OSI Systems Inc (OSIS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2011 OSI Systems, Inc. earnings conference call. My name is Chanelle, and I'll be your Operator for today. At this time all participants are in 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 Mr. Alan Edrick. Please proceed.

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; and Victor Sze, our General Counsel.

Welcome to the OSI systems fourth quarter and year-end 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 2 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 measure, and a quantitative reconciliation of those figures please refer to today's Press Release regarding our fourth quarter and year-end results. The press release has also been filed with the SEC as an exhibit to a current report on 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 last Annual Report on Form 10-K and other 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 the call over to Deepak, I will provide a high-level overview of our financial performance during our fourth quarter. We will touch on several themes that we discussed during past conference calls. We entered Q4 with expectations of double-digit revenue growth, capitalizing on our strong backlog, leading to strong earnings. And the bottom line results did not disappoint. Highlights for our fourth quarter of fiscal '11 are as follows.

First, we achieved record sales of $183 million, an increase of 11% over the prior year driven by growth in all 3 divisions. Leading the way was our Opto division which grew 27%, marking the second consecutive quarter of 20%-plus year-over-year growth.

Followed by our Healthcare division which posted a 10% top line increase, the second consecutive quarter of double-digit sales increases. A And our Security division reported a 4% Q4 revenue increase resulting in 17% growth for the year. These results are especially noteworthy given the strength of Q4 last year.

Second, bookings were again outstanding leading to a record Q4 backlog of $304 million, a 27% increase over the same period last year, providing us good visibility as we enter fiscal 2012. Third, our strong earnings growth momentum continued as we reported a 40% increase in Q4 diluted earnings per share excluding restructuring and other non-recurring charges.

This quarters results marked our strongest quarterly EPS ever, and the 16th quarter out of the last 17 that we generated year-over-year earnings growth. Fourth, we generated $10 million of free cash flow. Our 14th consecutive quarter of positive free cash flow. Over the past 3 years, we have moved from a net debt position to a net cash position, a $109 million positive swing.

And finally, as we reported on our last call in April, we initiated operations under our contract in Puerto Rico. And to date those operations outperformed very smoothly. We are pleased to have once again reported another strong quarter and remain very enthusiastic about our future.

I will provide additional financial details and will discuss our fiscal 2012 guidance. 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 full year fiscal 2011. As Alan discussed, our results in the fourth quarter were quite strong as we generated revenues of $183 million, or an increase of 11% of the prior year's quarter. Revenues for the year reached $656 million, a 10% higher than fiscal 2010.

For the fourth quarter and the fiscal year, in addition to achieving double-digit revenue growth, we raised the Company's operating margin excluding restructuring and other non-recurring charges by over 1,000 basis points for both the quarter and the full year to 10.1% and 7.8%, respectively.

Our operating advantage has allowed us to grow our earnings rate significantly faster than the rate of sales. And we are committed to reach double-digit profitability across all of the businesses. Based on non-GAAP measures, our fiscal 2011 diluted EPS was $1.84, which increased by 32% over the prior year. Looking ahead, OSI is well-positioned to significantly grow both the top line and earnings.

I would like to spend some time focusing on each of our business segments. Let's start with our Security division, Rapiscan, which continues to perform very well. Revenues increased 17% in fiscal 2011 to $295 million. And ended the year with a backlog of $200 million, which is approximately 39% higher than the prior year, positioning us well as we enter fiscal 2012. In addition to our solid foundation in the commercial aviation, defense and security markets, we continue to make significant headway in the international arena, especially in developing markets like EMEA and Latin America.

During the fourth quarter we were awarded a $248 million indefinite delivery, indefinite quantity order from the US Army to provide entry control point non-intrusive inspection solutions. The Army will utilize this contract to procure a variety of products and services to fulfill the Army's global force protection requirements.

With our broad portfolio of recognized inspection solutions for personnel, vehicle and cargo, and our integration capabilities, we are in a very good position to capture numerous opportunities as they become available under this contract. As air cargo carriers continue to upgrade their infrastructure to meet tighter inspection regulations for global cargo traffic, we stand to benefit given that we have 10 inspection systems, more than any of our competitors on the TSA air cargo qualified technology list for air cargo's training.

To that end, we are especially proud to have received an order valued at approximately $12 million in the fourth quarter from DHL to provide baggage and parcel inspection systems.

