OSI Systems Inc (OSIS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2014 OSI Systems earnings conference call. My name is Gwynn, and I'll be your operator for today.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to your host today, Mr. Alan Edrick, Chief Financial Officer. Please proceed.

Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I'm here today with Deepak Chopra, our President and CEO.

Welcome to the OSI Systems third quarter FY14 conference call. We would like to extend a special welcome to anyone who is a first time participant on our conference calls. Please note that this presentation is being webcast and is expected to remain on our website located at www.osi-systems.com for approximately two weeks.

Earlier today we issued a press release announcing our third quarter FY14 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 during this call that may be deemed to be forward-looking statements under the Act. Forward-looking statements relate to the company's current expectations, beliefs, projections, and similar expressions and are not guarantees of future performance or outcomes.

Forward-looking statements involve uncertainties, risks, assumptions and contingencies, many of which are outside the company's control that may cause actual results or outcomes to differ materially from those described in or implied by any forward-looking statement. Such statements include without limitation information provided regarding expected revenues and earnings in FY14 and statements regarding the expected overall financial and operational performance of the company and its operating divisions.

Numerous factors could cause actual results to differ materially from these forward-looking statements. For example, the company could be exposed to a variety of negative consequences as a result of matters that are the subject of some or all of the company's ongoing investigations and compliance reviews and ongoing reviews by government agencies. Including regarding contract and regulatory compliance matters with the US Government which may result in judgments, settlements, fines, penalties, injunctions or debarment.

Other factors include the risk factors set forth in the company's last Annual Report on Form 10K. And other risks described in documents subsequently filed by the company with the SEC from time to time and the risks related to delays related to the award of domestic and international contracts, changes in domestic and foreign government spending, budgetary, procurement and trade policies adverse to our business. Market acceptance of our new and existing technologies, products and services, our ability to win new business and convert any orders received to sales in accordance with our operating plan.

All forward-looking statements made on this call are based on currently available information and speak only as of the date of this call. And the company undertakes no obligation to update any forward-looking statement that becomes untrue because of new information, subsequent events, or otherwise.

During today's call, we may refer to both GAAP and non-GAAP financial measures of the company's operating and financial results, including the introduction of adjusted EBITDA as a non-GAAP financial measure. For information regarding adjusted EBITDA and certain other non-GAAP measures and comparable GAAP measures and a quantitative reconciliation of those figures please refer to today's press release which has also been furnished to the SEC as an exhibit to a current report on Form 8-K.

Before turning the call over to Deepak to discuss the business in more detail including certain issues associated with our customer, the US Transportation Security Administration I will provide a high level overview of our financial performance. We will again touch on several themes that we have discussed during past conference calls.

Highlights for our third quarter of FY14 are as follows. First, we reported third quarter revenues of $204 million. This amount was adversely impacted by the movement to the fourth quarter of shipments of items primarily in the security division which had been previously anticipated to ship during the last weeks of Q3. Nevertheless, the amount represents a near record level for the third fiscal quarter sales.

Second, we reported non-GAAP diluted earnings per share excluding impairment, restructuring and other charges and the impact of certain tax elections made in Mexico of $0.70. This was a small decrease from the prior year level of $0.74 mainly due to an approximate $7 million increase in depreciation driven primarily by our turnkey operations in Mexico as well as the change in the FX impact which benefited the prior Q3 by over $2 million.

In the context of the significant increases in depreciation resulting from the Mexico rollout, we believe it is also useful to look at another non-GAAP measure, adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, stock based compensation and impairment restructuring and other charges. During Q3, our adjusted EBITDA increased 13% and for the first nine months of FY14 our adjusted EBITDA is up by 37%, in each case over the prior year period with a trailing four quarter total of approximately $157 million.

Third, we generated a record $42 million in free cash flow in the third fiscal quarter. Finally we concluded the quarter with a strong balance sheet. I will provide some granularity regarding certain balance sheet line items later on this call.

Before diving into additional financial details, 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 third quarter of FY14.

Through three quarters, OSI achieved year-to-date revenue growth of 13% and adjusted EBITDA growth of 37%. Given the strong near term sales pipeline and that several sales in the Rapiscan growth potentially for the third quarter slipped to the fourth, we are reiterating our full year revenue guidance as our fourth quarter is shaping up very nicely.

