OSI Systems Inc (OSIS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the OSI Systems Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Alan Edrick, Chief Financial Officer. You may begin, sir.

Thank you. Good afternoon, and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems, and I am here today with Deepak Chopra, our President and CEO. Welcome to the OSI Systems second quarter fiscal 2016 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 at least two weeks.

Earlier today we issued a press release announcing our second quarter fiscal year 2016 financial results. Before we discuss our financial and operational results, I would like to remind everyone that today's discussion contains forward-looking statements, based on the environment as we currently see it. I will now read the Company's cautionary statement on forward-looking statements. In connection with this conference call, the Company wishes to take advantage of the Safe Harbor Provisions of the Private Securities and 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 of 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 fiscal year 2016, and statements regarding the expected overall financial and operational performance of the Company and 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 and a quantitative reconciliation of those figures, please refer to today's press release regarding our second quarter results, which has also been furnished to the SEC as an exhibit to our current report on Form 8-K.

Before turning the call over to Deepak to discuss the business in more detail, I will provide a high-level overview of our financial performance. We have had the privilege of reporting strong financial results for most of this decade. This quarter's results, however, were disappointing in a number of areas, some of which were outside the Company's control. We will review these results and our assessment of the reasons behind them. We will also provide our view on the Company's markets, and why we continue to believe the Company is well-positioned for continued long-term success.

The overview of our financial results for our second quarter of fiscal 2016 is as follows. First, we reported second quarter revenues of $197 million, a 23% year-over-year decrease. We entered the quarter with a difficult comparison, given the approximately $39 million of revenue recognized in the prior year associated with the foreign military sale contract with the US Department of Defense for use in Iraq. Excluding this FMS contract, sales were down by 10% in the quarter. This was primarily driven by weak international sales in our healthcare division, together with delays in expected bookings and shipments, and the timing of revenue recognition in our security division.

Second, we reported Q3 non-GAAP diluted earnings per share, excluding impairment, restructuring and other charges, of $0.40 compared to $0.96 in the prior-year quarter. This change was largely driven by the decline in sales in our healthcare division, which carries the highest contribution margin of our three divisions, along with the decrease in sales in our security division coupled with other factors in this division, which we will discuss in more detail later. As an aside, we note that this marks only the fourth time in the last 35 quarters that we have not achieved non-GAAP EPS growth.

Third, free cash flow which we define as operating cash flow less capital expenditures was negative $8 million for the quarter, as working capital requirements increased to build inventory to support the Company's significant backlog in the security division, and the timing of collections led to higher day sales outstanding, or DSO. The demand mix from our products has been trending toward longer lead-time large equipment, mostly in security, and this trend results in higher levels of inventory from time to time. And fourth, our non-turnkey book-to-bill ratio for Q2 was 1.0, for the first half of fiscal year 2016 bookings were up 52% over the first half of fiscal 2015, driven by our security division. Before diving into more depth behind the numbers, let me turn the call over to Deepak.

Thank you, Alan. And again, good afternoon and welcome to the OSI Systems Earnings Conference Call for the second quarter of fiscal 2016. With the global macroeconomic dynamics that have affected most industries to various degrees, our security and healthcare divisions performance was also adversely affected to some extent by these conditions. On the other hand, our optoelectronics division again delivered increased adjusted operating income and margins. Alan Edrick will discuss the financials of each division in more detail later on. Jumping right into the review of the Q2 divisional performance, we will share our view of the market, and the changes we are making to improve the performance of the Company.

We will begin with the security division. During the quarter revenues in security were $94 million, a decrease of 32% from the prior year. As Alan has mentioned in prior calls, we anticipated a tough comparison due to significant FMS revenues in Q2 last year. This quarter's security revenues, however, were lower than our expectations. There were a couple of reasons for this, which were largely beyond our control. The primary factor was a delay in the customer schedules of certain cargo screening systems, as well as our recently-launched Rapiscan RTT whole baggage screening systems. Certain shipments were scheduled for second quarter but installations and customer acceptance were delayed by the customer due to their own readiness, nothing to do with Rapiscan products. In addition, we see customers taking longer to make purchasing decisions on some book and ship tenders, primarily in our small baggage and inspection product lines in the international locations. Together these factors led to security sales being 5% lower than the prior year, excluding the FMS contract from last year.

