OSI Systems' (OSIS) CEO Deepak Chopra On Q4 2014 Results - Earnings Call Transcript

| About: OSI Systems, (OSIS)

OSI Systems, Inc. (NASDAQ:OSIS)

Q4 2014 Results Earnings Conference Call

August 25, 2014 12:00 PM ET

Executives

Alan Edrick - Executive Vice President and CFO

Deepak Chopra - President and CEO

Victor Sze - General Counsel

Analysts

Brian Ruttenbur - CRT Capital

Tim Quillin - Stephens, Incorporated

Jeff Martin - Roth Capital Partners

Josephine Millward - Benchmark

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2014 OSI Systems Earnings Conference Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

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

Alan Edrick

Thank you. Good morning and thank you for joining us. I am Alan Edrick, Executive Vice President and CFO of OSI Systems; and I'm here today with Deepak Chopra, our President and CEO; and Victor Sze, our General Counsel. Welcome to the OSI Systems fourth quarter fiscal 2014 conference call. We'd 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 fourth quarter and full fiscal year '14 financial results.

Before we discuss our financial and our 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 fiscal 2015 and statements regarding the expected overall financial and operational performance of the company and its operating divisions. The company wishes to caution our 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, including the discussion 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 regarding our fourth quarter and fiscal 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 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 fourth quarter of fiscal '14 are as follows. First, we reported record fourth quarter revenues of $260 million, a 14% year-over-year increase. The growth was driven by record sales in our Security division, which grew 45% and included initial revenues from the Foreign Military Sales contract signed in June.

The growth in the Security division was partially offset by a disappointing conclusion to the year in our Healthcare division, which posted the 15% Q4 year-over-year sales decline, which will be discussed later during this call.

Second, we reported for the fourth quarter record non-GAAP diluted earnings per share, excluding impairment, restructuring and other charges of $1.19. This marks the 19th quarter out of the last 20 that we achieved double-digit non-GAAP EPS growth.

The 17% non-GAAP EPS increase was especially noteworthy, given the softness in Healthcare, as well as the impact of an approximate $5 million increase in depreciation driven primarily by our turnkey operations in Mexico.

In the context of the significant increase in depreciation resulting from the Mexico roll out, we believe it is again 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. Our Q4 adjusted EBITDA was $51 million, and for full -- and for fiscal year ’14 our adjusted EBITDA was up 30% to approximately $165 million.

Third, Q4 bookings were outstanding, again led by our Security division, resulting in a non-turnkey book-to-bill ratio of nearly 2x.

Fourth, we generated $5 million in operating cash flow in the fourth quarter with slightly negative free cash flow as anticipated. For fiscal ’14 our operating cash flow was $129 million, while our free cash flow was approximately $74 million, each of these amounts represent new annual records.

Finally, we concluded the quarter with a very strong balance sheet.

Before jumping into additional financial details, let me turn the call over to Deepak.

Deepak Chopra

Thank you, Alan. And again, welcome to the OSI Systems Q4 earnings conference call. As Alan discussed, in the fourth quarter and for the full fiscal year, we delivered record revenues and profit. Our Security division was the primary driver of our positive Q4 performance, while for a variety of reasons, Spacelabs and Optoelectronics did not deliver to our expectations.

Overall, revenues for the year were $907 million, 13% higher than fiscal ’13. During the year, we maintained our strategic direction in each business unit and invested in facilities, products, processes and people throughout the company.

As we approach close to the billion-dollar mark in annual revenues, we clearly are benefiting from having a presence in multiple end markets and having the ability to support customers with the manufacturing footprint that allows us significant flexibility in managing their demand and logistical needs. We have exciting opportunities across the company and look forward to making a further progress in each division during the 2015 fiscal year.

Talking in detail about each business, starting with our Security division, Rapiscan where revenues were $440 million for the full fiscal year about 18% higher than the prior year, with an operating margin, excluding the effect of restructuring and other charges of about 15%. The strong profitability resulted from higher volumes and increasingly favorable mix towards higher margin products and turnkey services.

Touching on the highlights of Q4 at Rapiscan. Rapiscan had an excellent bookings quarter of about $184 million non-key -- non-turnkey bookings. To break that down a bit, we received a $15 million order from a Middle East customer to supply multiple units of the Rapiscan Eagle M60 mobile high-energy X-ray cargo and vehicle inspection system.

We booked another international order to provide several Rapiscan Eagle cargo and vehicle inspection systems for approximately $13 million. We also were awarded a contract from a major international airport in the Middle East to provide several units of the Rapiscan 620 Dual View Advanced Technology AT checkpoint X-ray baggage inspection systems.

And last but certainly not the least, we received a Foreign Military Sales contract from the U.S. Department of Defense for approximately $102 million to supply multiple units of cargo and vehicle inspection systems and related training, spare parts, service and logistics support in Iraq.

