OSI Systems Inc (OSIS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 OSI Systems earnings conference call. My name is Tony and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, 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 CFO of OSI Systems. And I'm here with Deepak Chopra, our President and CEO; and Victor Sze, our General Counsel.

Welcome to the OSI Systems' first-quarter fiscal 2013 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.

Earlier today, we issued a press release announcing our first-quarter 2013 financial results. Before we discuss 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 officers on this call about future Company performance, as well as certain responses by Company officers to questions posed about future operating matters.

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 or its officers. 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.

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 information regarding non-GAAP measures and comparable GAAP measures, please refer to today's press release, which has been furnished to the SEC as an exhibit to a current report on Form 8-K.

Before turning the call over to Deepak, I will provide a high-level overview of our financial performance, and we will again touch on several themes that we discussed during past conference calls. Highlights for our first quarter of fiscal 2013 are as follows.

First, we achieved record first-quarter sales revenues of $182 million, representing 13% growth over the prior year. This represents our eighth straight quarter of double-digit revenue growth. In fact, each of our divisions generated double-digit revenue increases. Leading the way was our Security division with 14% growth, followed by our Optoelectronics and Manufacturing division with 12% third-party growth, and our Healthcare division, which grew by 11%.

Second, our strong EPS momentum continued, as Q1 diluted earnings per share increased 30% to $0.31 per share, which is a record first-quarter performance for us. This marks the 13th consecutive quarter in which we have generated year-over-year EPS growth in excess of 20%.

Third, bookings remained strong, leading to a record first quarter backlog of $1.1 billion or 155% increase over Q1 of last year. Fourth, we generated $42 million of operating cash flow, or over four times higher than last year's Q1. This strong cash flow was used to fund the significant CapEx associated with our Mexico turnkey program. And finally, speaking of our Mexico program, we continue to make great progress to move towards operational readiness.

We are pleased to report another outstanding quarter of financial results. We completed a transformative year in fiscal 2012 and have kicked off fiscal '13 in strong fashion. I'll provide additional financial details and we'll discuss our fiscal 2013 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 first quarter of fiscal 2013. As Alan mentioned, we had an impressive first quarter where we not only delivered overall revenue growth of 13%, but also achieved double-digit growth at each of our divisions in Security, Healthcare, and Optoelectronics.

Each division started the year in a strong fashion, much in the same way that each finished fiscal 2012. These results provide us with great confidence in our ability to achieve our performance targets through the remainder of the fiscal year.

Reviewing the highlights for the quarter, starting with our Security division, Rapiscan revenues increased 14% to $83 million. During the quarter, we had many key accomplishments that should serve as seeds for future growth. Highlighting a few of these activities, Rapiscan 620 Dual View Baggage and Parcel Inspection System received the European Standard 2 approval for threat detection of liquid explosives.

The 620DV can differentiate between threatening and benign liquids. I should note here that the 620DV has also been approved for use by the UK's Department of Transport and the TSA in the US for both aviation checkpoint screening and air cargo screening. As mentioned earlier, we have the broadest product portfolio for air cargo screening compared to any of our competitors. 620DVs are in other applications also, such as military checkpoints, customs, and border security. 620DV is a part of a broad portfolio of checkpoint screening solutions that we provide our customers to secure aviation and other critical infrastructure security.

As mentioned on the previous call, our RTT, the real-time tomography high speed hold baggage screening system, passed the European Civil Aviation Conference ECAC Standard 3 threat detection test, the highest standard test by ECAC for the detection of explosive threats in passenger baggage. The RTT continues to be evaluated by the TSA to inspect checked baggage at airports, and we look forward to a successful outcome of the certification in the near future. Our pipeline of the potential RTT customers is very robust and we expect to book orders in the second half of this year.

During the quarter, we launched a trace detection product, a new product for us, a handheld system that is designed for applications such as event security, rapid transit security, border protection, and law enforcement, where mobility, ease-of-use and high throughput security screenings are vital. The model HE50, which is the first of the whole line of products, can detect a wide range of explosives more reliably and faster than alternate security screening systems, as it does not require calibration prior to use. This is a new market for us and we are very excited about it. And we expect to generate revenue in the second half of this fiscal year.

Turning to the turnkey services program, the Puerto Rico's turnkey services program continues to perform exceptionally well. We are operating at about 85% of our internally projected run rate. While the timing of the final remaining site remains uncertain -- which, by the way, is a pretty small site compared to the other ones -- we await the handover from the customer. It is relatively immaterial to the overall project.

