated in the first quarter. Seasonally, it's relatively low versus the other quarters of the year. How should we be looking at G&A and R&D going forward on either a year-over-year or sequential basis or percentage of revenue or give us something to look at.

Sure, Brian. It's Alan. From an SG&A perspective I would anticipate that on a percentage of revenue basis that it will continue to decline on a year-over-year basis. However, on an absolute dollar basis it will increase. Recall, this being a lower revenue quarter, the variable costs associated with that such as commissions are lower so anticipate that on an absolute dollar basis you'll see a little bit of increase year-over-year and on a percentage of revenue basis we'll see a decrease.

Okay. And then backlog in bookings, the trends are typically the summer months -- the spring and summer months you have good backlog in bookings. Typically in the December and March periods, you have not as strong of backlogs. Is that a trend that's going to continue or is the international market so strong on the security side that that trend will change?

Would you repeat that again, Brian?

Okay. So I'm basically looking at backlog for the next -- for the December and March period. I'm trying to figure out seasonally you have declines historically during those periods -- from these peak levels and I'm trying to figure out if you're going to have a seasonal decline in the December and March periods this year or do you anticipate that there's such strong business that you're going to have actual increases in backlog from these levels?

I think, Brian -- this is Ajay -- you know, keep in mind that obviously the fiscal year for US ended in September and we had a record backlog of $112 million. Traditionally, yes, the second quarter, the backlog, the bookings have been lower. For us to comment quarter by quarter, it's going to be -- it's very hard to do, but we do see internationally right now very, very strong activity and I think that's the best -- the most I can give you at this point.

Okay, so you still -- you don't see anything different on the US side, but you see probably increased activity year-over-year on the international side? Is that fair to say?

Yes. I think internationally you see increased activity. I think US -- traditionally quarter two is lower than quarter one because of the fiscal year.

Okay. And then last question on -- just on Health Care, how are things trending post the end of the quarter? Have things picked up in October?

Again, we can't look at it by just month to month. Basically, we feel very good about it, that the Health Care and the Optoelectronics, both the businesses will grow. Second half is going to be very strong.

Thank you.

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

Hi. Good morning, gentlemen.

Good morning.

I know you don't break out Health Care and Opto backlogs, but directionally can you tell us if Health Care backlog grew sequentially and are these record highs just like Security and total Company?

Hi, Rick, this is Alan. Yes, while we don't tell exactly what the Health Care backlog is, it has grown both sequentially as well as year-over-year.

Okay. And did this quarter's backlog in Health Care, is that an all-time high, or no?

It is not at an all-time high but it has increased nicely.

Okay. Okay. And then Puerto Rico, are you still estimating revenue in the $10 million to $30 million range per year? I know -- I think it was announced as $100 million to $300 million over 10 years, right?

Hi, Rick, this is Alan. We have never given any guidance on revenue or profitability on the Puerto Rico contract. The numbers you're referring to are certain estimates that have been put out by different analysts. We have refrained from giving any financial guidance until we have a quarter under our belt.

Okay. Fair enough. And then on the M&A side of things, are you seeing valuations start to come in line? Seems like with other companies that I follow that there's a wide gap previously I'd say over the last 18 months between valuations as far as sellers and buyers. And I've seen that narrow. Are you seeing the same thing?

Well, obviously there's certain deals that have been done in the Security spaces especially, Reveal and some of the other ones, ICX, they are all over the place. I don't know how to answer it between the sellers and buyers. We continue to monitor that and with a strong balance sheet we are looking at all opportunities to grow the Company, both organically and inorganically. Not only just in Security but in Health Care and Opto.

Put differently, then, today compared to, say, 12 months ago, are there greater odds for affecting a transaction?

Well, we have a pretty active M&A activity. We continue to look at it in all three areas. So I don't know how to judge the odds one way or the other but we definitely are looking all over.

Okay. And then last, tax rate, did you say 30% to 31% for the full year? Is that what -- ?

Our effective tax rate for the quarter was 30% and we think that that is a pretty good rate, plus or minus, for the full year.

Okay. Perfect. Thanks, guys.

Our next question comes from the line of Tim Quillin with Stephens, Incorporated. Please proceed.