In Q3, our revenues were $204 million, 3% higher than prior year and we delivered an operating margin of 10%, excluding the impact of restructuring and other charges. In a macroeconomic environment that at times has been challenging, we continued to grow by innovating solutions for our core markets, launching new products and driving various improvement initiatives in our organization.

Reviewing the highlights for the quarter for each division starting with our security division, Rapiscan, Q3 sales were about 5% lower than the prior year. Primarily due to approximately $10 million of international cargo shipments that were delayed by certain processes such as obtaining the appropriate export and import licenses and letters of credit.

A few highlights in the quarter, we successfully participated at the Sochi Olympic Winter Games, deploying our security equipment to perform inspections for not only the olympic venues but also for the supporting infrastructure such as the Sochi Airport, numerous railway stations and main roads leading to the city of Sochi. The execution was very successful, just like our execution at the Summer London Olympics.

In March we received a very important booking to provide RTT whole baggage screening systems and related support services for Norway's Oslo Airport, a major European airport, marking another significant airport win and our first in Western Europe consisting of multiple units of our stationary Gantry CT based high speed checked baggage solutions. We continue to work with TSA towards certification of the RTT for the US aviation market and I would like to note here that this process has not been impacted by the ongoing matter with the TSA, which I will address later in my comments.

We also made excellent progress with the HE50, the new hand-held trace detection 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 screening are vital. We see a growing opportunity pipeline for this product and have started ramping up production in our Torrance facility.

We are working on numerous multi-million dollar large cargo opportunities that we are optimistically hoping to capture in the next 90 to 120 days. Our fourth quarter guidance includes some revenues from this.

In addition, we are working on numerous turnkey services opportunities internationally. In summary, Rapiscan continues to progress with a robust pipeline of product and service opportunities with the best international cargo pipeline ever.

Moving to healthcare division, Spacelabs' revenue grew slightly in the third quarter to $52 million and also contributed significantly to our record free cash flow that Alan will discuss later on. As with the case of Rapiscan, several sales opportunities were pushed out into the fourth quarter.

We continue to make good progress with our recently launched products and are in a position to capture new opportunities. As an example, our state-of-the-art anesthesia workstation, Arkon, is gaining traction and acceptance in the marketplace. Overall we believe we have the potential for strong Q4 finish in the healthcare division.

Moving to optoelectronic division, where total revenues grew 21%. Overall growth benefited from our long term approach of partnering with customers and giving them the flexibility in choosing the geographic location from where they've served. We continue to innovate and seek ways to be the supplier of choice for our customers.

I should note here that contract manufacturing for OEMs contributed to a significant portion of the revenue growth in the third quarter and thus reduced our operating margin. As defense spending recovers generally speaking, the optical component product lines are expected to grow and rebalance the sales mix and thus create opportunity to improve margins at optoelectronic division.

Before I close my comments here I would like to mention that we are continuing to work to resolve the open matter with the Department of Homeland Security stemming from issues with the TSA. As much as we would like the matter to be resolved as expeditiously as possible, these matters often move at their own pace.

We cannot speculate how long this might take but we are eager to resolve it. While we have answered questions asked of us, we have not had substantial discussions with the department on the matter since our last call.

On a positive note, the x-ray generator which was in question has been tested and validated by TSA and third parties. And has now been approved TSA for use in Rapiscan's x-ray machines installed at various US airports.

Finally, given the ongoing nature of the discussions, as you can appreciate, we cannot add anything further to these comments during the question-and-answer period. I would like to thank our employees, customers and shareholders for their continuing support. We look forward to a strong fourth quarter and FY15.

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

Thank you, Deepak. We continue to focus on driving our growth initiatives, which in recent periods have resulted in meaningful revenue growth.

I'll speak to our FY14 guidance shortly, but first let me review in more detail the financial results for the third quarter of this fiscal year. Our net revenues in the third quarter of FY14 increased 3% over Q3 last year.

Leading the way was our opto division, as strong top line continued with 21% year over year sales growth. Approximately one-third of this increase was derived from organic growth and the remainder came by way of acquisitions.

As Deepak described, sales in our security division decreased 5% over the same quarter last year. While our healthcare divisions saw modest sales growth of 2%.

Our third quarter gross margin of 34.6% is below last year's Q3 margin of 36.2% which was driven by the fact that the sales growth in the quarter was driven by the opto division, our lowest margin division, which places pressure on the consolidated gross margin. In addition, increased depreciation from our turnkey operations impacted the margin.

