OSI Systems Inc (OSIS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the OSI Systems' fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Alan Edrick, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. I'm here today with Deepak Chopra, our President and CEO. Welcome to the OSI Systems' fourth quarter and year end FY15 conference call. We would like to extend a special welcome to anyone who is a first time participant on our conference calls. Earlier today, we issued a press release announcing our fourth quarter and FY15 financial results.

Before we discuss our financial and our 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 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 statements. Such statements include, without limitation, information provided regarding expected revenues and earnings in FY16. And, statements regarding the expected overall financial and operational performance of the Company in each of its operating divisions.

The Company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from these forward-looking statements. These factors include the risk factors set forth in the Company's last annual report, on Form 10-K, and other risks described in documents subsequently filed by the Company with the SEC from time to time. 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 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 in a quantitative reconciliation of those figures, please refer to today's press release regarding our fourth quarter and year end results, which has also been furnished to the SEC as an exhibit to the current report on Form 8-K.

Before turning the call over to Deepak to discuss the business in more detail, I'll provide a high-level overview of our financial performance. We will again touch on several themes that we have discussed during past conference calls. Let's get to it. Financial highlights for our fourth quarter of FY15 are as follows: First, we reported record Q4 revenues of $267 million, a 2% year-over-year increase, as compared to a tough comp in the prior-year period. The top line growth was driven by our Healthcare Division, which had an outstanding quarter, delivering a 29% increase of sales, which included 21% organic growth. For the year, OSI sales were $958 million, also a new record.

Second, we reported record Q4 non-GAAP diluted earnings per share, excluding restructuring and other charges, of $1.22. This marks the 23rd quarter, out of the last 24, that we achieved non-GAAP EPS growth. Third, we generated free cash flow of $12 million in the quarter, bringing the full-year total to a record $90 million, or 20% higher than last year. We concluded the quarter with a very solid balance sheet. And finally, our backlog heading into FY16 is strong. We achieved an equipment, and related service, book-to-bill ratio, or in other words, a non-turnkey book-to-bill ratio of 1.2 in Q4. And, have subsequently booked several high-profile Security wins already in FY16. Before jumping into additional financial details and discussing our FY16 guidance, let me turn the call over to Deepak.

Thank you, Alan. And again, welcome to the OSI Systems' earnings conference call. As Alan mentioned, in the fourth quarter and for the full fiscal year, we delivered record revenues and profit. During Q4, the Healthcare Division's performance stood out, leading to record divisional revenues, along with significant margin expansion. With strong overall OSI bookings in Q4, and thereafter, we begin FY16 with a healthy backlog and a stronger organization, which we believe positions us well.

Throughout the year, we continue to pursue excellence in each division, with the implementation of operational, strategic and talent-management initiatives. As an example, we are happy to announce that Pak Chin, a former Honeywell Executive, joined our team as President of Rapiscan Systems. Ajay Mehra, who led Rapiscan to strong success over a number of years, is now focused exclusively on the solutions business, reflecting the importance, and the priority we have, on growing our turnkey business, expanding service and solutions to Security customers, as well as developing service offerings to other markets. Under Mr. Mehra, we've also created a Healthcare solution initiative, to replicate our success in Security turnkey business.

Let's talk in more detail about each business, starting with our Security Division, Rapiscan, where revenues were $481 million for the full fiscal year, or 9% higher than the prior year. With a strong operating margin of 15.2%, excluding the effect of restructuring and other charges. Rapiscan's revenues in Q4 were 7% lower than the prior year, due to a tough comp, as prior year Q4 sales grew 45% in part from FMS revenues, that Alan Edrick will discuss later on. Excluding the prior year FMS revenues, Rapiscan's revenues increased 10% in the fourth quarter. A few of the highlights of Rapiscan in Q4. We've continued to gain momentum in our Real Time Tomography, CT, our latest checked-baggage product, as we have had significant win at Rome Airport, valued at approximately $27 million. This validates our platform, following our win last year in Oslo, Norway. And, have subsequently booked additional international customers after the Rome win.