Good morning. Nice quarter.

Thank you.

Can you give us an update on the progress with your RTT in certification and is it such that if you are able to get lab certified that you'll have enough data through field testing in the UK that you can start selling once you get lab certified or how does that process work? Thanks.

Well, right now, Tim, we are in test. We're very excited about our prospects, both in US and international. Because it's active testing going on, it's very difficult to comment beyond that. We continue to be excited about it.

Is it something where you have a time frame in your mind about when it could be certified?

I think -- this is Ajay. For competitive reasons, I really don't want to comment on it. We are actively pursuing various tests and I'll leave it at that.

Okay. And Ajay as well, can you comment a little bit about the pipeline that you have for the S2 global business and I know there's probably a lot of customers that will look at what's happening in Puerto Rico but maybe if you could give us a sense of how many customers will be looking at what you're doing in Puerto Rico.

I think that we've got interest pretty much on every continent and there's a lot of questions, a lot of activity. The numbers, I'm not going to comment on, but very, very strong activity in that area and a lot of customers really like the concept that we presented to them.

Tim, this is Deepak. Just to add on to it, we said on the last conference call, all cargo screening sale potential large contracts can also be fee-per-scan contracts. So we continue to mix both the potential for winning a sale and talking about whether the customer would like a fee-per-scan as a partnership. It's not that there are different buckets. We continue to look at it and as I mentioned before, we have never seen the activity so much as we've seen in today on these kind of cargo opportunities, both for sale and for fee-per-scan.

That's great. And Alan, I think you mentioned that you paid down the $25 million in term debt and I'm not sure, does that mean that you used cash to pay it down and what is your net debt position and what kind of interest expense should we be assuming for this fiscal year? Thanks.

Sure, Tim. Yes, we had $56 million in cash at quarter end and we utilized a portion of that cash to pay off the term debt of about $25 million subsequent to quarter end in October when we did the new facility. The new facility's interest rate is at LIBOR plus 2% which as you know is very favorable in today's climate. Going forward we would anticipate interest expense in the relative range of what you've seen before because recall that interest expense is not only term debt but it's letters of credit and as our business is growing with Rapiscan, there's more and more letters of credit and bonds used to support that growth. And of of course with a larger facility you have the unused commitment fees.

Okay. Great. Thank you.

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

Hi. Good morning, guys. Just Alan, going back to your guidance, maybe t at a high level, I think in the past you've broken out Security and Health Care and Opto at least in general terms. If you think revenue in Security continues to grow somewhere in the mid to high teens and Health Care single digits?

Sure, Michael. We tend to give guidance on an overall OSI-wide basis as opposed to per division. We do believe that the growth in fiscal 2011 will be led by Rapiscan, which will have high double-digit type growth. And that will lead the way in both of our sales and earnings momentum.

And then just on Opto, I think you commented that you were continuing to expect positive growth in the Opto division. Considering first half was pretty difficult comp year-on-year, are you referring to second half being positive over second half last year or for the entire fiscal year achieving growth?

Well, we believe that there's an opportunity for the entire fiscal year to achieve growth but certainly your comment is right. With very difficult comps, particularly in Q1, the real growth that will be taking place in the Opto division is more second half loaded, similar to the entire Company, although we are anticipating a pickup in our second quarter as well.

Just in terms of -- through the -- I guess the sequential growth through the rest of the year, would the customer delay in Q1, is it your sense that Q2 looks a little bit more flat with the second half than what we saw in prior years?

Well, we tend to see -- this is Alan again. We tend to see some seasonality whereby Q2 and Q4 tended to be our strongest quarters. Q1 and Q3, a little bit lower. I think with the strong backlog that we have, I think that that does lend some credence to Q3 being stronger than it has historically been and seeing a Q2, Q3, Q4, all three of those quarters actually being quite strong in and of themselves.

And the customer delay, was that on your part or was it on the customer essentially pushing out their delivery time? Can you expand on your commentary?

This is Deepak here. It's the customer's request.

Okay. And what was the magnitude of that shift? Can you frame in rough terms what that looked like?

This is Alan. It was the neighborhood of about $7 million to $8 million.