On a sequential basis however we saw gross margin expansion. As I had mentioned on previous calls the margin will fluctuate from period to period based on the revenue mix.

Moving to OpEx. We continue to work to manage our costs carefully. SG&A as a percentage of sales was up slightly over the prior year due to support the growth of the company and included additional legal and professional fees. Our goal is to hold the SG&A growth rate below the rate of sales growth, though individual quarters may vary from this.

We remain committed in all of our divisions to increasing efficiencies and managing our cost structure. We continue to invest significant resources in R&D to enhance our security and healthcare product offerings. Our R&D spending of $10.6 million in Q3 was a little below that of our first two quarters of FY14.

We expect this amount in absolute dollars to increase as we continue to focus our efforts on innovative technologies to add value to our product offerings and to enhance future growth. We are seeing the results of these efforts in the number of new products that have been and are being released.

Restructuring and other charges were $2.5 million in the quarter, which primarily related to costs incurred in our security division stemming from contract issues with the US government. These charges are excluded from our non-GAAP EPS and adjusted EBITDA.

Our effective tax rate for Q3 was 71% driven by a non-cash tax charge of $7.6 million as a result of electing to accelerate the tax depreciation of certain fixed assets related to our Mexico turnkey operations. This year's election resulted in cash tax savings of approximately $21 million in the third quarter. As you may recall we made a similar election in the fourth quarter of FY13.

Excluding the impact of this charge our effective tax rate for the third quarter and for the nine months in FY14 would have been 25.3% and 27.7% respectively. By making this election, portions of the tax bases of the underlying assets were forfeited resulting in the non-cash tax charge in the period the election is made.

We decided to make this election to accelerate depreciation because the statutory tax lives of the underlying assets exceeded the initial term of the turnkey program. Going forward, we do not anticipate being able to take advantage of this opportunity as effective for tax years beginning January 1, 2014, the election to accelerate depreciation is no longer available under the Mexican tax laws.

Our provision for income taxes is dependent on the mix of income from US and foreign locations due to tax rate differences among countries. As well as the impact of permanent taxable differences, tax elections and valuation allowances, among other items.

Moving down the income statement, due primarily to the tax elections just described, our GAAP diluted EPS was $0.23. The Q3 non-GAAP EPS per diluted share, excluding restructuring, impairment and other charges, and the impact of the tax elections just noted, was $0.70 compared to $0.74 in the comparable prior year period.

Shifting to a view of our operating margin, again excluding impairment, restructuring, and other change. The Q3 operating margin was comparable to Q2 with the year over year change mainly due to the increased depreciation.

Adjusted EBITDA margins for Q3 increased by 160 basis points over the prior period to 18.3%. While significantly stronger than reported in Q1 or Q2, the operating margin from our security division was not as high as last year due to the higher depreciation from Mexico operations previously discuss and the FX benefit in the prior year. Note, the operating margin in security in Q3 was the second highest of all-time, only eclipsed by last year's very tough comp.

Our healthcare division leveraged its sales growth to expand operating margins by 80 basis points year over year. Similar to last quarter, due to the product mix and some less profitable contracts still running their course, opto margins were below prior year levels.

On a sequential basis the opto operating margin improved by 2.2%. We continue to take steps to improve efficiencies in the opto division.

Moving to cash flow. Q3 was a very strong cash generating quarter. The record free cash flow of $42 million allowed us to significantly reduce our revolver borrowings and further strengthen our balance sheet. Cash flow from operations in the third quarter of FY14 was $49 million while capital expenditures were about $7 million for the quarter. Depreciation and amortization totaled $14 million, an increase of approximately $7 million from the third quarter of FY13, primarily due to the ramp up of our Mexican turnkey program.

A few balance sheet changes and cash flow items that are worthy to mention include days sales outstanding or DSO was again a solid 64 days. Our level of DSO may fluctuate significantly from period to period. Inventory balances increased in the quarter by $19 million as we prepared for anticipated strong Q4 shipments including certain equipment that was ready for shipment at the end of Q3 as previously described.

Customer advances, as you will recall, we received a $100 million customer advance associated with the Mexico turnkey program. This customer advance amount amortizes over four years and is thus currently expected to decrease approximately $25 million per year from FY14 through FY17. There is no P&L impact associated with this amortization.