As you can imagine, we are very busy as the RFP activity for RTTs is very robust. In the European market, there are approximately 15,00 machines that will come up for replacement or upgrade, as airport and air cargo customers strive to meet the European screening requirement standards by 2020. Our initial wins give us strong optimism for this market segment, for our growth. With respect to the US market, we expect to submit the RTT 110 for TSA certification testing this fiscal year, to compliment the RTT 80, which was TSA certified earlier this year. The RTT 110 employs the same underlying technology as the RTT 80, but offers a larger tunnel size. And, thus, is capable of screening larger items. Rapiscan had Q4 bookings of $142 million, which represents a 1.4 non-turnkey book-to-bill ratio for Security in Q4. We received several orders for people screening, baggage and parcel and cargo and vehicle inspection systems, as we announced wins totalling approximately $58 million in Q4, from the Middle East and Africa. We also received multiple orders for service and support contracts, from the US and international customers, for our large install base.

In turnkey services, our current programs continue to contribute strongly to our performance. Based on what we see in our pipeline of other potential turnkey customers, we continue to believe that we are in excellent position to capture additional opportunities. The turnkey services market represents an outstanding growth opportunity, and as mentioned earlier, we have realigned some of our leading resources to focus exclusively on this. The growth engines for FY16 are the whole baggage, our checked-baggage market with the RTT leading it, international cargo screening and turnkey opportunities. Overall, our pipeline and Security continues to be very robust.

Moving to Healthcare, Spacelabs sales were $79 million for the quarter, a new record. Or, 29% higher than the same quarter in the prior year. And, $256 million for the year, or 15% higher than the prior year. Alan Edrick will talk a little bit more detail on the mix. A few of the Healthcare highlights on the quarter, starting with the market. It appears the North American market is increasingly active, which provides confidence that the market of the few past years is improving. We announced several strategic wins at hospitals during the quarter. And, continue to penetrate the market with our latest technology in the patient monitoring, anesthesia and cardiology product lines.

In June, we launched our new telemetry system, XTR, which offers a simple workflow for managing patients, intelligent arrhythmia analysis and advanced alarm management. This new product has already contributed to revenue growth. Finishing off the year in strong fashion, we are optimistic to continue the momentum through the coming quarters, leading to nice growth in the Healthcare Division in FY16. We continued to invest in research and development. We've developed newer and newer products in this market.

Moving to Optoelectronics. In the fourth quarter, the Optoelectronics Division generated revenues of $68 million, including the inter-company revenue, a slight decrease from the same period in the prior year. Year over year, revenues were down by 6%, as we focused on improving the business operations and margins, including shifting towards a more favorable customer and profit mix. We have mentioned that in our previous calls, of this strategy. To do that end, the operating margin increased 230 basis points for the quarter, excluding restructuring and other charges, compared to the prior year. In Q4, we also completed a facility consolidation of an EMS plant to our main facility in Hawthorne, California. These efforts are now behind us and we believe Opto growth is in excellent position to return to top-line growth in FY16, with strong operating margins.

To conclude, with a strong balance sheet and exciting prospects in each business unit, we look forward to delivering growth in revenues and earnings per share in FY16. With that, I'm going to hand the call back over to Alan, to talk in detail about our financial performance, and guidance, before opening the call for questions. Thank you.

Thank you, Deepak. We continue to deliver revenue and earnings growth by expanding our product portfolio, and entering new markets, while maintaining a relentless focus on further operating [efficiencies] to continue to expand margins. Let's review the financial results for the fourth quarter of the fiscal year in greater detail. As mentioned before, our revenues in Q4 of FY15 increased 2% over Q4 of FY14, while full-year revenues increased by 6%. The Q4 2015 revenue growth was driven by a 29% increase in sales of our Healthcare Division. Led by strong growth in North America and the inclusion of revenues from the cardiology business that we acquired in the first quarter of FY15, which contributed 8% of the quarter's growth.

In FY15, our Healthcare Division delivered record revenue in each of the North America and the emerging markets regions, while the European and Middle East region lagged, in part due to the impact of FX. Q4 sales in our Security Division were strong, representing the third highest quarter on record. However, with the tougher comp, due to $23 million recognized in Q4 last year, associated with the foreign military sale to Iraq, revenues were down 7% year over year. For the full year, Rapiscan's revenues were $481 million, up 9% over the prior year. And, as expected for Q4, our Opto Division's external revenues were down 2%, yet the Opto Division delivered significantly higher operating margin, which we will discuss later. We expect Opto to return to revenue growth as early as Q2 of FY16.

Our Q4 gross margin came in at 33.5%, compared to 32.9% in Q4 of the prior year. The increase was driven by margin expansion in our Healthcare Division, achieved primarily from economies of scale, as well as margin expansion our Opto Division, achieved through operational improvements. These factors more than offset the impact of a less favorable sales mix in the Security Division. As mentioned on previous calls, the margin will fluctuate from period to period, based on revenue mix, amongst other factors.