During the quarter, we made excellent progress in Mexico, and are proud to tell you that we are tracking ahead of schedule for this turnkey services project. We have invested a significant amount of capital and Company resources for this important effort. And we will provide more details on the progress as operations begin. We continue to expect significant revenues from this project in the second half of our present fiscal year.

Our turnkey services operations in Puerto Rico and Mexico are excellent examples of our ability to innovate and fine-tune our offerings to the needs of our customers. The progress and resulting success in turnkey services has generated a lot of worldwide interest, and we are proud to announce that we are in active discussions with several potential customers.

Over the past few years, Rapiscan has made tremendous progress in separating itself on the competitors by leading the way in innovation, and not just by developing new products like the trace solution or our high-speed check baggage inspection RTT systems, that is currently at the TSA under evaluation, but by creating new service-based security offerings like Mexico and Puerto Rico. Going forward, we are well-poised to thrive in our core markets and newly created market areas, such as the turnkey security services that we can help shape.

Moving on to the Healthcare division, Spacelab's revenues grew 11% in the quarter to $52 million, making it the third consecutive quarter of double-digit revenue growth for this division, driven by the market in the US especially. This can be attributed to several factors.

First, our currently launched products enable our sales team to differentiate by offering the latest technologies within proven platforms with an open architecture that can be fully integrated to existing systems. Second, our strategic relationships with Group Purchasing Organizations, or GPOs, have provided new growth opportunities that were not accessible in the past.

And finally, the impact from the contribution of the division's management team cannot be ignored. As mentioned in the prior earnings call, we are realizing the benefits from strengthening our senior management and sales team with an emphasis on better understanding, and then delivering on the needs of the customer. This helps capture revenues in the short-term and targets our product development efforts for the long haul.

As we have in the last few quarters at Spacelabs, we also introduced new products during this quarter. We introduced the BleaseFocus Anesthesia System to the US market, which is an ideal solution for smaller hospitals and surgery centers. And we also received 510(k) clearance for our Capnography Pod, a compact sidestream gas analyzer compatible with the new Cube patient monitor. Our new anesthesia workstation, Arkon, will be officially launched and made available to the market during the current quarter. As we have mentioned, the initial feedback from potential customers have been extremely positive, and we are truly excited to provide Arkon to our customers in the US and overseas.

As an example of our continued commitment to invest in our divisions and people, we have made a decision to relocate the headquarters of Spacelabs based in Issaquah, Washington to a state-of-the-art building that we recently bought near Snoqualmie. The new headquarters will highlight an open office environment, minimizing the use of separate offices, thereby promoting communication and facilitating collaboration among employees.

The move is expected to be completed in the spring timeframe, and should result in better productivity and efficiency, as well as occupancy and cost savings. Looking ahead, Spacelabs is in a very nice position, as we continue to benefit from the recovery in hospital spending with a fresh product portfolio.

Moving to our Optoelectronics division, external revenues were 12% higher than the prior period. Opto has broad geographic exposure from OEMs in various industries, including medical, defense, test and measurement, and industrial. In spite of some headwinds in certain regions -- for example, Europe -- Opto was able to attain new customers in the security, ID, home healthcare, and retail industries, resulting in solid revenue growth.

With a global manufacturing and sales presence, we expect to continue gaining new customers and deliver profitable growth in the coming portion of the year. I would like to thank our employees in delivering a strong startup to the new fiscal year. I'm confident of our Company's abilities as we have risen to meet past challenges head-on and come out stronger. We are excited about what lies ahead, and look forward to delivering top-tier performance to our customers and shareholders. All three divisions are expected to grow in the second half of the present fiscal year.

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

Thank you, Deepak. Our ongoing focus on growth initiatives and operating improvements throughout the Company has succeeded in delivering continued double-digit revenue growth, with significant earnings leverage. Strong momentum across each of our divisions, coupled with our $1.1 billion backlog, position us well for strong topline growth going forward and additional margin expansion.

I will speak to our updated fiscal 2013 guidance shortly, but first let me review in more detail the financial results for the first quarter. As mentioned earlier, net sales were up 13% on an overall basis. Our Security division grew 14% in the first quarter. This solid growth was seen across many different business lines, headlined by the contribution from the London Olympic Games.

