OSI Systems Inc (OSIS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, andwelcome to first quarter 2012 OSI Systems earnings conference call. My name is Carmin, and I will be your coordinator for today. At this time all participants are in listen-only mode. (Operator Instructions). Later we will conduct a question and answer session. I would now like to turn it the call over to your host for today, Mr. Alan Edrick, CFO. Please proceed.

Good morning, and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems. I am here today with Deepak Chopra, our President and CEO, and Ajay Mehra, President of our Security division, Rapiscan Systems.

Welcome to the OSI Systems first quarter fiscal 2012 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 this presentation is being webcast and will remain on our website for approximately two weeks. Before discussing our financial and operational highlights, I would like to read the following statement.

In connection with this conference call, the Company wishes to take advantage of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements you 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 results and financial results. For complete information regarding non-GAAP measures, please refer to our press release filed today and our 8-K.

The Company wishes to caution participants on this call this 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 am going to provide a high level overview of our financial performance during our first quarter. We will touch on several themes that we discussed during past conference calls.

We entered Q1 with expectations of strong double-digit revenue growth, capitalizing on our record backlog, and the results were consistent with these expectations is. Highlights for our first quarter of fiscal 2012 are as follows.

First, we achieved record first quarter sales of $161 million, an increase of 26% over the prior year driven by growth in all three acquisitions. Leading the way was our Security division, which grew by 42% with a book-to-bill ratio of 2.5. In addition to the strength shown by our Security division, our Opto division delivered impressive results, reporting 34% top line growth on external sales, marking the third consecutive quarter of double-digit growth. And our Healthcare division reported its third consecutive quarter of growth, albeit the a rate of 1%. However, we do expect Healthcare sales to pick up speed in future quarters for reasons we will discuss later on the call.

Second, bookings were outstanding, leading to a record backlog of $413 million, a 34% increase over the same period last year, providing us excellent visibility for the next twelve months. The key driver of this increase was the $98 million US Army order that we received in September. Excluding the Army order, our Security division still achieved strong bookings with a book-to-bill of 1.2.

Third, our bottom line momentum continued, as we reported a 33% increase in diluted earnings per share. This quarter's results marked the ninth consecutive quarter we generated year-over-year earnings growth.

And, fourth, we generated $7 million of free cash flow, on you 15th consecutive quarter of positive free cash flow. Over this period we have generated $108 million of free cash flow, allowing us to move from a net debt position to a net cash position.

We are pleased to again report another strong quarter, and we remain enthusiastic about our future. I will provide additional financial details, and we'll discuss our updated fiscal 2012 financial guidance but first let me turn the call over to Deepak.

Thank you, Alan. Good morning, and welcome to the OSI Systems earnings conference call for the first quarter of fiscal 2012. As Alan mentioned, we had an impressive first quarter where we delivered revenue growth not just for the overall Company, but also growth at each division. Ending the quarter with a new record backlog of $413 million, we look forward to building upon our nice Q1 start through the remainder of the fiscal year.

Reviewing the highlights for the quarter and each division, starting with our Security division Rapiscan, where bookings increased 65% to $185 million. This impressive level of bookings contributed to increasing our security backlog to a record $319 million. Our sales in Q1 were up 42% to $73 million. Going forward, the strong backlog, combined with the fact that our average book-to-bill ratio is 1.4 over the last four quarters, gives us great visibility and will continue to broaden our footprint in the security industry worldwide.

Our Q1 bookings are a reflection of our efforts to go beyond our traditional role as an equipment provider and selectively seek opportunities where we can effectively serve as a prime contractor and a systems integrator to our customer base. We focus on doing this because in security, as in any competitive industry, companies that find ways to offer the best overall value to the customer will have a significantly higher chance of success over the long haul. Our position in the marketplace affords us the benefit of remaining judicious and participating in opportunities where we would have a meaningful amount of value add through leveraging our existing product portfolio and global service and installation footprint.

A few of the highlights for Rapiscan for the first quarter. As Alan mentioned, we received a $98 million order under the previously announced $248 million indefinite delivery, indefinite quantity contract won earlier in the year from the US Army to be the systems integrator for screening and surveillance equipment at entry control points. As you may recall, we are one of the six vendors qualified on this IDIQ.