In Q2 this year security bookings were $67 million, and for the first half were $249 million, which is more than three times the amount we booked in the first half of last year in our security division. We believe that the global market swings that we have all seen has had an impact on our customers. That said, we are confident that security and safety needs will continue to be a priority. In the high growth aviation checked baggage market we are doing very well with our Rapiscan RTT whole baggage screening system. As the regulatory requirements force airports to upgrade airport baggage infrastructure to screen for explosives. We expect significant opportunities to compete on airport procurement bids throughout the European Union, as the region prepares to meet the regulatory deadline of 2020 to upgrade their aging checked baggage systems.

Our win rate on these procurement bids to-date has been outstanding. Notable wins include Paris, Rome, Oslo, among others. Consequently we are ramping up our production capabilities ASAP. As with any production build-up to significantly higher levels, we expect some inefficiencies, and thus, the contribution margins on sales to be lighter during the initial period of the build-up. We have been successful in developing a high-quality whole baggage screening product that has quickly achieved customer acceptance, and is so far being preferred above competing alternatives. Though we are excited about the RTT product, in the short-term it adds some variability to our financial results and projections, as the acceptance dates are often at the behest of the customer, and subject to change for a variety of reasons, such as completion of airport terminal construction, and all of the integration into the baggage handling systems. We have already seen this in the early days with changes in customer schedules that has pushed out some RTT revenue expected in fiscal 2016 to fiscal 2017.

While RTT is expected to be a big sales growth driver, the cargo business has numerous opportunities as well. We are currently working to fulfill several large orders from our backlog that were announced last summer, that based on current schedules are now expected to be delivered in Q4 of this year and fiscal 2017. As a matter of fact, the raw materials and finished goods related to these cargo orders is one of the reasons for the higher level of inventory on the Q2 balance sheet. We believe the global market for cargo will continue to be strong, much of the demand for cargo, however, comes from countries dependent on oil revenues or in regions of instability, which have been a factor in government procurement delays. So changes in customer timing and requirements are the primary reason for the delays in revenue recognition, and thus, a contributor to the reduction in our current year guidance.

On a positive note protecting infrastructure continues to be an objective of many of our customers. Also notwithstanding the marketing challenges discussed, it is worth noting that we have not seen any loss of significant orders. On the contrary, the funnel is looking very robust north of $1 billion, and with each month the clarity, especially for the RTT, is becoming clearer, with well-defined airport needs to fulfill the 2020 deadline, especially in the European Union.

In turnkey services another major growth opportunity for us, with a long sales cycle, we continue to see a strong pipeline. We are optimistic of landing new turnkey deals, and have added additional resources to support these opportunities. However, the timing of these deals has been and will continue to be influenced by the macroeconomic factors discussed earlier. Our most recent turnkey contract in Albania is performing well, and we expect to be fully operational within this quarter. In addition, our other turnkey programs continue to perform well.

We are well-situated for growth in products and services including turnkey programs, and have a strong balance sheet that can easily absorb the capital requirements from longer lead time builds, or turnkey opportunities that often require significant initial capital outlay. In summary we have high-quality innovative product and service offerings in security, short-term market gyrations and revenue recognition delays due to project timelines, among other factors, have resulted in a disappointing quarter. We are taking appropriate actions for cost reductions in security to improve the operating margin, and will continue to review the organization further and make the necessary changes to build a stronger foundation. The strength in our backlog and bookings trend and continued strength in foreseeable demand for our products globally, gives us confidence in the second half and delivering a very strong Q4 in security.

Moving on to the healthcare division, Spacelabs revenue were $55 million, a decrease of 20% from the prior year. The results were highly unsatisfactory. There were two key factors that led to these results. First, global uncertainty mentioned earlier had an impact. US sales were down a little, but we witnessed a significant drop in the international sales. And second, the Spacelabs team encountered some challenges with new product roll outs, which resulted in some sales delays and a few lost opportunities in the quarter. The team understands the nature of the operational difficulties, and has taken action to resolve them going forward.