In the commercial aviation segment, we received an initial order for approximately $20 million to provide multiple units of our RTT whole baggage inspection systems. As you know, we embarked on a mission to develop the next generation CT-based inspection systems, emphasizing the goals of higher throughput, reliability, and a design for performance that would easily meet or exceed the latest standard set by aviation authorities worldwide.

We developed an innovative system that consists of a revolutionary solid state CT design involving a fixed gantry configuration. In other words, our design has fewer moving parts than existing CT-based whole baggage machines, which in turn is expected to make the RTT more reliable resulting in lower overall life cycle costs.

Our initial models of the RTT systems are targeted at the aviation checked baggage inspection market. We continue to make progress towards certification both in Europe and US. In the international arena, we continue to gain new customers worldwide. Some examples of international successes in this quarter, we received orders for cargo scanners from several Eastern European customers.

With increased intra-continental cargo traffic, Eastern European countries are upgrading security infrastructure to comply with the standards of their trading partners. We received an order from a major airport customer to provide full maintenance and service of its inspection system infrastructure.

During Q4, we achieved European Commission Type C certification, a standard set for detecting liquid explosives for a multi-view advanced checkpoint scanners. And finally, in our longstanding tradition of playing a critical role of providing security systems at major sporting events, we are proud to have been selected as the official security solution provider for the London 2012 Summer Olympics. This is a huge and prestigious win for the Company.

On the turnkey scanning service front, we commenced operation in Puerto Rico during Q4. In addition to providing the customer with tremendous benefit of minimal up-front investment, during our short window operation, we have already played a role in identifying contraband and highlighting variations between the reported manifest and the actual content in a container. We expect to be fully ramped up in Puerto Rico in the next several months.

We have discussed numerous successes in the marketplace. I would like to take a moment to reinforce the strategy that has helped our success. Rapiscan has focused on providing a broad portfolio of detection systems to the market instead of a narrow offering.

We believe that customers would ultimately benefit from our ability to provide optimal configurations, utilizing multiple platforms. And, in turn, gaining a broad understanding of the market needs would allow us to rapidly develop versatile solutions to address constantly evolving threats. In addition with this approach, we are also able to reach an economy of scale for a global service and logistics network.

We are glad to see the pay-off of this strategy as our growth is coming from several market segments beyond aviation and the Department of Defense. An example of growth in an incremental segment is our success with international customers who often look for a 1-stop shop experience to not only establish or upgrade infrastructure quickly, but also arrange for a comprehensive maintenance and services package.

Examples of other types of customers that seek complete integrated solutions include prison networks, nuclear facilities, and international airports in newly-industrialized countries. These customers often do not have the capability or the desire to maintain inspection systems.

At Rapiscan, we enter fiscal 2012 with a nice order backlog, plenty of momentum, and healthy growth in the coming year. Our R&D investment continues to pay off for a robust stream of new products in the future.

Turning to Healthcare, the Healthcare division's Spacelabs achieved sales of $62 million, a 10% increase from the prior year. And delivered an impressive 12% operating profit margin. For the year, Spacelabs grew 4% to $215 million, which is nice to see after 2 years of revenue contraction, primarily because of economic challenges in the industry.

Even with modest revenue growth, the full-year operating margin, excluding restructuring and other non-recurring charges, increased by 200 basis points to 9% from the prior year. And this performance really exhibits the operating leverage in our business model.

The amount of backlog in this business is not a very meaningful indicator primarily because a significant portion of sales are booked and shipped within the quarter. So, we gauge the trends and develop forecasts by paying close attention to other inputs. An example is utilizing feedback from our Datex sales team that provides realtime information about the dynamics at customers and geographical regions.

With the launch of multiple new products like XPREZZON in April, an innovative patient-monitoring solution, we have had 6 new products launched in our patient monitoring, cardiology and anesthesia product lines for fiscal 2011. We recognize that new product launches spur incremental sales and thus we are confident that Spacelabs will have a strong fiscal 2012.

In the fourth quarter, Optoelectronics generated revenues of $55 million, a 27% increase from the prior year. Fiscal 2011 revenues were $193 million, 13% higher than fiscal 2010 revenues and a record for annual sales. Our OEM customers in multiple industries continued the growth in demand that started in fiscal 2010.