Our Healthcare division also continued the strong momentum seen in the second half of fiscal '12, reporting 11% topline growth, again driven by strong performance, as Deepak mentioned, in the United States, which continues to gain good momentum. We continue to leverage our Healthcare division's infrastructure to increase operating income by 62%. These results once again highlight that our focus on improving operating efficiencies, while simultaneously introducing new products to drive growth, is working.

And finally, our Optoelectronics and Manufacturing division rebounded from a flat fourth-quarter to deliver 12% external sales growth as a result of the success of a broadening customer profile. The Q1 gross margin for the Company was 33.8%, up by 100 basis points from Q1 of last year. This increase was mainly attributable to a favorable sales mix in our Security division, as well as strong Healthcare sales, which carry higher gross margins, which were partially offset by a reduced gross margin in our Opto division due to a less favorable sales mix. We anticipate our margins will continue to improve as our product mix changes, with increased turnkey revenues from our Security division.

Moving to OpEx, Q1 SG&A expenses as a percentage of revenue increased slightly to 22% in preparation for our turnkey operations in Mexico. For the full year, we expect to see a reduction in SG&A as a percentage of sales, as we further leverage our infrastructure as sales grow. We continue to invest significant resources in R&D to enhance both our Security and our Healthcare product offerings.

To this end, our R&D spending increased 4% in the first quarter to $11.3 million, with such incremental investment primarily focused on our Security business. As a percentage of revenues, R&D expenses were 6.2% in the first quarter of fiscal '13 as compared to 6.8% in the first quarter of fiscal '12. We believe these efforts will enable us to capture major opportunities in our core markets in the future. We continue to see the results of these efforts in the significant number of new products that are being released.

Taxes. Our effective tax rate for Q1 was 29.7% as compared to 30.1% in the prior year. Our provision for income taxes is dependent on the mix of income from US and foreign locations, due to tax rate differences among such countries, as well as the impact of permanent taxable differences, valuation allowances, amongst other items.

Our strong sales growth and gross margin improvement led to a 30% increase in our first quarter diluted EPS to $0.31 per share, a new record first-quarter EPS for OSI Systems. Moving to cash flow, as we mentioned on each of our last two calls, we expect to see significant volatility in cash flow in fiscal 2013 as a result of the Mexico program.

We started out the year strong, generating Q1 operating cash flow of $42.4 million. This cash flow was used to partially fund our capital expenditures, which totaled $62.7 million in Q1, which, as expected, was significantly higher than historical norms in support of our Mexico program. In addition, as Deepak mentioned, we acquired a new property to serve as the future headquarters and domestic manufacturing center of our Healthcare division. This property was acquired for approximately $14 million, and was financed with an $11 million term loan in addition to our internal cash.

In addition, we effectively repurchased approximately $9 million in stock. Further, depreciation and amortization was $4.9 million. We ended the quarter with $74 million of cash, which although lower than last quarter, because of the significant CapEx, was much better than we expected, due to the excellent operating cash flow. Although we expect to continue to experience greater than usual variability around free cash flow over the coming quarters, we remain very well-positioned to meet future requirements with our cash on-hand, cash flow from ongoing operations, and our credit facility, which has a total capacity of $425 million.

And finally, turning to an update of our fiscal 2013 guidance. With a strong outlook for each of our businesses, we are increasing our earnings guidance. Therefore, we now expect diluted earnings per share of between $2.77 and $3.00 per share, excluding the impact of restructuring and other charges, which represents an increase of 21% to 31% as compared to fiscal 2012. In addition we are increasing the upper end of our sales guidance with a range of $870 million to $895 million, which represents a 10% to 13% increase over fiscal '12.

During the past few years, we have transformed OSI into a company that generates strong and sustainable topline growth, along with an organizational framework that positions us for significant earnings growth. We believe we are well-positioned for continued operating margin expansion in the coming years, and we look forward to sharing our progress on the coming calls.

Thank you for listening to this conference call. And at this time, I'd like to open the call to questions.

(Operator Instructions) Tim Quillin, Stephens Inc.

Nice quarter again. Alan, do you happen to have the more precise backlog numbers in front of you? And then also the security backlog?

Sure, Tim. The security backlog was about $943 million. The total backlog for the Company was about $1.1 billion, which was -- which rounded up to $1.1 billion, so it's a little bit less than that on a precise basis.