Prior to receiving the $98 million order, we received the initial order from this IDIQ, which was a $7 million order, to provide our backscatter Secure 1000 scanners to the Army. Already winning the first two orders that have a combined value of 40% of the total IDIQ value is an indication of our standing in the marketplace and the level of the customer's confidence in us.

In airport security in Q1 we received a $12 million order from the TSA where we will upgrade the install base of our carry-on baggage X-ray inspection systems in order to provide enhanced threat detection capabilities. Our high speed all baggage screening solution, the Real Time Tomography inspection system, is currently being evaluated by US and European Union aviation authorities.

During the first quarter we continued to expand our install base of cargo scanning in the Middle East and Europe, with sales of multiple mobile Eagle T10 cargo scanners. The T10 is trailer mounted, towable and can be redeployed at different check points quickly. The T10 is an especially attractive alternate for customers that do not wish to build the related civil works infrastructure required to implement fixed [log entry] inventory based solutions for scanning cargo and vehicles.

As we mentioned in previous conference calls, we continue to see an abundance of opportunities US and abroad to offer integrated solutions for cargo and follow-on service and support packages. We expect we will be able to sell customer requirements with a range of options, from offering traditional equipment sales to introducing innovative screening service models similar to the one currently utilized in [Puerto Rico] or some combination there of.

Our Security team has shown the ability to innovate and quickly adjust to market conditions and customers shifting requirements and demands. With a backlog of $319 million, we are excited about the future of the Security arena.

Moving to the Healthcare division, our Healthcare division continues to move forward in a difficult and challenging economic environment. Healthcare sales grew slightly in the first quarter, but based on order activity and some new factors on which I will elaborate further, we expect that Healthcare's performance will improve in fiscal 2012.

In addition to managing the [cost] structure in the Healthcare division, our focus over the last several quarters that we have been mentioning on previous conference calls has been to release a host of new products in patient monitoring, cardiology and anesthesia. We continued on the spot with three product introductions in this quarter. In patient monitoring, following the successful launch of the XPREZZON series of patient monitors, we introduced Sonicaid Encore, a high performance fetal maternal monitor with advanced technology that used during labor and delivery.

In cardiology we launched Pathfinder SL, a Holter analysis solution that delivers innovative technology, rapid analysis, and enhanced accuracy in the exploration of a patient's cardiac condition. Also in cardiology we released a Sentinel 8, which is the latest version of our cardiology information management system.

The highlight of the new product introduction for the quarter, and after just recently, was the [Arcon] anesthesia product. Subsequent to quarter end we have filed a 510(k), notifying the FDA of our intent to market our new anesthesia system. The reception at the recent American Society of Anesthesiologists in Chicago was exceptional.

Another area of focus is to develop strategic relationships with major healthcare group purchasing organizations, or GPOs. As some of you may know, hospitals are increasingly using GPOs to provide ongoing supply chain management, from preparing RFQs, selecting bidders, eventually winner or sometimes winners, and establishing follow-on supply contracts. Therefore it is critical in the industry for healthcare suppliers to be included in the GPOs qualified vendor pool.

With two GPO contracts executed in Q1, we now have long-term contracts with the following major GPOs in healthcare. MedAssets, Premier, Novation, and Amerinet. The GPOs provide excellent visibility into the aggregated demand and purchasing trends of its members. In the coming quarters we expect to benefit from sales resulting from these GPO relationships. These GPOs together represent the vast majority of the GPO hospital market.

Moving to the Optoelectronics division, over the past few quarters the Optoelectronics division has been delivering revenue growth and strong profitability, which they delivered again as repeat performance in Q1. Opto group's revenue were 27% higher than the prior period, with an operating margin of 9.3%. In addition to growing demand from sister divisions, Opto saw higher demand from its OEMs in all major segments, including medical, defense, test and measurement, and industrial.

With some of the recent consolidations that occurred in major industries, there have been instances where current Opto customers, having been acquired, are now part of larger companies. In these cases Opto has an opportunity to leverage existing relationships with its longstanding customers and develop paths to corporate global sourcing teams that are responsible for qualifying strong suppliers and increasing their exposure to all businesses within the large companies.