Moving to OpEx. SG&A as a percentage of sales was 15.6% in Q4. For the year, we leveraged the sales growth and saw SG&A decrease 50 basis points. We remain committed, in each of our divisions, to increasing efficiencies and managing our cost structure prudently. Our goal continues to be to hold the SG&A growth rate below the rate of sales growth. Though, results in individual quarters may vary, such as it did this quarter. We continue to develop innovative technologies, to broaden our offerings and enhance future growth. And so, continue to invest significant resources in R&D. Our R&D spending of $13.2 million in Q4 was up approximately 10% from the prior year, primarily due to increased spending to support our next generation of products in our Security Division. As mentioned on previous calls, we planned for a higher level of R&D spending in FY15. In FY16, we expect R&D to remain relatively stable as a percentage of sales.

Our effective tax rate was 25.7% for Q4, and 26.7% for the full fiscal year. Our provision for income taxes is dependent on the mix of income from US and foreign locations, due to tax rate differences amongst countries, as well as the impact of permanent taxable differences, tax elections and valuation allowances, among other items. Moving down the income statement, our Q4 GAAP diluted EPS was $1.09, compared to $1.07 last year. The Q4 non-GAAP earnings per diluted share, excluding restructuring and other charges, were $1.22, compared to $1.19 in the comparable prior year period. For the full year, our non-GAAP diluted earnings per share were $3.53, compared to $3.13 in FY14. Or, a 13% improvement.

Let's now turn to a discussion of our operating margin, excluding restructuring and other charges. The Q4 adjusted operating margin was 12.9%, which was comparable to the prior year. Leveraging strong sales, our Healthcare Division realized a significant uptick in operating margin, from 11.7% last year to 17.3% in Q4 this year, a 560 basis point improvement. This was led by strength in our US sales channel and our patient monitoring product line.

Our Opto Division operating margin also increased significantly, from 6.2% in Q4 last year to 8.5% this year. As discussed on several calls, we have been working diligently to approve the Opto Division's operating margin. These efforts continue to yield results, aided by a favorable product mix in Q4. During the quarter, we completed the consolidation of one of our Opto manufacturing sites, as Deepak just mentioned. Finally, the Security Division reported an operating margin of 13.7%, which was about 50 basis points lower than last year. Primarily due to the level of, and mix of, revenues as earlier described, as well as higher R&D.

Moving to cash flow. For Q4 of FY15, we reported operating cash flow of $17.4 million. Capital expenditures were $5.9 million in the quarter, while depreciation and amortization was $13.5 million. Day sales outstanding, or DSO, was 61 days in Q4 FY15, compared to 65 days last year. Our level of DSO often fluctuates from period to period, due to the timing of sales and collections. Our balance sheet is strong, and our leverage ratio remains well below 1. Our credit facility continues to provide us with flexibility to execute our business plan and respond to opportunities.

Finally, turning to our FY16 guidance. As discussed, FY15 revenues were $958 million, which included approximately $70 million from the FMS sale with Iraq. While there is a possibility of receiving follow-on awards with the same customer, our guidance for FY16 does not include any material revenues for a follow-on order. Should we receive an award, we will likely update the guidance as appropriate. Excluding FMS revenues related to Iraq, including the possibility of a follow-on order, we anticipate continuing growth in FY16, as revenues are expected to be between $985 million and $1.020 billion, which represents an 11% to 15% increase over the prior year.

We generally provide overall Company guidance rather than guidance by division or program. We can say our guidance incorporates annual growth in each division, though individuals quarters may vary. Given the challenging first-half comps associated with the fulfillment of the FMS order in FY15, and the expected timing of deliveries from our current Security backlog. Unlike FY15 where the growth rate was stronger in the first half than the second half, in FY16, we anticipate the growth rate to be significantly stronger in the second half than the first half. We expect FY16 non-GAAP diluted earnings per share, excluding the impact of impairment, restructuring and other charges, to be between $3.75 and $4 per share. We currently believe the sales and earnings guidance reflects reasonable estimates. However, actual results could vary from the anticipated ranges, because of the risks and uncertainties applicable to our business and industry, including the timing of certain awards and deliveries. And, because of other risks and uncertainties described in our SEC filings.