Okay. And then Ajay, just a couple of specific programs on AIT. I think one of your competitors submitted some software upgrades for testing. Are you also submitting some upgrades for privacy considerations and how that might affect delivery timings for the balance of the year?

You know, we are working very closely with the TSA and submitting all kinds of software upgrades that they've requested. In terms of specifically what they do, what they don't do, I'll defer that to the TSA. But we are also working very closely with them.

And is there any reason to expect that their target year end for the AIT program would be any different based on your -- what your visibility is right now?

Right now, whatever they told us is what we're going through. We don't see any differences from what they told us over the last several weeks.

Okay. And then just briefly on the AT X-Ray, obviously very nice size IDIQ, you have one other major competitor there. Do you have a sense if there would be a significant shift in the mix from the previous deployments or pretty much as is with previous years?

You know, I think we feel very good. We had the largest share in terms of total quantity and we feel very good about our prospects going forward.

Okay. Great. Thank you very much.

Our next question comes from the line of Josephine Millward of Benchmark Company. Please proceed.

Good morning.

Good morning.

Deepak, can you talk about why are you only expecting high single digit, mid to high -- sorry, why you're only expecting mid to double-digit growth in Security when your Security backlog is up about 40% and it doesn't include Puerto Rico? Shouldn't Security grow -- do better than that in fiscal year '11?

This is Deepak here. Alan, just to correct, I don't think we ever said Security single digit.

No, no, I meant double. Mid 15% to 20%. Sorry, I didn't get that right. But that's what I was asking.

Well, backlog is strong, as you know. The government fiscal year ended in September. We've always historically had this quarter quite strong and we look at as Ajay mentioned, the international sector is also we're anticipating good growth. I think in the teens is a very healthy growth for Security and definitely in all the calls we do not include periodic one in our backlog.

Right, but Deepak I'm asking it -- what I'm asking is if you think Security can do better in coming year based on your bookings and your backlog because your Security backlog is up 40% from last year.

Alan, do you want to add? I still don't understand the question, Josephine.

Well, I think your expectation for growth in Security in the coming year, it's in the mid-teens, right, or higher? My question to you is do you think you -- Security can do better based on the strong bookings we've seen during the quarter? I don't understand why your outlook isn't better because of all the business you booked in Security.

I think we are a very conservative Company.

Okay. That's fair. Can you give us an update on the new distribution channels targeting small to medium sized hospitals in the US and how much revenue contribution do you anticipate from these new channels in the second half for Health Care? And a break down for emerging markets in your Health Care business in terms of revenue mix.

Josephine, you know that I'm not going to give you that information. We never break it down to that detail for competitive reasons. We do -- Alan has mentioned many times over previous conference calls, we have a manufacturers rep channel that we hired sometime a year ago. We are excited about the prospects. We have a whole portfolio of new products coming out, both geared up for those smaller hospitals and the emerging markets. But to break it down into those kind of categories, frankly even if I -- personally, I don't have it at my fingertips but even if I do, I cannot give that away for competitive reasons.

Okay. What about do you think it's your plan on track and do you anticipate growth in contributions from these new distribution channels?

Yes, we do.

For Health Care?

Yes, we do.

That's great. In terms of Opto I believe you have around $40 million of business to offset this year from ITT for the electronic jammers. Is that right? And do you think Opto could get to flat this year?

Josephine, this is Alan. Yes, that was significant business last year. Recall that that is not a number that needs to be replaced in its entirety because there continues to be business in fiscal 2011 and significant business. We do believe there is the potential for Opto to even grow this particular fiscal year, even with that change.

Thank you very much.

There are no further questions at this time.

Thank you very much. In summary, I'm very excited about the prospects going into the -- into Q2, Q3, Q4, with a very strong backlog. Our prospects in Security, both domestically and internationally look very good. We are looking forward to starting the Puerto Rico program. Health Care though continues to be challenging. We see growth opportunities both in the domestic and the international market. We have a whole portfolio of new products coming out in the next eight to 12 months in the Health Care area. The Opto, as Alan mentioned, we have some great prospects. So we look at it that the Q2, Q3, Q4 are going to be growth, profitable, and we have very confident about our prospects. Thank you very much.

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