However, local to offshore vertical integrated manufacturing model is a particularly attractive feature here, because we can provide product development, support [in proximity] to the customer's design team, and transition the production of our -- to our appropriate offshore locations as needed for high value. Often large OEMs can find sources overseas, but they suffer with complex new programs that cannot bear the time, logistics, social differences that can exist with suppliers that are completely offshore. Without our global structure spanning US and Asia, we can help bridge gaps by having a customer serviced by single global account team throughout the program life cycle for our customer.

I am proud of our team and its ability to manage the business through various demand cycles we have seen over the last few years. We are now entering a phase where we expect all three divisions to grow the top line and continuously improve performance in all facets. We set aggressive but achievable goals for our business teams and provide them the resources to be successful. With a record backlog and healthy pipeline, we are excited about our prospects in fiscal 2012 and beyond.

With that I'm going to hand the call over to Alan to talk in detail about our financial performance before opening the call for questions. Thank you.

Thank you, Deepak. Our relentless focus on growth initiatives and operating improvements throughout the Company have succeeded in developing significant earnings expansion and free cash flow. Given our successes, we remain excited about our future prospects, especially with a record 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 first quarter of fiscal 2012.

As mentioned before, net sales were up 26% on an overall basis. Our Security division grew 42% in the first quarter and has averaged over 25% year-over-year growth across the last four quarters. We once again had record Security bookings of $185 million, representing a 65% increase over last year's Q1, positioning us exceptionally well for fiscal 2012 and beyond. And as we mentioned on our last call, our screening services business in Puerto Rico is running very well. Sales from this operation are expected to become more significant in the second half of this year as we fully ramp up.

Sales in our Opto division were again very strong, increasing 27% overall, which includes a 34% increase in third party sales and a 4% increase in sales to our sister -- to our two sister divisions.

Our Healthcare sales grew by 1% in the first quarter, which was below our expectations, but the strength in the other two divisions covered the shortfall. Again, given Healthcare's recent product launches, coupled with its entering into new long-term contracts with several hospital GPOs and large hospital buying groups, we expect to see an acceleration of growth in our Healthcare division over the balance of the year.

Our gross margin in Q4 was 32.8%, compared to 36.5% last year. A decrease for the quarter was expected and was primarily due to three factors.

First, the mix of revenue growth. As discussed in the past, while operating margins are generally strong in our Security and Opto divisions, the gross margins are generally below that of our Healthcare division. As Security and Opto revenues grew significantly faster than Healthcare sales, the consolidated margin was adversely impacted.

Second, last year our Security division agreed to take on the role of a prime contractor, including construction services on a large international equipment service sale. On our last two conference calls we projected that cost over runs would continue to impact our gross margin in the first quarter of fiscal 2012.

As we continue to grow at OSI, we expect to be faced with various challenges, along with opportunities to meet our customer's needs. Taking the prime contractor role in this project is a good example. We accepted the challenge, This issue is now largely behind us as we complete the final two installations this month, October.

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. Our SG&A expenses as a percentage of revenues was 21.3% in Q1, which is an improvement of 360 basis points over the prior year as we continue to effectively leverage our infrastructure. In absolute dollars such expenses were up about $2.4 million,or 8%. and in support of the 26% revenue growth.

We continue to invest resources in research in development to grow and to enhance our security and healthcare product offerings. To this end our R&D spending increased 18% in the first quarter to nearly $11 million. This additional spending was focused on our Security and Healthcare businesses. Our R&D costs in Healthcare are heavily weighted in the first half of fiscal 2012 in support of the launch of our new anesthesia product that Deepak mentioned called [Arcon] and certain patient monitoring products.

As a result of revenues -- I mean as a percentage of revenues, R&D expenses were 6.7%, as compared to 7.2% in the first quarter of fiscal 2011. We continue to invest resources in 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 tax rate. Our effective tax rate for the first quarter was 30.1%, which was consistent with the prior year quarter. 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 strong sales growth and the effective leveraging of our cost structure resulted in a 33% improvement in our first quarter diluted EPS to 24% per share.