While this contract took a great deal of time and patience to finally book, we are excited about it and commenced initial deliveries in June. The cargo scanning market remains our fastest growing segment with the potential for both hardware sales and turnkey solutions. We have continued to capture new opportunities in cargo with a broader set of customers around the globe, including those highlighted above.

In turnkey services, the Mexico contract continues to contribute to our performance. With the large scale program, the size of Mexico operating, we stand to benefit from overall increasing awareness in the marketplace and believe we are in a good position to capture additional opportunities in turnkey security solutions in the future.

Last year, we announced a 15-year contract that we received from the Government of Albania to provide turnkey cargo and vehicles screening services at various sites throughout the country of Albania.

Unfortunately, we recently learnt that the customer, the Albanian newly elected government, has halted further progress on the contract and put into doubt the continuation of the program.

The program had been proceeding smoothly and ahead of schedule. We intend to strongly enforce our contractual rights and hope to reach an amicable outcome. I would also note here that no revenues from Albania are included from this contract in the revenue guidance we are providing for fiscal 2015. You can understand that under the circumstances we cannot comment further at this time.

During the year, we also made good progress in the European region with our European Standard ECAC-certified Real Time Tomography whole baggage screening systems with our most prominent win coming at Norway's, Oslo airport, where we will be providing multiple units of our CT-based high-speed checked baggage solutions. We are excited about the checked baggage solution opportunities in general in this region.

We also continued to walk towards certification of the RTT product for the U.S. Aviation market. I'm sure many of you are interested on the status of the open matter with the Department of Homeland Security stemming from the TSA issues. We are in continuing dialogue with the DHS.

We do not wish to speculate regarding how long this might take. We continue to work towards resolution of this matter. As you can appreciate, we are not in a position to comment further at this time and will not take any questions on this subject.

We enter fiscal 2015, with a strong backlog in Security and believe we have a growing pipeline of opportunities. We are well-positioned to provide versatile Security solutions to help protect people, as well as infrastructure and expect to continued demand, particularly in light of the continued unrest in certain regions around the globe.

Moving onto Healthcare division, Spacelabs sales were $61 million for the quarter or 15% lower than the same comparable quarter in the prior year. The U.S. Healthcare market continues to be very challenging with certain hospitals at times delaying capital investment decisions.

We are making good progress with our recently launched new products and are in a position to capture new customers. Our latest anesthesia workstation at ARKON continues to gain traction in the marketplace. We increased unit shipments during Q4 after ramping up ARKON product line to enable higher volume production output. We remain optimistic about the prospects for the ARKON product line in fiscal ‘15.

At Spacelabs, we also continue to leverage our direct sales force and work with group purchase organizations, GPOs and hospital Integrated Delivery Networks or IDNs to capture larger scale sales opportunities in the U.S. Hospitals are increasingly utilizing these types of groups to manage the procurement process.

So, although, Q4 was a disappointing quarter for Spacelabs, we remain confident that our new product portfolio combined with a potential general ramp-up in hospital spending will provide the impetus for a strong fiscal 2015.

Moving to Optoelectronics division. In the fourth quarter, the Optoelectronics division generated revenues of $70 million, including intercompany revenues, a slight increase from the same period in the prior year. Year-over-year profits were down due primarily to product mix. Although, Opto’s Q4 performance was less favorable than we planned, the division delivered a record $285 million in revenues, including intercompany revenues in fiscal 2014, an increase of 19% over the prior year.

This growth was based on several factors. The two most prominent are new or expanded programs from existing and new customers and two small tuck-in product line acquisitions. We intend to continue to look for strategic opportunities that either expand the customer base or bring new capabilities to this division.

We expect that as the overall economy continues to expand, the defense and industrial sectors stabilize, Opto division will be in a good position for improved performance in terms of growth and profitability. On the whole, we are excited about our prospects and look forward to continuing to deliver growth in OSI revenues and profits in the coming year.

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.

Alan Edrick

Thank you, Deepak. Our focused efforts have continued to succeed in delivering meaningful revenue and earnings growth. I’ll now review in more detail the financial results for the fourth quarter of the fiscal year before discussing our 2015 guidance.

Our revenues in the fourth quarter of fiscal ‘14 increased 14% over Q4 last year. As mentioned previously, this was primarily due to 45% revenue growth in the quarter in our Security division, resulting from strength across multiple sales channels and product volumes. The quarter also included approximately $23 million in revenues from the new FMS contract.

Our Opto division's revenues were relatively flat year-over-year as Deepak described. In the drop-off in Healthcare revenues noted earlier, dampen in other way strong quarter, as the hospital capital spending environment proved to be much more challenging than our team had anticipated.

Our gross margin in the quarter was down 5.3% from the same quarter last year. This was driven by a number of factors, including first, the revenue decrease in our Healthcare division, which carries the highest gross margin in the company's three divisions.

Second, the change in product mix within our Opto division was stronger sales in the contract manufacturing side of the business, which carries lower gross margins than the Optoelectronic side and third, increased depreciation from our turnkey operations.