As you know, we have introduced multiple new products in patient monitoring, cardiology, and anesthesia over the past four years in Spacelabs. The team has done a commendable job of developing multiple products. Nicholas Ong, the President of Spacelabs has led the team during this product improvement cycle. However, we both recognized it is time for a leadership change to take Spacelabs through the next stage, and will be announcing a new leader to serve in this role shortly. Nicholas Ong is staying on through the transition period. Given that our healthcare division is a book and ship business, with the vast majority of revenues booked and shipped in the same quarter, we believe that we can recover in a timely fashion to improve our performance in the second half. We are committed to resolving the problems that are within our control, and affect top and bottom line performance improvement.

Moving to our optoelectronic division, we are very pleased with the continued growth in adjusted operating income in the division, despite a reduction in revenues from the prior year. Since we have retooled this division over the last year to shift the revenue base to a higher profit product mix, we expected a reduction in sales this quarter. Going forward we intend to pursue growth opportunities that are consistent with our product mix objective, accomplishing this organically, as well as through strategic acquisitions.

Overall second quarter has been a very challenging quarter. We believe the results were an anomaly. All of our businesses operate in key markets, with strong long-term growth prospects. We anticipate that over time the long-term fundamentals that have historically driven the growth in our business will continue to do so. I would like to thank our employees, customers, and shareholders for their continued support. With that, I'm going to turn the call back over to Alan to talk in detail about our financial performance before opening the call for questions. Thank you.

Thank you, Deepak. The second quarter proved to be very difficult. As a result of macro dynamics and customer changes, where the impact was felt most significantly in latter December. Our team has embraced the challenge of navigating the macroeconomic pressures and improving operations, and is focused on delivering revenue and earnings growth in the future. While the security and healthcare divisions had their problems, the optoelectronics division delivered higher non-GAAP operating income, as our operating margins expanded for the eight consecutive sequential quarter.

Let's review in greater detail the results for the second quarter before discussing our updated guidance. As mentioned earlier, our revenues in the second quarter of fiscal 2016 decreased 23% over Q2 of fiscal 2015. Security division revenues were down 32%, or 5% if we exclude the FMS contract previously discussed. We shipped approximately $15 million of security equipment during Q2 of 2016, for which revenue is expected to be recognized in future quarters, as the product is installed and the revenue recognition criteria are met. The Albania turnkey contract has been ramping up nicely. It is expected to be fully operational in Q3.

Revenue in our healthcare division decreased 20%. While sales in the US our core market was down somewhat, international healthcare sales declined 30%, primarily as a result of foreign currency exchange impacts, deferred purchasing decisions, weakness in China, and a generally soft global healthcare market, which we believe is due to the global economic uncertainty. And as expected, our opto divisions revenues decreased by 8%, mainly as a result of lower contract manufacturing sales, as we shift our customer mix. Our Q2 gross margin was 34.5% virtually the same as our Q2 fiscal year 2015 margin of 34.6%, with a more favorable product mix, offset by negative economies of scale due to lower sales volume. As mentioned on previous calls, the gross margin will fluctuate from period-to-period, based on product mix, among other factors.

Moving to operating expenses. In Q2 selling general and administrative expense decreased by $4.8 million, or about 10% with all three divisions reporting lower SG&A. Given the magnitude of the revenue decrease, SG&A as a percentage of sales increased. Our goal continues to be 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 prudently. We continue to make significant investments in research and development to expand our security and healthcare product offerings. Our R&D spending of $13 million in Q2 fiscal 2016 was down only slightly from the writer year. We are focused on the growth platforms and new innovative products our teams are developing. Given the decrease in revenue this quarter, our R&D spending as a percentage of revenue increased to 6.6%, from 5.1% in Q2 of fiscal 2015. The Company's effective tax rate was 27.5% for the first half of the fiscal year. Our provision for income taxes is dependent on the mix of income from US and foreign jurisdictions, due to tax rate differences among countries, as well as the impact of permanent taxable differences, tax elections, and valuation allowances, among other items.