Moving to cash flow. We generated operating cash flow of $10 million during the first quarter. Capital expenditures were about $3 million, while depreciation and amortization was $4.8 million. Overall our net cash position continued its upward momentum, as we ended the first quarter with $58 million of net cash. As mentioned in previous conference calls, generating strong cash flow has been a top priority, and weare very pleased with the consistent level of progress we have made in this area over the last few years.

Finally, turning to an update of our fiscal 2012 guidance. With record bookings and backlog in Q1, and the strong outlook for our business, we are increasing our guidance for both sales and earnings. Over the course of this coming quarter we will gain increased visibility as to the timing of revenues associated with the $98 million Army order. Where he currently anticipate such revenues will commence in earnest in our third fiscal quarter.

At this time we are increasing our fiscal 2012 sales guidance from a previous amount of 10% to 13% growth to a full year growth rate of approximately 13% to 16%, or $740 million to $760 million. And similarly, we are increasing our fiscal 2012 EPS guidance to be between $2.27 and $2.40 per share, excluding restructuring and other charges, representing an increase of 23% to 30% over fiscal 2011.

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

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

(Operator Instructions). The first question is from the line of Brian Ruttenbur from Morgan Keegan. Please proceed.

Thank you very much. A couple questions. First of all on Puerto Rico, you say you're down to your final two. Does that mean a total of five, so you have three live right now?

Brian, this is Alan. There are a total of five. What we said is we have the first one live and operational, the second one coming up live and operational imminently, and we expect the others to be coming up live and operational over the next few months.

Okay. So you expect to have the second one up and operational in October, and then the third one -- third and fourth and fifth by the end of the year -- end of the calendar year? Is that the plan?

That's the plan right now.

Okay. The timing of DOD shipments, you talked about some of those coming on board in the March/June timeframe. Is it going to be one of these ramps that it starts slow and then works its way up, or is going to be front-end loaded, evenly? Can you give us any kind of perspective there?

Brian, this is Ajay. We're still looking into it. I think it is going to be pretty -- it is going to start off a little slow, but at the same time I think after that we should see pretty even shipments going forward. A lot depends on what the requirements of the Army are, so we're kind of dependent on that. So we're looking at it, and we'll have a better idea by the next conference call.

Okay. [Let's] come up about -- just along that order, that as we pull out of Iraq and Afghanistan, what happens to your services contracts on those pieces of equipment that you ship in there, and what happens to those pieces of equipment that -- as we leave? Do they just go with the Army to the next location or stay behind with the Afghans?

I think it is a combination of everything. Obviously from Iraq pretty much everybody is out, so there is really no service contracts except for the local service contracts we have there, and we really anticipate the same things happening in Afghanistan. And we're looking at very carefully, and really it is part of the plan that we already have.

Okay. And then on the Opto side, you're up 30% year-over-year. Why was that so strong? Was there any specific reason?

Well -- Brian, Deepak here. Basically we work very hard,and customers continue to buy. We have a diverse portfolio. No single customer or no single industry impacts us. We are very much broad based. That's been the strategy frankly in all divisions. And the other area is that we entered into new areas, especially in the medical area with disposables that have been very good.

Okay. And then the last question on Healthcare. It was up 1% year-over-year. You're expected to be very back end weighted. Is that because of new product launches? What's driving the growth in the back end of the year?

Well, you just said it. I mentioned before, one is obviously we have been diligently working and spending R&D dollars over the last couple of years on new products, and they've started coming out in the last two quarters. The anesthesia launch has been a big success. We are banking upon that to carry growth and the XPREZZON monitoring product lines. But the second thing is that whenever you have new products coming online, the customers go into a little holding pattern and wait for the new products, which is also happening.

And the last one is GPOs. I said that in the conference call that this is the first time almost with the last five, six years that Spacelabs is now approved for long-term contracts in four major GPOs, which controls thousands and thousands of hospitals in the GPO hospital circle. So that, like Alan said, that gives us a hunting license to go start talking to all of these GPOs once you already on the qualified vendor list. And we think as that kicks in, we will start seeing more growth on the top line in US, especially over the next three quarters.

Thank you very much.

The next question comes from the line of Jeff Martin from ROTH Capital Partners. Please proceed.