Deferred revenue increased approximately $16 million in Q3 due to strong receipts in advance of revenue recognition. The deferred tax liability increased approximately $26 million as a result of the tax election in Mexico, we just discussed.

Our balance sheet is strong and our leverage ratio is well below 1. Our credit facility continues to provide OSI with great flexibility to execute our business plan.

Finally, turning to our FY14 guidance. We are reiterating our revenue guidance for FY14 at $890 million to $920 million, representing 11% to 15% year over year growth. We generally provide overall company guidance rather than guidance by division or by program.

That being said, we anticipate the fourth quarter growth will be primarily driven by our security division. As the opto division had a very strong Q4 in the prior year.

We currently believe this sales guidance reflects reasonable estimates. However, actual sales could vary from this range because of the risks and uncertainties applicable to our business and industry, including the timing of certain awards and the outcome of the issues relating to TSA that Deepak discussed earlier.

Subject to this, we expect to achieve FY14 non-GAAP diluted earnings per share of $3.10 to $3.29 excluding impairment, restructuring and other charges and the impact of tax elections. As with the sales guidance, actual non-GAAP diluted EPS could vary from this range due to similar factors just discussed with the sales guidance.

During the past few years we have built a strong foundation for growth. The investments we have made enabled us to become the leader in turnkey screening solutions and to continue to innovate to bring new products and services to market.

We look forward to sharing our progress on upcoming calls. Thank you for listening to the conference call. At this time we would like to open the call to questions.

(Operator Instructions)

Brian Ruttenbur with CRT Capital.

A couple questions. First of all, the cash flows were very strong so far this year. Is that primarily due to Mexico ramping up or is there something else going on?

Brian, this is Alan. Yes, we've been very pleased with our cash flow this year, where our operating cash flow this year is $124 million, our free cash flow is about $75 million, $76 million.

The primary reasons for that are, you're right, Mexico has played a big part of that. As you may recall they were a little delinquent in paying us at the end of June 30th at the end of our last fiscal year. They've caught up and are paying us currently in each month, so that has been a big driver.

The rest of our business has done a nice job as well in terms of collections and reducing DSO overall. The enhanced profitability helps.

Countering that a little bit is our increase in inventory as we're getting ready for what we believe might be a very strong Q4. But yes, we're very pleased with our cash flow for the year.

Okay, so assuming that Mexico was, I believe you stated at the end of the last fiscal year was around 70%, we're now 90% plus ramped, the cash flow should be increasing for 2015 versus 2014 as a step up just off of that.

Well intuitively that may sound right. You may recall that at the end of last year they were about $30 million behind in payments to us which was reflected in our unbilled receivables. That amount has since been collected. So that was kind of a $30 million bump to FY14. It will change from time to time but you're right, a lot of the CapEx that we did in ramping up for Mexico in FY14 is largely behind us.

Very good. Next question I have is about a statement Deepak made about best cargo pipeline ever. What percentage of that or number of opportunities are turnkey out of that cargo pipeline? Is it a handful, is it less than a handful or is that cargo pipeline excluding turnkey?

Brian, this is Deepak here. Good question because we have said in the past that it's a mixture of cargo sales and also services, services can go down at the end to the sale.

What we meant was this just specifically is, it's the cargo sales pipeline. We have a very robust pipeline on multi-million dollar sales internationally.

Not to discount it that we are not trying to also work on a very aggressive pipeline in the services business, but to just specifically say that our cargo pipeline at this point, which we are optimistically hoping for equipment that we can close the next 90 to120 days has never been as strong as we see right now. Obviously, timing is important, and internationally these things can move around, but we are very optimistic and it's a very healthy pipeline, and they are large, large multi-million dollar orders we are looking at.

Okay, and then one other question about FMS orders, potentially with Iraq. Can you give us anymore specifics on that? Are you negotiating directly with the Iraqi government, what's the status with all of this?

Brian, as you know in the past, we have been very cautious, anything that's in active we don't like to talk much about it. All we can say is we are very optimistic and we are well positioned.

Great, thank you very much.

Tim Quillin with Stephens Incorporated.

How much visibility do you have on your fourth quarter guidance? I think even at the low end, it would be a record quarter both in terms of revenue and earnings and you mentioned that you had factored in some large cargo orders that have not yet been received into that guidance. What portion of the guidance still is dependent on future orders?

Tim good question. This is Alan. Every time we give guidance, it's based on a couple of different aspects of it. One, we have a relative degree of certainty for those shipments that are already in our backlog that we expect to ship in the current quarter or the current period that we're referring to.