Let's now turn to a discussion of our operating margin excluding impairment restructuring and other charges. The Q2 adjusted operating margin was 6.0%, compared to 10.9% in the prior year. We saw strength in the opto division, as the adjusted operating margin increased from 6.8% in Q2 last year to 9.4% in Q2 this year. Again, marking the eight consecutive sequential quarter opto's operating margins have expanded. Our healthcare operating margins, however, are extremely sensitive to the top line, given the strong contribution margins of most of the product lines. As sales go up, the operating margin generally falls, and unfortunately, as we have said before, the inverse is also true. With the decrease in the healthcare division's revenue even with lower operating expenses, the adjusted operating margin declined from 10.8% in Q2 of fiscal year 2015 to 6.1% this year.

Finally, several factors contributed to the security division reporting an operating margin of 9.4%, as compared to 13.1% in our first quarter of this year. The decline was driven by negative economies of scale associated with lower sales, a less favorable product mix, a few operational issues that have been addressed, and an accrual for approximately $1 million, on a contract that is expected to generate a loss due to foreign currency exchange impacts and higher projected costs. A Phase 1 review of the cost structure of the security division was completed late in the second quarter, and actions were taken that will result in approximately $6 million of annualized cost savings. A Phase 2 review is currently underway with additional cost savings expected from this exercise, though it is too early to quantity the amount of this additional savings. We recorded a consolidated charge of $11 million in the quarter, consisting of $2 million in restructuring and other changes including severance, and $9 million in impairment charges associated with certain fixed assets no longer in use, as well as for a minority equity investment.

Moving to cash flow and the balance sheet. In Q1 we generated operating cash flow of $25 million, while in Q2 we used $5 million. Capital expenditures were $2.4 million in Q2, while depreciation and amortization was $14 million. DSO was 73 days in Q2 of fiscal 2016, compared to 65 days in Q2 of last year. The increase in DSO was due to two factors. One, the prior year exclude about $39 million in FMS sales, and the US Government is a relatively swift paying customer. And two, the percentage of international sales was higher this year. And international customers are often associated with a higher DSO in our businesses. Our level of DSO often fluctuates significantly from period to period.

Our inventory increased $20 million from Q1, which as noted earlier, was primarily driven by the continued build-up to support the significant backlog in our security division, as well as increased inventory in our healthcare division, as significantly higher Q2 sales were anticipated. The total inventory includes a significant amount of inventory that was shipped to security customers for which revenue will be recognized in future quarters, and until then remains in our reported inventory balance. The higher healthcare inventory is expected to be consumed in our second half. Deferred revenues decreased $6 million in Q2 from the prior quarter. This balance generally decreases each quarter, as milestone payments on a turnkey program which were primarily received in fiscal 2013 are amortized on a monthly basis. Our balance sheet is strong, and our leverage ratio remains well below 1. Our credit facility continues to provide the Company with the flexibility necessary to execute our business plan.

Finally, turning to the updated guidance. Fiscal 2016 revenues are currently projected to be between $900 million and $945 million. The change in guidance reflects the global market dynamics, which have led to the delay in certain bookings in our security division, customer decisions to extend the delivery date or acceptance of orders already in the backlog, which have moved from fiscal year 2016 to fiscal year 2017, and a more conservative view of annual healthcare sales following a disappointing Q2. Given the updated sales guidance fiscal year 2016 non-GAAP diluted earnings per share excluding the impact of impairment, restructuring, and other changes, is expected to be $2.95 to $3.20 per share.

We currently believe the sales and earnings guidance reflects reasonable estimates. Actual sales and earnings however could vary from this range, because of the risks and uncertainties that may affect our business and industries, including items that are not often entirely within our control, such as site timing and customer acceptance. During the past few years we have built a foundation for growth, and notwithstanding this past quarter have delivered a strong bottom line, along with consistent operating and free cash flow. Our investments have enabled us to continue our leadership role in the turnkey screening solutions market space, and allowed us to introduce innovative products and services to the market. Though this quarter was not in line with our consistent past strong results, we remain confident about the future, and we look forward to sharing our progress on upcoming calls. Thank you for participating in this conference call. And at this time we would like to open the call to questions.

Thank you. (Operator Instructions). Our first question comes from the line of Jeff Martin from Roth Capital Partners. Your line is now open.

Thanks. Good afternoon, Alan and Deepak.

Hi Jeff.

Hi Jeff.

Hi Deepak. Alan, could you give us some more insights to the specific drivers behind the change in guidance?