Thanks. Good morning. Couldyou go into a bit more detail on, not necessarily giving away the trade secrets, but on your progress with prime contractor and system integration contracts? Seems to be a real growth area for you. Some detail there would help, and with respect to timing as well.

I think that you look at what we have done in the Army contract,you look at some of the other things we have done overseas, for example, in Olympics where it is we're integrating other products as well. It is definitely a strategy we have been pursuing. We have a very, very wide range of different security products. We're actually putting those products, integrating them together, working with key other suppliers and taking their products and integrating them.

So it is really an ongoing strategy for us, where we take it from here, I really don't want to get into too many details for competitive reasons, but we feel very good about it, and I think it is really goes back to what we have been saying all along having the breadth of products in the security side has enabled us to offer a scanning solution or overall solutions to customers besides just providing them products.

Just, Jeff, just to add onto what Ajay was saying, that strategy has been -- it's come to fruition now, but we have been working on it for some time. We have done previous Olympics. As you go into with your product in any part of the world, and you have been good and satisfy the customer with your service and performance, and you look around, there is other integrated products around our scanning products. And the trend is, from the customer's point of view is to deal with one vendor if he can.

So that's what we have been trying to work with, focus on it, and going forward basically with a two prong attack. One where we want to offer more services, more integration, and second thing is the Puerto Rico model, which is the services model. So those two things go hand-in-hand in many places. As we go back and educate customers, as we show and demonstrate our performance, we look at it that over the coming years this will be the driving force growth besides our scanning products growth. Not to mention keep broadening our own ability to introduce new products on complementing technologies. All of that goes hand-in-hand.

Great. And on a [Holt] baggage product, can you shed a little insight as to how that's positioned competitively, where you are relative to the competition and getting it approved in the US and abroad? Thanks.

Well, for competitive reasons obviously we have been saying, and I know it is like we have said it many times before, this testing and certification takes a long time, and we have been working diligently. We don't want to say anything until we -- it gets done, but I would like to make a comment to what you said about competitive position.

To date we have heard nobody else in the marketplace that has a similar product as us, meaning at 1,800 bags an hour certifiable that it can do the kinds of things that both in EU and US what they're doing, especially with the new specifications they're putting together. No other company has a product at this speed.

Okay. And then in terms of the replacement cycle for that market, how aged is the current equipment, and what do you think the annual replacement is?

The numbers vary from various sources. Most of the units were placed in operation post-9/11, so they're pretty aged. There is count, maybe about 3,000 units domestically and 3,000 worldwide, so there's about 6,000 units at various aging of all vintages. Obviously all of them are not going to replaced right away.

But if you really look at it, there is about 6,000 [sockets] without any growth, and the growth is on top of it. And that does not include, Jeff, any of the other conversions which, once there is a certified 1,800 bags an hour machine, both in the US side and the EU, it will also open up more sockets, what right now has been used with what I call lower certification requirements because nothing was available. So as you combine all of that, it is a very large market. The placement cycle is going to be for a long time, and average [ASP to use] is about $1 million-plus. So it is a very large replacement cycle, and it will go on for the next ten years.

Great. And then final question. Could you elaborate on some of the feedback you were hearing about the cardiology product at the recent conference?

The anesthesia product, I presume?

Yes.

Very well received. We have been very delighted. There was a tremendous amount of crowds at the booth. It is a well thought out product. We did a lot of due diligence before developing it by talking to the anesthesiologists, and we think that it is going to be a very, very successful product once we get the 510(k) approval.

Okay. Did you take any orders? [Put in] orders at the orders?

We cannot take any orders until we get the 510(k) approval. We have got a lot of interest. We with have generated a lot of excitement in the industry, and we're hoping and excitedly waiting for the 510(k) approval.

Good luck, guys.

Thank you.

The next question comes from the line of Tim Quillin with Stephens Inc. Please proceed.

Hey, guys. Nice results. In terms of the Healthcare business, can you say what portion of your revenue right now goes through the GPOs, and where you expect that to go over the next couple years?

We don't break it down that way, Tim. Suffice to say that it is not a big number.

Not a big number now.

Yes.

And just to clarify, so you do business with which would I guess are the four largest GPOs, but you have been doing business with three of those and added the fourth. Is that right?