Got it.

The bookings for Rapiscan continue to be solid. We had a book-to-bill ratio of north of 1.

Okay. And on the security bookings, is there -- what would be the outlook over the next six months? You know, US government is facing a potential budget sequestration; international government sometimes have some economic sensitivity, and the global economy seems uncertain. So what do you see in security pipeline over the next six to nine months?

Tim, this is Deepak here. Ajay is traveling today, so I'm going to take that question.

Definitely, there are headwinds in the US, but some of the programs we are working on, they're already funded. And, as I said in my speech, we look at the international arena as as-strong as we've ever seen. There's a tremendous amount of activity and interest generated in Asia, in Latin America, in Mexico, and in Europe -- though there are some countries in Europe that, as you know, are going through tough times. But overall, our sales funnel is as strong and as healthy, and we expect the rest of the year to have a very robust bookings.

Okay, good. And one of the opportunities I think that is out there for you is a potential foreign military sale for the government of Iraq. And I was wondering if you could help us size that up a little bit. And how far along that is, and if you face competition for the potential order there?

Tim, you've known us for a long time now. The only thing that we would say is that we don't actively talk about things that have not booked yet. So, we do not want to comment on anything. All we say is that Iraq, Afghanistan and the other parts of the world, they are very exciting areas for us, for especially in security, and we continue to monitor that area with a lot of excitement.

Yes, I'm sure. And you, Deepak, you had mentioned Mexico as well. Is that separate? Or are you talking about an expansion of the current turnkey contract?

We look at Mexico as a potential for other businesses. We won't go into detail about the expansion. We continue to look at other opportunities. It's an exciting area. We have a strong presence in there, good name and reputation. And we plan to continue to look at other opportunities in Mexico and in other countries.

Okay. And then in terms of the Mexico startup, and it does sound like it's going smoothly and that's great, it has this implied annual revenue run rate of about $150 million. I'm just wondering how quickly you can get to that run rate or how steep is the ramp-up once you start revenue?

Maybe Alan can shed some more light. I'll just give you a high-level picture. We are working towards finishing up the installation, construction and other things, and expect significant revenue contribution in the second half of the year. When it starts or what it ends up, and maybe that's one of the reasons that the range that we have given for our revenue is that dependent upon when we actually start in the second half.

Alan, do you want to add on to it?

Yes. Just to add on to that, it is going very, very well, Tim. And the ramp we expect to be a swifter ramp than perhaps what you saw in Puerto Rico. Even though the project is much larger, the lessons learned from Puerto Rico and other items that we were able to successfully negotiate in this contract, allow us to ramp up faster. So as we move into fiscal '14, we expect if we're not fully ramped, we'll be pretty close by that point in time.

Okay. Very good. And just one last question and I'll jump back in the queue. But Deepak, you mentioned that you're in active discussions with several customers around other turnkey opportunities, and I haven't checked, but I mean, it sounded relative to what you said on previous calls, maybe a little bit more optimistic. I guess the word active discussions may be a little bit different. And I'm just wondering, what exactly that means or how far along you might be on signing another turnkey contract. Thanks.

Number one, it's true what I said. We are more positive now than before. Obviously, our sales team have been working on it. We are in discussions and looking at other opportunities. More than that, I won't comment, except we are very, very excited about the turnkey services in our business.

Thank you.

Brian Ruttenbur, CRT.

Thank you very much. Great quarter. A couple of questions. On Mexico revenue, I know that this has already been asked from Tim, but in your guidance, there's a $20 million difference, and you're saying all that range difference is dependent on Mexico ramp, is that correct?

So, Brian, this is Alan. I think what Deepak was referring to was, as we increased our guidance and increased it by $5 million, that largely accounted for some of the positive feelings that we have with respect to Mexico. The overall range of $870 million to $895 million includes different variabilities throughout all of our business. It's not only the Mexico but sort of the core Rapiscan business, as well as Spacelabs and optoelectronics.

Okay. And maybe we can talk about this quarter that you just finished reporting, and how much revenue did Puerto Rico contribute and how much profit -- was it profitable? I guess is the first question.

Sure, Brian, it's Alan again. Puerto Rico was very profitable for us this quarter. As we said on our past calls, we do not intend to break out the revenues or the profits associated with Puerto Rico now or in the future. But what we can say is that the profitability profile and the margins are significantly higher than the corporate averages. So we are exceptionally pleased with the performance of Puerto Rico. And I look forward to that continuing, really, over the next 10 years.