In addition, we are gaining new customers that look for a flexible model where we can migrate the local manufacturing typically required in the early stage of a product life cycle to manufacturing and lower-cost regions for high volume production. Looking ahead to fiscal 2012, in addition to being a critical supplier to our Security and Healthcare divisions, Optoelectronics is well-positioned to grow and continue on the path of increasing profitability.

We ended fiscal 2011 with a record backlog of $304 million, a 27% increase over the prior year and a new Q4 record. Breaking the previous record that was just set last fiscal year. Starting fiscal 2012 with a record backlog, recently introduced products with the latest technology, and a healthy opportunity pipeline, we look forward to delivering continued growth in revenues and profits in fiscal 2012.

With that, I'm going to hand the call back over to Alan to talk in detail about our financial performance and guidance 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 deliver significant earnings expansion and free cash flow. We are pleased with both the earnings momentum and free cash flow generated.

And are excited about our future prospects, given our strong backlog and excellent pipeline of opportunities which are expected to fuel continued growth. I will speak to our guidance shortly, but first let me review the financial results for the fourth quarter of fiscal '11.

As mentioned earlier, net sales were up 11% on an overall basis. We're very pleased to report 10% growth in our Healthcare division, the second consecutive quarter that we have recorded double-digit growth as all product lines experienced growth in the quarter.

Our Security division grew 17% in fiscal '11 and 4% for the quarter, coming off a very strong Q4 in the prior year. We once again had very strong security bookings of $85 million in Q4, which represents a 22% increase over last year's Q4, positioning us very well for fiscal 2012.

And as we mentioned on our last call, and earlier, we initiated operations under our contract in Puerto Rico and began recognizing screening revenues during Q4. Sales from this operation are expected to become more significant as we fully ramp up.

Sales in our Opto division were very strong, increasing 27% which includes a 29% increase in third-party sales and a 22% increase in Opto sales to our other 2 divisions. While such inner segment revenues are eliminated in consolidation, they demonstrate the continued strength of our vertical integration strategy.

Our gross margin in Q4 was 38.2% for the quarter compared to 38.7% last year. The change is primarily due to 3 factors. First, it is due to the mix of revenue growth. As discussed in the past, while operating margins are strong in our Opto division, the gross margin is below that of our other divisions.

As Opto revenues grew faster than both Healthcare and Security sales, the consolidated margin was adversely impacted. Second, as mentioned on last quarter's call, our Security division agreed to take on the role of a prime contractor including construction services in connection with a large international equipment and service sale.

We incurred cost overruns on the construction component which impacted our gross margin in Q4 and is expected to also significantly impact our margin during the first quarter of fiscal 12, as we expect to complete the majority of the remaining construction projects during this first quarter.

As we grow at OSI, we expect to be faced with new challenges along with opportunities to meet our customers' needs. Taking the prime contractor role in this project is a good example. We accepted the challenge, learned from the experience, and believe we are now better prepared for similar opportunities in the future.

And third, 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.

Moving to OpEx, with strong cost controls remaining in place, our SG&A expenses as a percentage of revenue was 21.6% in Q4, which is an improvement of 150 basis points over the prior year as we continued to effectively leverage our infrastructure. In absolute dollars, such expenses were up about 4% year-over-year in support of the 11% revenue growth.

We continue to invest significant resources in R&D, to enhance our Security and Healthcare product offerings. To this end, our R&D investment and our spending increased 7% in the fourth quarter to nearly $12 million, with such incremental investment focused on our Security business.

As a percentage of revenues, R&D expenses were 6.5% as compared to 6.7% in the fourth quarter of fiscal '10. We continue to invest resources and technologies to add value to our Security and Healthcare product offerings. As a result, we believe these efforts will enable our Company to capture major opportunities in our core markets in the future.

Our effective tax rate for the fourth quarter was 27.7%, resulting in a 28.5% effective tax rate for the 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.

Our sales growth, combined with leveraging our cost structure, resulted in a 45% improvement in our fourth quarter diluted EPS to $0.61 per share compared to $0.42 in the comparable prior year period. If we exclude the impact of restructuring charges, our non-GAAP normalized EPS would have been approximately $0.66 per diluted share, representing a 40% increase over Q4 last year.

Moving to cash flow. We generated operating cash flow of $15.5 million during the quarter and $40 million in fiscal 2011. Q4 capital expenditures were $5.9 million while depreciation and amortization was $4.7 million.