Yes, the answer is yes.

Okay. And so how big of a deal is that ? So I kind of think of them as like an IDIQ, where you get qualified on that list and can do business now without that fourth GPO, but how meaningful should we think about that as -- being as a driver of growth for

Tim, number one, just to clarify, the two things that are going forward for us in this year is, one is obviously the GPO, which is we think a significant plus point, because now you can openly go back and the doors are open instead of you try to break open the doors, and we can go back.

The second thing is we have not had new product launch for a long time. We finally launched new patient monitoring product line a couple months ago, the XPREZZON product line, followed with the other ancillaries and accessories. That in, addition to the anesthesia launch, gives us what I call a perfect storm looking at it. We got the doors open, wegot the excitement, and we have the products that we can now go back and sell and show to the customers what it can do to reduce costs and increase efficiency.

That is why we are excited that and feel confident that the next three quarters will drive the revenue, especially monitoring and anesthesia when we get the 510(k) approval, driven by the GPO contacts.

Right, right. And in terms of the anesthesia product, I know the timing of 510(k) approval is a little bit uncertain, but let's say that's within the next couple quarters. How quickly can you take a little bit of market share -- and let's call it a $400 million US market -- how quickly can you ramp up sales there? Is it primarily through your existing sales infrastructure on the Spacelabs side, or do you need to set up some kind of different sales organization or specialist sales people?

It is the same sales force. As you know we're already are in the anesthesia business, though not very big time in the US because by didn't have the right product. But it is the sales channel. And secondly we can ramp up fast. We have factory that can handle it. And just to add another thing is the ASP of the product line is in a pretty healthy mode, and the margins are very good.

Right. Moving onto the Puerto Rico contract, so you have -- you are close to having a second site running. You have seen the first site going. Do you have any better sense now of what the opportunity is in terms of revenue and margins or -- and/or is there anything you can share with us about the opportunity there as it becomes a little easier to size up?

I think the second site -- we are by the way, just to clarify, we are in testing and do doing radiation testing and stuff like that. So we are already are working on the second site, and it is going to go live imminently any day, any week.

The second site is pretty much the same size as the first site, so that the revenue model is pretty much the same as first site. The next sites are a little bit bigger, and they require a little bit more construction. They are in construction, so I think we have I a better idea by end of this month and sometime end of November when the second site is on, and we can get a little better idea of timing. The only caution we give is that these -- there has been delays and as the weather goes into the what I call the bad kind of thing in Puerto Rico, the site construction gets slowed down.

So we are watching with it. We are working with them. We are very confident the second site will be on in the next couple of days, weeks. Third, fourth site a little bit more difficult for us to gauge when, but we think it might be sometime by the end of this calendar year or a little bit next January, February. Ajay, do you want to add on something?

That's pretty much where it is. Everything we have seen so far from an operational standpoint has gone very, very smoothly. We are very happy with what we have seen so far.

Right. And in terms of your pipeline of other customer opportunities there, handful or six or that are looking at this type of solution, how -- what would be the timeframe that you would hope to get an additional new customer? And Puerto Rico is a little bit slow to ramp up. Do you think others might be quicker? And maybe if you could comment maybe on the relative size of the pipeline customers as well.

Tim, even if I had the answer, I wouldn't say it, but I don't. This is an evolving business. We have been educating everybody on it that every potential cargo port is a potential customer. They will either buy, or they will lease, or they would have a services contract.

Regarding the speed, I don't know whether they will be faster to execute than Puerto Rico or it depends from place to place. But suffice to say our pipeline is quite full, and wedefinitely actively working with other potential customers of the same kind of business strategy.

Okay. Okay. Just lastly, on the body scanners, there is I think working on some automated target recognition software there. If you can talk about what -- when you think you will have that perfected so that you get the next order. Thanks.

I can't go into too many details, obviously when we work with the TSA. But what I will say we're actively in testing, we'reworking with the TSA, and we should be able to give you a lot more feedback by the next conference call. But we are actively working with them to get it done right now.

Okay.

Thanks.

The next question is from the line of Josephine Millward from Benchmark. Please proceed.

Good morning.

Good morning.

Congratulations on a great quarter.