Okay. And the Mexico impact in the quarter? Was it a drag in the quarter, I assume?

Yes, Mexico was a headwind to us in the quarter, as we described on our last call. And the guidance that we put forth incorporates Mexico. So we're not pro forma-ing out any Mexico costs or anything else associated with it. So we're kind of looking at it as just part of our business going forward, so we're not looking to break out costs or contributions from the business going forward.

Okay. So last quarter, if you could refresh my memory, Mexico was a drag of $0.10 or $0.12, is that correct?

Yes, I believe it was a little bit higher than that last quarter.

Okay. Is the drag -- can you at least give me directional -- is it going up or down these next couple of quarters for Mexico?

Sure. It's actually going down a little bit. You might imagine in the early startup period, we have a lot of sort of one-time costs associated with legal, with consultants, with some professional advisors. That was largely what was responsible for some of the stuff in the second half of our fiscal '12. So as we've gone forward, in this past quarter, at least in Q1, the drag would have been a little bit less than you'd seen in Q4.

And then the drag goes away 100% in third quarter or fourth quarter?

Well, we haven't kind of given out specifics. We do expect it to be profitable in both of those quarters.

Okay. And there is no drag whatsoever on Puerto Rico any more, now that we're 85%. Is that correct?

That's correct. It's a nice solid profit contributor.

Okay. And then I believe this was asked too. The book-to-bill was 1, and you expect book-to-bill for, on a quarterly basis, to remain around that level this -- for the remainder of this fiscal year?

Well, just to correct it, Alan said it was bigger -- larger than -- book-to-bill was larger than 1. As you know, in the security business especially, the bookings are pretty lumpy. So, we can't comment on the -- on that specifically per quarter, but I think it's our expectation is that our book-to-bill ratio will continue to remain healthy.

Great, thank you very much.

Jeff Martin, ROTH Capital Partners.

I was just curious, if -- you talked about a new market, the trace detection market. Can you help characterize the opportunity in the market size?

It's difficult to characterize the market share. As you know, it's a pretty segmented, fragmented marketplace. We believe that this market is not what I would call bigger than what I would call the checkpoint market. It's not as big as the cargo market, but it fills a niche and a product necessity for us to be able to bundle the products together. So, specifically, I can't put down a number of what the trace market is, but I would venture as a guess that worldwide, including desktop, handheld, the trace detection market is a couple of hundred million dollars.

Okay. And then jumping over to the turnkey solution side of the business, how would you characterize your capacity for taking on large contracts? I assume you're in discussions with contracts that would be similar in size between Puerto Rico and Mexico. How quickly could you take on a sizable new project? Or is that even an issue? Do you want to get Mexico ramps first and have that as another proof point? Or are you ready to assume additional medium to large size contracts at this point?

You know, this was also asked by Brian in the last conference call. Obviously, we would like very much to smoothen it out. But this business is -- if we land something, we are very confident that we have the infrastructure in place, both in the manufacturing capacity -- as you know, in this field, we are the only vertically integrated company. So we can move on a dime to get resources in our multiple facilities of Rapiscan to manufacture the product and the variability of different designs.

As far as manning the show, getting the people and the infrastructure, and the engineering and civil works and stuff, we have learned -- we are very well-tuned into it. We've demonstrated, as Alan has mentioned, we have done -- we are doing well to our expectations in Mexico; what we have learned from Puerto Rico, and the ramp-up will be faster. We think that anything that we land and when we land, we are not shy about because we are involved in Mexico. We can handle multiple contracts.

And the other thing in this business, this business does lend itself to mean that it's not a quick, fast requirement. It's a longer process, well-thought-out, and we are ideally suited for it and we have the infrastructure in place. That's what we are building the Company for. We have invested the last five years, four years in this business, so we have the infrastructure. And frankly, that's what differentiates us from our competitors.

That's helpful insight. Thank you. And then a couple of modeling questions for Alan. I deduced from your comments that you expect margins -- gross margins to trend higher over the course of the year. Is that the correct interpretation?

Jeff, that is a fair interpretation, yes.

Okay. And then your interest expense for the quarter was a bit lower than I had thought. Is that a run rate we should use? Or will that tick up -- I modeled about $1.5 million a quarter and you were, I think, about $1.1 million.