Yes, Jeff. The factors that contributed to the change in revenue guidance, some of which were sort of mentioned on the call, we had a pushout in RTT installation dates by our customers into the next fiscal year. This impacted revenues by about $15 million from what we were thinking. We had push-outs in certain cargo awards in the Middle East, as well as the timing of deliveries of some of the backlog in cargo. That probably pushed things out by about another $25 million. Given the healthcare Q2 that we had, that revenue shortfall which we don't expect to make up, it may be a generally more conservative stance following the quarter brought down healthcare revenues by $20 million or so, and probably about $15 million in opto as third-party customers demand has softened a little bit in the wake of the economy, even though profits remain very, very strong in that business.

Okay. That's helpful. And then Deepak had mentioned some inefficiencies with respect to the early stages of the RTT rollout. Could you help quantify that either from a margin basis or an absolute dollar basis, and what kind of timeline do you expect to improve on those inefficiencies?

Jeff, and Alan join in. It's difficult to specifically talk about dollars in a margin number. Basically the way that, what is happening is we finally got traction in the order book in our RTT, and as you know that we have not shipped too much product until going into this year, and as we won successfully multiple orders, with that comes the dates, or the certain date that we got to ship the product because it has to integrate into the systems at the airport. And so we ramped up from a very low quantity to what I would call a medium to high load in a very fast manner, and obviously that brings up inefficiencies in production and manufacturing, and trying to put the facilities together, expedited parts get brought in, and just it takes more inefficient labor, so we can get to that fine tuned revenue rate, and that's what's happening and to make matters worse, some of the stuff as Alan has mentioned on the call, that we were working hard and heavy to get the units in time, and then the customer changes their mind because of their own delays, or whatever it is, with the result that we can't take revenue recognition. So this thing is there, and good news is, we have a lot of products to manufacture. How long it's going to last I think it definitely goes through 2016 at least, and maybe somewhere in the first quarter, but as the revenue ramps up, it will start making it more efficient. Alan, do you want to add some color to it?

Yes. I think Deepak summarized it well.

Okay. And then could you give us a sense of the international exposure by the healthcare and security segments?

Jeff, it's Alan. On the international side, the US has always been our biggest market on the healthcare business. It represents the majority of sales. We tend to see, depending upon a particular quarter, 40% of our sales or so outside of North America in healthcare, so we have some exposure there, but it's the US market that tends to be the most important market for us. On the security side with some of the slowdown in spending over the last many years actually in the United States, the greatest growth for that business has been internationally, and as we look forward, though we have received some nice US wins, we continue to believe that the international area is the highest growth area for us in security.

Jeff, just to add on to it, the strong bookings in Q1 the majority of them were international ,and our focus we have said it on the previous conference calls, that our focus has been that the growth both in the turnkey business and in cargo and in the RTT for the time to come is all international.

Okay. And then you referred to Q4 being a very significant quarter. Could you give us a sense of what some of the expectation is built into that, either from a segment point of view, or if there are larger contracts to point to, maybe point to those?

Jeff, this is Alan I'll take a shot at it. Our second half is heavily weighted to Q4, and that's predominantly in the security and healthcare business. The healthcare business traditionally has a much larger Q4 than Q3, and that is expected to be the case yet again. On the security side, based on the strong backlog that we have, principally in the cargo as well as in the RTT a huge amount of our shipments and revenue that will be recognized in each of those product lines is going to occur in Q4. So Q4 is shaping up for us right now to be an extremely strong quarter.

Okay. And then last question if I could on the healthcare side, you have got some senior management change going on there. What are some of the strategic things that you expect to be implementing over the course of the initial phase of making some improvements there?

Well, this is Deepak here, Jeff. Number one is that we are focusing on what we call Center of Excellence in execution and operations, and in quality and in new product introductions, we are also looking at a more strategic way forward for the product line, and as we look for the search for the new leader for that area, all of these factors and their strengths are going to be looked at needed towards what we think we need going forward. In the meantime while we are trying to fill that position, Alan and I are taking more focus on leading the Spacelabs growth.

Excellent. Thank you. Good luck with the second half, guys.

Thank you.

And our next question comes from the line of Josephine Millward from Benchmark and Company. Your line is now open.

Good afternoon.

Good afternoon, Josephine.