The other aspect that is always involved in every single quarter is book and ship. Those items that we're going to book the order in the same quarter and ship it. That's just a regular routine part of our business, particularly in the healthcare business, as you well know.

As we look at our Q4 it's a combination of both of those elements. We certainly have a healthy backlog going into the quarter, that's very helpful.

The licenses we're looking to obtain right now would certainly help. The cargo, the cargo is really a big part of it, as Deepak mentioned, and many of those are near term opportunities for us. So I would say we have a good visibility allowing us to provide the overall guidance we gave, which would provide for a very strong Q4 as you point out.

And it sounds like there's a fairly broad range of possibilities, is the low end of the guidance more probable than the high end and what would swing it to the high end, if anything?

Tim, this is Deepak here. With a very strong potential pipeline that we think is 90 to 120 days in cargo, and as you know, cargo has a little bit more time to make, import/export licenses, LCs and stuff. So depending between the low end of the guidance and the high end of the guidance, it all depends on the timing on some of these orders that we will get. That we are anticipating of getting.

Okay, and situations where you're awaiting export licenses, is that selling into a country that you haven't sold before or is there some complicating factor in getting the licenses?

Tim, any time you have a high energy cargo product, you need to get an export license and in some places some of the customers also require an import license. Nothing to do with a new country sale or any complications. It's just time because it just takes time to get, it's a standard policy for the high energy cargo that you need these licenses. ¶ And secondly, we are very conservative in when we do business on these large cargo deals an LC or some kind of a comfort feeling of getting cash up front is very important.

Yes, fair. Alan, do you have a more precise backlog number other than just $0.8 billion?

Tim it was really it was $0.8 billion. I think it was within $5 million of being at that $800 million level.

Okay, and do you have a bookings number, maybe an overall bookings number and a bookings number for the security business?

Our book-to-bill ratio, Tim, in our security business, excluding turnkey, as we've done in the past was 1.1, so it was a pretty good book-to-bill overall. For OSI, it would have been just south of one overall.

Okay, and then in terms of the Mexico ramp up, how much growth should we expect in FY15 versus FY14 just because of that ramp up? Would you expect significantly more revenue under that contract in FY15 versus FY14 because of the ramp?

So Tim, we intend to provide our FY15 guidance on our next call in August, so I don't want to prematurely say anything. The revenues that we have been reporting on to the Mexico contract have been significant all year long. So while there will be a certain amount of potential increase in revenues in FY15, I think we're better off deferring that until we give our FY15 guidance.

Okay, and then just two quick questions and I'll pass it over, but question one is do you expect to be cash flow positive in the fourth quarter? And then what would you expect the tax rate to be for the fourth quarter? Thank you.

Tim, it's Alan. So while cash flow has been extremely strong in the first nine months, as you can imagine with the strong Q4 that we're anticipating, that you astutely point out, at the revenue level, that will be a user of working capital into Q4. So we're not anticipating any significant free cash flow in Q4. It might even be a little bit negative in Q4 which following that with the collections from strong Q4 shipments could lead to very strong free cash flow in Q1.

From a tax rate perspective, our effective tax rate on a year-to-date basis I believe is 27.7% so that would be a pretty good indicator for Q4.

Okay, thank you.

Josephine Millward with Benchmark.

Can you tell us what security bookings were or was a number of security funded backlog?

Josephine, it's Alan. I'll take that question. Our book-to-bill ratio for security excluding turnkey was 1.1. We don't break down our revenues precisely between turnkey and non-turnkey as a matter of course. But a 1.1 book-to-bill ratio and our backlog in non-turnkey for security actually went up a little bit from Q2.

Okay, can you break out turnkey for us so I can back into security bookings? Are we talking $30 million, $35 million during the quarter?

Oh, significantly higher than that, Josephine. We don't break out our turnkey revenues but I think you have a pretty good idea the range of what our turnkey revenues are. But we don't break that out separately but our security bookings would be significantly higher than the number you just mentioned.

No, no, the $30 million, $35 million, was that your turnkey contribution during the quarter, so I'm trying to break that out because it's very hard to back into funded backlog if I don't have a precise number for your turn -- what was recognized, the portion of turnkey in your reported revenue and I'm just trying to get there.

I'm sorry, I misunderstood your question. I thought you said bookings. Yes, that is in the approximate range, yes.