Yes, Jeff, it will tick up for two reasons. One, we took on a new $11 million term loan for the purchase of the new Spacelab's headquarters in Snoqualmie, Washington. So that will contribute a little bit more interest expense. We also had -- that line is Interest and Other. And we had a couple hundred thousand dollar benefit from some hedges on FX in this particular quarter, which we wouldn't count on for necessarily future quarters. So, yes, we would expect to see that line item trend up a little bit.

Okay, and is $1.5 million a quarter conservative enough?

That is conservative enough, yes. We had expected it to be a little bit less than that.

Okay, great. Thanks, guys. Good luck.

Mike Greene, The Benchmark Company.

I missed the first part of the Q&A, so I apologize if you already answered any of my questions. Deepak, I think you mentioned that you expect RTT orders in the second half of this fiscal year. Would that be in time for revenue recognition in fiscal '13? Or is that more likely in '14?

More likely in '14.

Okay, great. Thanks. And is it possible you'd get TSA EBS certification this fiscal year?

Well, you know, this is one thing we've been talking about it for the last couple of quarters. And as you know, it's a tough call. We hoped -- this would be a great hope for us to do it. We are working diligently on it. But keep in mind that it's something that is a moving target, but we are more confident now than we were some time ago. But this is one area where I'm sure most of you feel we keep saying that -- some companies have had seven or eight attempts. It's a tough blind test, but we feel very, very good about our product, and we feel that, ultimately, we'll succeed.

Okay. And then are there any additional -- I'm sorry, on the additional turnkey opportunities you're pursuing, are they largely the fixed costs like Mexico or the fee per scan variety like Puerto Rico? Or is that largely customer-dependent?

Well, it depends on what the customer wants. We don't have any preference. Basically, this is one of those areas where you have to develop a relationship with a customer. The customer is the ultimate decision-maker, how they want it. And as I mentioned before in many conference calls, that the alternative also is that the customer can buy the equipment. So we have the various variety -- we try to do the best what the customer wants, but ultimately, it's the customer's decision. And we are ready for both.

Okay, great. Thank you so much.

Yair Reiner, Oppenheimer.

Most of my questions have been asked but just a couple of follow-ups. First again, on RTT, you've had certification in Europe now for a number of months. Can you give us just a flavor of what you're experiencing in the market as you're trying to sell the product?

Yes, this is Deepak here. As you know that that portion of the business is very different from selling a conventional X-ray machine at a checkpoint. The ASPs are much higher. You have to integrate it with the baggage handling people. And though that's true we've had certificate for some time, we are in active discussions with multiple potential customers.

On the other hand, as you see, Europe does have a lot of turmoil in the country. There are also regulatory reasons where, though there are some of the requirements are for 2014, some of the countries are pushing back. So that it's -- I would call it the market is in a flux. And that's why we said that we believe very strongly that we will start booking business, but our best estimate, it might not result into any revenue recognition or revenue in it, in the second half, but bookings will definitely take place.

Got it. And then, Alan, in Opto, margins were, I guess, good by historical standards a little bit lower than they were through most of 2012. Can you give us a sense of what's driving that? Is it mix? Is it other factors? And what should we expect for the rest of the year there?

Sure. Good question, Yair. We had very strong sales growth in Opto, but that strong sales growth was a little bit shift in the business. We saw a little bit stronger sales on the contract manufacturing aspect of Opto, which carries lower margins than sort of the sensors sales in the OSI Optoelectronics, sort of the core Opto piece.

So as a result, although sales increased, the operating margins came down a little bit. As we look forward, we're seeing some strength in both sides of the business. And therefore, we'd expect to see operating margins improve throughout the remainder of fiscal '13.

Great. Thank you.

(Operator Instructions) Tim Quillin, Stephens Inc.

Thank you for taking my follow-up. Just first a couple quick questions on -- more questions on RTT. But Deepak, when some of these opportunities come to fruition with RTT, could it be -- could they come in at a dozen units at a time? Or will it start smaller?

Tim, basically it can be both ways. If it's going to be a larger airport, and it's changing over from the incumbent to a new platform, the tendency would be that it will be a wholesome transformation from the incumbent to us. In that case, it would be multiple units.

But also these units are ideally suited because of its speed and the size for smaller airports, where they just want one system or two systems. And if they go to a lower speed competitor system from other people, they might have to buy more numbers. So it could be both ways. And we are actively looking at and send quotations out, and talking to potential customers in both environments.