Deepak, can you give us more color on what happened in healthcare? Was it primarily weakness in emerging markets, Europe, and when did you see this coming, and how do you see things improving going forward?

Josephine, like Alan said that most of the fall was on the international sector, and it really basically comes down to the volatility in the marketplace out there, and we didn't see much coming of it. It came frankly every time we have done that the last couple of years, it just goes into always the third month, and December is a pretty strong month, because everybody is trying to do it before the shut down or before the holidays. In this particular case, if you really look at it, there was so much turmoil in the international sector in late December, that some of the things they were counting on and building pre build, and that's why there is also an inventory increase as Alan mentioned, it just didn't happen in a timely fashion to get it out. And it's not just prevalent to just one area. We could look at sure PAC, Middle East, we could look at some of the European places, we can look at Latin America, we can look at Mexico. So all that international area, and basically it was already always pushing to the end in December, in this particular case it just didn't make it in time.

Okay. In terms of security can you give us your bookings number for the quarter, and your funded backlog for security?

I did mention on my call, on my thing but go ahead. Alan.

Sure. The backlog for security, Josephine, is about $571 million. And the bookings were in the neighborhood of around $67 million.

What do you have in your backlog for Albania, Alan? It's not the 200 million Euros. We don't have all of it in there?

That's correct. We only include five years worth of revenues on Albania in our backlog, so that's in the neighborhood of $60 million, plus or minus.

Can you give us an update on your security pipeline and the level of activities since the Paris attacks? Are you seeing any pickup in pace, or are you seeing, it sounds like you're seeing decisions being pushed to the right?

Josephine, firstly, I think to say that Paris attack is a driver, a driving factor I think that's not a right statement. The better way to look at it, there is a lot of uncertainty and there's a lot of turmoil, which is generating interest in security in all of the places, especially Middle East and Africa. Second, we have been saying it for the last couple of years, as we approach more towards the 2020 deadline, it automatically has a built-in requirement for regulatory reasons for airport upgrading in the HBS checked baggage market, especially in the European Union, and one of the things that we are seeing is that now that it's coming into the 2015, late 2015, 2016, we have seen good successes of wins, and the activity is very well defined in those airports where our clarity is much better now ,which airport and what product they're going to buy and when, than it was six month ago, nine months ago. We were talking in general terms at that time, number of sockets, now we can be more specific on airport to airport to airport.

Regarding the cargo side, it is mostly driven by what I call the awareness that you have to protect your infrastructure. So in one case with all the crisis that's happened, whether you say it oil, or whether you say the uncertain economy, it's also driving those countries that are heavily dependent upon oil and other places to defend their infrastructure, which generates more interest in making the right choices of the products, which gets back into the cargo and the turnkey solutions. The challenge is to be able to go from requirement to closure, and then to delivery when all of the stuff is in a volatile mode of settling down. Once it settles down, it's not going away, it's very specific, and it's more needed now than before. So our pipeline continues to look very strong, and our bookings in the first half sort of say it, that our bookings were almost 3X to what we did last year.

Thank you very much. That is helpful.

And our next question comes from the line of Brian Ruttenbur from BB&T Capital. Your line is now open.

Yes. Thank you very much. Okay. So first question you completed $11 million in charges in the quarter, as I understand it. How much more restructuring do you expect this fiscal year?

Brian, it's Alan. Sort of continuous improvement and looking at our cost structure, we do expect more in Q3, and probably Q4 as well. We're still going through that review right now ,so we haven't quantified it. We don't expect it will be at those type of levels. It will be significantly below that, but we do expect more charges in the second half.

Okay. And then I think that you mentioned $6 million in annual savings on the security side. Is that $6 million annually, and do you have to do any more cuts in order to get that $6 million?

So, Brian, this is Alan. That $6 million has been implemented, so that is on a go-forward basis, and we are also looking for further sums above and beyond that $6 million.

Okay. So that's not annual savings, that was how much in restructuring charges have taken place, rather than I misread, than your actual savings going forward, correct?

Brian, that is our actual savings.

Okay.

We will have $6 million of actual savings going forward.

Okay. Great. And then you're cash right now is roughly $80 million. Are there any plans in place, or I know there are plans in place. Maybe you can tell me for a repurchasing, what do you have authorized right now?