Thank you.

Deepak, looks like Rapiscan has received EU certification for liquid explosive detection for airport checkpoint. Can you talk about the addressable market there and give us a sense on timing?

Let me -- this is Ajay, Josephine. Let me address that. There are different standards that the EU has come back with. Specifically, by April of 2013 and have given the option -- again, it's an option to leave liquids -- to take liquids through check points. We do have the certification -- it's called type C -- for our X-ray systems.

So what the addressable market is, basically I think you are going to look at airports. It is going to be a competitive issue. Can you take liquids through certain airports, you can't take liquids through other airports. So obviously it is an important feature for them to have. It doesn't start until April of 2013, and we are very well situated to take part of that market.

That's helpful. Ajay, can you -- on the RTT TSA certification, do you think we will see that sometime next year or even before the calendar year end this year?

I think Deepak talked about it. We're working with TSA. We're working with the Europeans as well. We're going through the process. For competitive reasons I am not going to tell you exactly when, but we are going through the process right now and actively working with both regulatory authorities in the US as well as in Europe.

Okay. I was wondering if you can expand on the pipeline for fee for service cargo screening. Do you expect additional contracts like Puerto Rico in the coming year?

Well, we said that -- I said it before to Tim's question -- we definitely have in the pipeline multiple customers we are talking to. There is no specifics that we can talk for competitive reasons, but I want to again continue to emphasize that it is not a new customer base. It is the same customer base who would either buy equipment, lease equipment, or they'll give -- look at services proposition from Rapiscan.

So we continue to talk to our customer base, and the funnel is the same that it was last quarter, this quarter. We are very excited about services business, and with this new win at the Army, as I mentioned before to Jeff's question that we think that they go hand-in-hand of a integrated -- integration, services, and we look at that as a focus thing. Not only just for ports, but even for airports.

Deepak, given how well you executing in a very difficult budget environment, would you say you are taking market share from some of your competitors?

Well, thank you for the first part of your compliment. Yes, I am very proud of the team and that we are executing well. I would rather not make a comment whether we're taking market share or the market is growing. That's for you guys to decide. We continue to focus ourselves, be humble and focused, and just continue to execute.

Great. Thank you. Great job.

(Operator Instructions). The next question is from the line of Jonathan Richton from Imperial Capital. Please proceed.

Good morning, guys.

Good morning.

Just a quick housekeeping question. I was wondering what depreciation was for the quarter, and if there were any restructuring charges?

Jonathan, this is Alan. There were no restructuring charges this quarter, and depreciation and amortization were about $4.8 million.

Okay. Thanks. And then I take everything that the media says with a grain of salt, as I think we all do, but there is a recent article that spoke about the L-3 win and kind of a recommendation for phasing out the Rapiscan machines. I was just wondering if there is anything to that article, or if there is any talk about that, if that could affect you guys, or that really don't see anything coming from that?

I think if you look at the article, there was a subsequent statement made by TSA, if that's the article that I am thinking of, which basically said they're misquoted, and they are actively working with us on backscatter technology as well.

Right, in terms of the software. And in anticipation of, so this software being approved is still when it comes?

Can you repeat that, please?

I say in terms of timing. I know this has been previously touched on, but there is no additional color you can provide in terms of timing?

Well, like I said earlier, we're working with them right now. We're actively going through testing, and we'll give you a little bit more color at the next conference call.

And then just lastly, I was wondering in terms of the IDIQ contract that the Army awarded to you guys. The remaining portion of that contract, has that been awarded to other competitors, or that's still outstanding and there is a possibility for you to win that as well?

That's still outstanding. Like all the other contracts, I am sure it is going to be competitively bid.

Right. Okay. Thank you very much.

We have no further questions at this time. I would like to turn the call back over to management for closing remarks.

Thank you very much for listening to the conference call for this quarter. In summary, it has been a great quarter. All the divisions have performed well. We have a great record backlog, great visibility, a pipeline of new products, new challenges, new strategies out there, and a lot of excitement globally, both domestically and internationally. And we look forward to talking to you with better results next conference call. Thank you.

This concludes today's presentation. Ladies and gentlemen, you may now disconnect. Have a wonderful day.