Okay, so it sounds like security bookings was fairly good. Can you talk about what drove the growth in what product area, geographic area where you're seeing strength? And lastly, talk about Albania, if you expect Albania to contribute in Q4 or it's more FY15.

Josephine, this is Deepak here. Regarding the strengthen the security bookings, I'd like to answer that more broadly including the Q4 because we're already one month into it. It's primarily driven international, and there's no one region, though I would say that Middle East is a very strong area for us.

Regarding the products, obviously the big gorilla, 100 pound gorilla, is cargo in the equipment bookings but RTT was very good. We announced the multiple unit order in Oslo, we made some other bookings, we continue to look at other new prospects into it. So the two areas, non-services related is cargo primarily, and RTT, and it's all driven international.

Regarding Albania, we are making progress and we are on track. But I don't think that there would be any contribution in revenue in Q4 and but we are moving on target, we are working diligently with it and looking forward to 2015.

Deepak, just to follow-up on that do you still expect to receive TSA certification some time this calendar year for RTT?

I know we've been talking about it. I'm sure that you're very astute, you've talked to other people. It's a blind test, people go through multiple times.

We are in test actively and I know I've said it before end of the calendar year, fiscal year, we are optimistic. Every time that you get into data with them it's helpful, and people take multiple rounds. And we are quite optimistic that our technology fundamentally is going to get certified. It got certified in Europe so it's a matter of time.

Great, congratulations on the Oslo order.

Thank you.

(Operator Instructions)

Yair Reiner with Oppenheimer.

So just one more question on the guidance. If I look at the -- if I take the middle end of your revenue range, it looks like getting to the middle or even the bottom end of your EPS range requires you to have an operating margin of about 13%, which is quite elevated on a historical basis. Is that math right and if so what's driving that in your pipeline in terms of product mix that would give you confidence around those kind of margins?

Yes, Yair, it's Alan. I think your math is probably in the ballpark. What would drive operating margin improvement would certainly relate to just economies of scale.

When you take a look at the implied revenues versus prior periods, it is a big indicator of what can happen in the margins. As you also know our biggest quarter in our healthcare business tends to be Q4 which is highly leveragable and scalable on the revenue basis to lead to operating margin improvement. So that is fundamentally what's driving it, economies of scale associated with the higher revenues across all three of our businesses.

Got it. Which I guess leads me to a question about healthcare. You've been speaking I think maybe a little bit less about the anesthesia delivery product. Can you maybe talk about the reception you're seeing, maybe what have been some of the impediments to gaining share, and then maybe update us on what you think is a reasonable target for you in terms of market share going forward over the next call it year or two?

This is Deepak here. Good question. It's a new launch and we have talked about it.

You're right. Last quarter, Alan did mention we have started ramping up production and there are no stoppages kind of thing but you're entering a market which is dominated by two large players and we are very optimistic about it, every place we've shown it has been very well received.

We have started shipping product and our target obviously is optimistic. We think that fully rolled in 2015, 2016, 2017 there's no reason with the product line we have and our focus and our penetration that we should not be looking at about 15% to 20% of the market, so we're very positive about it.

It's a little slow start than we would have liked to see but it's a product that everybody is very cautious about it. People look at it and we are going in against some big guys, Drager and Data Comida, but we are very confident to capture what a call a significant growth in the coming years.

Okay, very good. And then one more question for you Alan on the CapEx. It seemed to have been down significantly quarter-over-quarter. Can you update us on why that was and then what your target is for the full year?

Sure, Yair. Q1 and Q2 included quite a bit of CapEx still associated with Mexico, the continued ramp up there, as well as Albania. With those two things coming down in terms of size and scope, the overall CapEx levels have evened out a little bit more. So we continue to believe that our CapEx will be somewhere in the neighborhood of the $60 million for the full fiscal year plus or minus.

Also wanted to mention in context your last question, Yair, about questioning about the 13% operating margin. Just as a reference point our Q4 of last year was 12.8% on a non-GAAP basis, so it gives us a pretty good reference point. Okay, thank you.

There are no more questions at this time.

Thank you very much, ladies and gentlemen. I want to thank everybody and look forward to a strong finish for Q4 and hope to talk to you soon. We are very excited about what progress we are making in the product line, especially in RTT and cargo and services and our healthcare new product introductions. Thank you.

Ladies and gentlemen thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Have a wonderful day.