During the past few years, we have built a strong foundation for growth. And, have consistently delivered a strong bottom line, along with significant operating and free cash flow. Our investments have enabled us to become the leader in turnkey screening solutions, and have allowed us to introduce innovative products and services to the market. We look forward to sharing our progress on upcoming calls. Thank you for listening to this conference call. And, at this time, we would like to open the call to questions.

(Operator Instructions)

Our first question comes from the line of Jeff Martin from ROTH Capital Partners. Your question, please.

Thanks. Good morning, Deepak and Alan.

Good morning.

Alan, could you help me just clarify that the challenge in comparisons, both in the first and fourth quarter. I have roughly $25 million between FMS and the Glasgow gains challenging the first quarter compare. And, $34 million for the second quarter. Is that accurate?

Yes, Jeff, your numbers are directionally accurate. In the first quarter, that's extremely close to what we reported last year for Glasgow and FMS. The FMS revenues in the second quarter of FY15 were actually a little bit higher than the number you mentioned. So, that's what contributed to the comment thing. The first half comparisons are a little bit tougher, and we're anticipating a higher growth rate in the second half of the FY.

Okay. And then, you anticipate growth in each of your divisions, did I hear that correctly, for the full year?

That is correct.

Okay. And then, do you have a number for the foreign exchange impact on revenue in the quarter?

The FX impact on the revenue in the quarter gave us a headwind of a couple percent in this past quarter. Namely from the euro and the pound, compared to the prior year.

Okay. And Deepak, could you -- go ahead.

I was going to say, although it was a headwind on the top line, it was not on the bottom line.

Okay, okay. And then, Deepak, could you go into a little bit more of an update on the pipeline for RTT in Europe?

Well, as know that 2020, all the airports, Western European airports, have to meet the new standards. So, there's a lot of activity in the European airports, in trying to put their plans together. Together with their airport expansion plans, of the replacement cycle and new additions for meeting these deadlines. So, there are a lot of activity. And, as I mentioned on my call, that we are very fortunate we won the Oslo, Norway, which the major airport last year. We announced the Rome airport. And, we have had subsequent wins after that, both in the European sector and the Asia-Pacific sector.

Okay, and you mentioned submission of the RTT 110 by the end of the FY for certification in the US. I would imagine that would be a shorter certification process, given the 80 has already been approved. Is that the right way to think about it?

That's the right way to look at it. As you know, the US is not, right now, ready to replace all their machines. So that, we think that by the 2018, 2019 and 2020, they'll start doing the same thing. And, we've decided there's no point of carrying RTT 80 and RTT 110. We already have a certificate from TSA on the RTT 80. Since the rest of the world is moving on to the 110, and that's what we are focusing on. We announced in the last call, also, that we are submitting for recertification of the 110. And, think that it will go faster because of our experience with the RTT 80.

Okay. I'm curious to get your take on potential consolidation opportunities of the security market, particularly with some of the vendors in the US, as well as overseas.

You know that we don't want to comment on anything specific, but we are watching the industry. And, we have always said that we have a very good appetite. We have a clean balance sheet and, what I call, an organization which can digest it. So, we continued to watch and look. And, we'll continue to look at what is out there.

Okay, great. Alan, in terms of how we should think about unusual expenses in restructuring charges. With Opto, you referred to being mostly done there. With Security and Healthcare, is there more to go there? Should we expect some of those charges in FY16, or are those mostly behind?

Sure, Jeff. I think a lot of the heavy lifting is behind us. That being said, we have a mantra of continuous improvement. Wherever we think we can create opportunities for increased efficiencies, we always seek to do that. So, while we're not currently forecasting significant restructuring charges in FY16, we will look for ways for further operating efficiencies.

Okay, and can you help us get our arms around the savings that result, on an annualized basis, from the efforts that were implemented this year, this past year?

Yes, it's a good question. And, there's loads of different aspects of that. Much of which was already been incorporated into the numbers that occurred throughout FY15. The one that happened later in the year, which is a fair question, would be the consolidation of the manufacturing facility that Deepak alluded to, which was completed in the May timeframe. And, we believe this consolidation could save us close to about $1 million year, going forward.

Okay. That's very helpful. Thanks.

Thank you. Our next question comes from the line of Josephine Millward from the Benchmark Company. Your question, please. Josephine, you might have your phone on mute.

(Operator Instructions)

It appears we have no further questions at this time. I would like to hand the program back for any further remarks.

Well, thank you very much for listening to our call. We are very excited about FY16, and hope to talk to you with more update in our October Q1 call. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.