Okay. And from the outside anyway, the system that Smiths/Analogic have certified by EU and hope to get certified by TSA looks similar to your RTT product. Do you have a competitive advantage versus that? Or what's the dynamic there?

Well, it does the same job from the end-user point of view, except their system is based on a different technology. It's much bigger in size. It's based on the same way the other older systems with what we call the rotating gantry, where you have this big gantry like a doughnut, spinning at a very high speed, which needs brushes and needs power conversion, and noise and weight, and wear and tear, and downtime.

We have a completely solid-state system which has no moving parts. So we really believe that as a performance, uptime of price to performance, we definitely have advantages. And we believe -- one of the things that we believe very strongly that, with another party entering into this business, it's not a negative. Basically, it shows that it is a requirement as it goes forward for the high-speed will become more useful. Politically, by the regulatory, two competitors are better than single source. And we believe that, as this market moves forward, especially in Europe, we definitely have significant advantage in performance.

Okay. And then there were three different vendors that were awarded AIT to development contractors for next-generation body scanners. Rapiscan so far hasn't received one of those development contracts. Is that a market opportunity you're still pursuing?

Tim, as you know, many, many conference calls before -- I remember Brian especially asking and I think you're asking -- our whole focus is a broad product portfolio. Definitely body scanners are an important portion of our portfolio, but it's insignificant revenue. As a matter of fact, I think Alan made a comment a couple of conference calls ago that our revenue intake in 2012 was zero.

Once we say that doesn't mean that we don't have a great product. There is a throughput issue that TSA feels at larger airports. The L3's unit is faster than our unit. So they decided that for that sake of the throughput, they would like to get more units of the faster speed, and are putting our units in the smaller airports.

When you leave aviation away, the throughput does not matter. Performance matters maybe more. And we are very well entrenched into the non-aviation sector, especially the DOD and some of the high-security areas like nuclear facilities. We continue to pursue this area. And as you know, though we did not participate -- we did not get a contract this time around, we do have an active ID/IQ with the TSA on our product, and we can always go back into it. Unfortunately, it's true that we did not win it this time and we just continue to move forward.

Okay, fair. Is the $98 million Army integration contract, is that completely finished now?

Tim, it's Alan. Just a small immaterial amount to go.

Okay. On the Healthcare side, bookings at least looked exceptionally strong in the -- in your fiscal fourth-quarter, and revenue growth was obviously strong in this quarter. How did bookings look? Is there any signs of hospital capital spending tailing off and impacting that business?

Well, from quarter to quarter, bookings definitely change. And we've had three quarters of double-digit revenue in the Healthcare area. Going into this quarter, the bookings were maybe a little lighter, but I wouldn't put any to it. There is great potential with the GPO wind that we've had. We have a new product introduction. And we have said before in our conference call, the second half will be stronger than the first half.

Okay. And do you have any specific expectations or hopes in terms of revenue from the new anesthesia delivery system?

Tim, this is Alan. We're very optimistic about the product. We think the revenue contribution in fiscal '13 will be relatively modest, as hospitals take a look at it and probably buy smaller quantities. And as they grow comfortable with it, our expectation for fiscal '14 and beyond is that we'll have a real nice contribution from it going forward.

Okay. And just a couple more questions. But Alan, I think you mentioned that you used $9 million for a buyback during the quarter. And I'm just wondering what the rationale was for that.

We continue to believe it's a strong investment. And we use it to offset some dilution.

Right. And then lastly, do you have a specific CapEx plan at this point for the year?

Well, there's a lot of variability in that related to the overall Mexico project. We would anticipate that our CapEx outside of Mexico and outside of the new building acquisition, that we did up in the Seattle area for Spacelabs, will be more or less in line with what you've seen in past years.

All right, thank you.

There are no further questions from the listening audience. I would now like to turn it over to Mr. Deepak Chopra for closing remarks.

Thank you very much for listening to the conference call. I want to thank all the employees and the customers. And it's an exciting time for us. We look forward to talking to you again. And by the next conference call, we should be able to give you more clarity.

We are very much focused into our turnkey business, our Healthcare business, our RTT bookings in the checked baggage area and the Opto growth. So it's a great time for the Company. We are very optimistic and excited, and look forward to talking to you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great week.