Sure, Brian. We have a stock buyback program, we have about 965,000 shares as we sit here today authorized for that program, and we can participate as we deem appropriate.

And then the new guidance of $2.95 to $3.20, and operational earnings, how much cash from operations, or cash generation whatever way you want to define it should we be looking for this fiscal year?

Yes, Brian. We don't provide guidance on operating cash flow or free cash flow, what I can tell you is that with a more heavily weighted second half to the Q4 you're going to have big Q4 sales. Those Q4 sales will ultimately be collected in Q1, Q2 of 2017. Fiscal 2017. So I think this is going to be a little bit lower year for us from a cash flow standpoint, but positioned extremely well for significant cash flow in fiscal 2017 six months from now.

It won't a negative cash flow year, it will just be not as positive as past ones, is that correct?

That's our belief. Yes.

Okay. And then another question. I'm just trying to go down through the list an get checks here. Breakdown of revenue. Should we see anything differently in terms of the three buckets, opto, healthcare and security, in terms of percentages? Opto is 25% to 28%, healthcare 25% to 28%, and then roughly 50% is security. Can you talk about the buckets, are they going to switch for the year because of changes with healthcare, and things like that?

Yes. Brian, it's dependence each quarter on the particular mix. With the fourth quarter expected to have such significant revenues from the security basis, we would expect in that quarter that mix to be much higher, much more heavily weighted towards security. That's probably the biggest driver of change between the buckets.

Okay. And then you mentioned healthcare foreign exchange. How much did foreign exchange impact you in the period?

Yes. It impacted us by about, well, overall for the Company by about 2%. Healthcare a little bit higher than that, because they have a little bit more foreign exchange exposure.

Okay. And then the SG&A you have been running around 18%. Do you expect to get back to that by the end of the fiscal year, or is that something in the out year that you can get back to?

Yes.

As a percentage.

Yes it's really a function of that top line. We pay close attention to that percentage as a percentages of sales, but we also probably look on an absolute dollar basis as well. So as revenues increase, clearly we will get some leverage in the economies of scale, and that percentage of sales of SG&A will start to go down, so you will start seeing that in the Q4 time period.

Great. Thank you very much.

(Operator Instructions). And our next question comes from the line of Les Sulewski from Sidoti & Company. Your line is now open.

Thank you. Good evening, guys.

Good evening.

Alan, can you provide a little bit more color on the security bookings, perhaps a breakdown of RTT versus cargo and the turnkey side?

Yes. Les. Our general policy is not to provide breakdowns of our particular bookings, so we did have a book-to-bill of roughly 1 in the security segment for us. For non-turnkey.

Were there any additional awards from the ID/IQ in the second quarter?

Would you repeat that question again?

Were there any additional awards from the ID/IQ in the second quarter?

No. The CDP announced was that in the first quarter.

Q1.

Q1. We don't expect that award to have any additions until we start delivering some of the product, and just to mention it again that there were four ID/IQs given to us and three other competitors. Everybody else got a first trench, which was quite small. We are the only ones who got a very large second trench. I think we talked in the last conference call.

Correct.

Got it. Okay. And then also, Deepak, I think you mentioned some issues regarding new product introductions in Spacelabs. Perhaps maybe you can touch a little bit more on that if you could?

Well, it's one of the factors where when you introduce new products, you plan a launch, and you will take the right precautions, and you do all of the right things, and sometimes it doesn't go as well as you expect it to, so you have to redo it, and it happens sometimes and that's what happened to us. Alan.

Yes. And the team has done a really nice job addressing the issues an relaunching the product here in January, so consequently we feel much more comfortable going forward for the Q3/Q4 sales for healthcare.

Got it, thank you guys. I guess one for me and annual jump back in the queue. How far are you in weeding out the remainder of the less profitable opto line?

Yes. We are principally done with that, so I would say that all the heavy lifting is behind us in that regard.

Got it. Thank you.

I'm not showing any further questions. I would now like to turn the call back to management for any further remarks.

Ladies and gentlemen, thanks once again for participating in our conference call. We look forward to the second half, and speaking with you at the next earnings. I do want to say that we are as a group disappointed in our Q2, and we are going to do everything possible to make it better. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now all disconnect. Everyone have a great day.