Overall, our net cash position continued its upward momentum as we ended the year with nearly $53 million of net cash. As mentioned in previous conference calls, generating strong cash flow has been a top priority and we are very pleased with the consistent level of progress we have made in this area over the last few years.

With strong top line growth and the build up to next summer's London Olympics, for which we are the exclusive provider of security detection equipment, we anticipate investments in working capital to be required.

Finally, turning to the introduction of our fiscal 2012 guidance. With the strength in our backlog and the strong outlook for each of our businesses, our annual revenue guidance for fiscal 2012 is $722 million to $740 million which represents an increase from the prior year of 10% to 13%.

Similarly, we expect a strong bottom line momentum to continue and are introducing our fiscal 2012 earnings guidance. We expect diluted EPS to increase at the rate of 20% to 26% over fiscal 2011 which will be between $2.21 and $2.32 per share. This excludes restructuring and other non-recurring charges.

During the past few years, we have transformed our Company into a consistent, sustainable performer, building a strong framework for future earnings power. Given the strength of the sales funnel, coupled with the operational improvement initiatives that we continue to implement, we believe that we are well-positioned to continue the operating margin expansion in the coming years.

Thank you for listening to this conference call. And at this time, we would like to open the call to questions.

(Operator Instructions) Brian Ruttenbur of Morgan Keegan.

Hi, this is Brian Ruttenbur. A couple questions that I have. First of all, the easy lay ups. Cash from operations in the quarter and your free cash in the quarter?

Our free cash in the quarter was roughly $10 million. Cash flow from operations was about $15 million.

Puerto Rico now. What was the revenue generated in the quarter and what do you expect in the next couple quarters?

Yes, Brian, this is Alan. As mentioned, our revenues from Puerto Rico in the quarter were not material, as we had the first site up and running. As we get all sites up and running by the end of the calendar year, we'll be giving some more information. We said on past conference calls that we believe that it's premature to release any information until we're fully up and running and have a full quarter behind us.

And then on the government funding, a macro question. What do you see out there in terms of body scanner orders, delays with the federal government? What's going on there with the TSA, Homeland Security budgets from your perspective?

Brian, this is Ajay. On the body scanner side, it's public information. TSA came out and said it, as well. There's money that's already been appropriated for another 500 scanners that they expect to buy over the next few months. And also, we really haven't seen a difference or change in what their procurement plans are for our check baggage or the checkpoint. So, I think that there's been a lot of talk. We just haven't seen anything particular right now. But, as you guys, we're going to wait and see. But the body scanners, it's pretty clear what the funding is right now.

And then on the Healthcare side, how many new launches do you plan this fiscal year?

Brian, this is Deepak here. We have not given a specific number but I mentioned that we launched 6 new products in the last year. In the coming year, we have similar or greater number of new products coming out.

And what is the traction that you're getting with the new products? Is that what is driving growth or is existing products because you're starting to see some growth back in the healthcare?

It's always a combination of it. Obviously, when you come up with a new platform or new products it generates a lot of excitement. You're servicing and managing the same customer base, and you open some new doors. So, it's a way to enter the same customer base, same database with new products and new platforms. So, it's not like there's a separation between the old product and the new product.

The last question is DHL. You had a $12 million order, and that's a commercial order, I assume, is that correct?

That's correct.

Is that an area that you see getting more traction, is the DHLs of the world, the FedExes, the UPSes?

Absolutely, Brian. There's a lot going on in air cargo. The good part is, it's not just in the US. Internationally we've seen a lot of growth in all areas whether it's Asia, whether it's EMEA -- Middle East or Europe. So it's really a very good area for growth for us and we have done very well.

Just to add on to it, generally speaking, the activity is as strong as it's ever been, not only just in air cargo but in other parts of the product line all across-the-board and globally.

Tim Quillin of Stephens Inc.

Alan, I got some of the figures but I just wanted to check with you. I think CapEx I heard $5.9 million, and D&A I heard $4.7 million. If you can confirm those. And then do you have a number for stock compensation in the quarter in front of you?

Sure. Tim, we can confirm those, the numbers you quoted are correct, $5.9 million and $4.7 million. Stock compensation expense is roughly $1.5 million in the quarter or about $6 million for the year.

And then in terms of the CapEx, it was relatively high in the quarter versus what you had in the prior quarters of the year. What was in that number? And what are you planning in terms of capital expenditures in fiscal '12?

Sure, Tim. This is Alan. The CapEx was a little bit higher than in previous quarters, mainly as a result of certain equipment and tooling to get prepared for a lot of the new product launches that we're going to be having coming out in fiscal 2012. So, that was a high proportion of it. In addition, we moved to 1 new manufacturing facility and we had some leasehold improvements associated with that.

And in terms of preparing for the new products, is that in the Healthcare side?

It is predominantly in the Healthcare side but it's also in the Rapiscan side, as well.

And what new products are you tooling for on the Rapiscan side?

We're looking in a lot of different areas basically. We're looking at the next generation on the checkpoint. We're obviously still going through our testing with our RTT product. And we are also looking to upgrade some of our products on the body scanning side. And cargo, we continue to spend a lot of R&D, coming up with the next generation products where we can provide the customers really a lot more of an integrated product than just a simple scanning machine.

Ajay, do you have an update on the status of RTT?

Yes. We are in testing and we are going through, both in Europe as well as in the US. And we think the testing will continue for the next few months. We feel very good about where we are. And I think we'll give you a further update in the next conference call.

And then you mentioned the body scanner orders that are expected over the next few months. But given that the funding has been appropriated, should it really be theoretically within the next few weeks?

I can't really comment on when TSA is going to release those orders. But whether it's a few weeks, a few months, it's going to be soon, is the best way to put it.

And then in terms of just the overall bookings outlook for the September quarter, this is often a very strong bookings quarter on the Security side. A lot of that is on the federal government side. And so, do you expect a typically strong bookings quarter or is the outlook cloudy at this point?

I think we've got to look at bookings not just from a federal standpoint but from an international standpoint. And everything we're seeing looks very good. Whether the bookings take place in Q1 or Q2, there might be some timing shifts here or there, but overall we feel very good about the upcoming year.

Alan, I know it's a little hard to project due to mix but what kind of tax rate should we assume for 2012?

Yes, Tim, you're right. It does vary depending upon where the source of the income is but we look at around 30% plus or minus as an appropriate tax rate to consider modeling.

Rick Hoss of ROTH Capital Partners.

Just 2 modeling questions. 1, Alan, can you tell me what revenue the Mexican contract contributed in the fourth quarter?

Rick, while we don't speak specifically about how much revenue it contributed, it was not of a material amount, though it did impact our gross margin a bit. We do expect it, though, to be more significant in our first quarter of fiscal 2012. It could be in the neighborhood of $10 million to 15 million.

And then the restructuring in 2012 and maybe if you could compare it to 2011. Could you discuss the mixture, if there's certain segments that you're focused on or if this changes on a quarterly basis?

Sure, Rick. It's Alan. We continually look to improve all 3 of our businesses. We believe that the heavy lifting is behind us over the last several years. So, as we look to fiscal '12 we're not forecasting or anticipating any significant restructuring charges. That being said, we'll always look to continue to optimize each business unit.

So, on a modeling basis then should we look at '12 below '11?

We would anticipate '12 will be below '11 at this point in time.

And the last question, remind me, how much of Opto, if any, is produced offshore?

Of our operating results, I would say it varies from period to period but certainly the majority is produced offshore relative to domestically.

Mike Greene of The Benchmark Company.

On the Healthcare side, the results for the quarter were very strong. But post quarter have you seen a recent slowdown in hospital CapEx with the current market conditions?

Generally speaking, historically Q1 is weaker than Q4 to begin with. But we don't see any trends from what's happening in Washington from the hospital spending. Business as usual.

And then on the Security side, I believe Smith Detection recently guided a lower growth rate of 7% for the next 3 years, down from 10% to 12% in the past. How do you see the overall Security end market trending over that time period?

We project double digits.

(Operator Instructions) And there are no further questions. I'd now like to turn the call back over to management.

Thank you very much. This has been a great year for the Company. All the 3 divisions have produced growth. We're entering fiscal 2012 with a healthy backlog, a stream of new products both in Healthcare and Security. And, as Alan has mentioned, we are not sitting on our laurels. We continue to look at how to maximize our earnings. And we expect that 2012 is going to be a great challenging but great year for us with a lot of new products growth and the continued strength of our earnings momentum. Thank you.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.