As I’ve mentioned in our previous calls, the margin will fluctuate from period to period, based on revenue mix amongst other factors.

Moving to OpEx, we continue to work to manage our cost prudently. Q4 SG&A as a percentage of sales was down by 460 basis points year-over-year to 15.3%. The lower Q4 SG&A benefited from our reversal of certain portion of performance-based compensation, which have been accrued in earlier quarters, based on forecast that anticipated stronger results in both our Healthcare and Opto division's.

Our goal is to hold the SG&A growth rate below the rate of sales growth, though individual quarters may vary from this. For the year, SG&A as a percentage of sales was 18.4% versus 19.9% in fiscal ‘13. 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 $12 million in Q4 represented the highest level of any quarter in fiscal ‘14. We expect our R&D spending to increase in fiscal ‘15 as we continue to develop innovative technologies to broaden our product offerings and enhance future growth. We are seeing the results of these efforts in a number of new products that have been and are being released.

Restructuring and other charges were $3.1 million in the quarter and relate to costs incurred primarily in our Security division, stemming from contract issues with the U.S. government, as well as legal and other costs incurred in our corporate vision. These charges are excluded from both our non-GAAP EPS and our adjusted EBITDA.

Our effective tax rate for Q4 in fiscal ‘14 was 25.4%, as compared to 52.7% in the same quarter of the prior year. The Q4 fiscal ‘13 tax rate level was driven by a non-cash tax charge of $6.8 million, as a result of an election to accelerate the tax depreciation of certain fixed assets related to the Mexico turnkey operations. Excluding the impact of this charge, our effective tax rate in Q4 of fiscal ‘13 would also have been 25.4%.

This tax election opportunity is no longer available under Mexican tax law, effective for years beginning January 1, 2014. Our provision for income taxes is dependent on the mix of income from U.S. 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.

As we move down the income statement, our Q4 GAAP diluted EPS was $1.07 a new record. The Q4 non-GAAP EPS per diluted share, excluding impairment, restructuring and other charges, and the impact of tax elections just mentioned was $1.19, also a new record, compared to $1.02 in the comparable prior year period. For the full fiscal year ‘14, the non-GAAP EPS was $3.13 a share, compared to $2.76 per share in fiscal ‘13.

I will next turn to a discussion of our operating margin, excluding impairment, restructuring and other charges. The Q4 adjusted operating margin was 13% driven by double-digit operating margins of both our security and healthcare divisions and reduced corporate expenses.

The operating margin from our Security division was a solid 14.2%, down from the prior year due to the higher depreciation for Mexico operations previously discussed in the revenue mix. Our Healthcare division has the highest contribution margins in the company. As such the Healthcare operating margin is very sensitive to the topline. The 15% revenue decrease in that division resulted in a substantial year-over-year drop in the healthcare operating margin.

Similar to last quarter, our Optoelectronics division's margins were below prior levels, mostly due to the mix of revenues. We mentioned that we expected fourth quarter Opto operating margins would approve on a sequential basis, relative to the third quarter and in Q4 they did, in fact they improved by 60 basis points.

We continue to take steps to improve efficiencies in the Opto division, which we expect to primarily be reflected in the second half of fiscal 2015. Overall adjusted EBITA margins for OSI systems for Q4 increased year-over-year from 19.2% to 19.7%.

Moving to cash flow. We mentioned on the last call that we expected Q4 free cash flow to be neutral to slightly negative, given the investment in working capital to support the anticipated strong Q4. This proved to be accurate, as operating cash flow for Q4 was $5.3 million where capital expenditures totaled $6.8 million.

For the year, we generated a $129.2 million in operating cash flow and $74.2 million in free cash flow. Depreciation and amortization totaled $14.2 million in Q4, an increase of approximately $5 million from the fourth quarter of fiscal ‘13, primarily due to the ramp up of our Mexico turnkey program.

With respect to day sales outstanding or DSO, we are pleased with 22% year-over-year improvement as DSO was 65 days at the end of June, compared to 83 days last year. Our level of the DSO frequently fluctuates significantly from period to period.

Our balance sheet is strong and our leverage ratio remains well below 1. In May, we increased the size of our credit facility to $450 million and also reduced our borrowing costs, extended the maturity date and improved many other terms in the agreement. Our credit facility continues to provide the company with flexibility to execute our business plan.

And finally, turning to our fiscal 2015 guidance. We anticipate revenues in fiscal ‘15 to be between $960 million and $985 million. We generally provide overall company guidance rather than guidance by division or program. That being said, we believe the growth will be driven primarily by our Security division though we are optimistic about sales in our Healthcare division in fiscal ‘15.

Given the soft sales experience in the past two years, we would like to see another quarter or two before we project much sales growth for that division in fiscal ‘15. We do not expect much growth in our Opto division during the first half of fiscal ‘15, given very challenging comps in the first half.

We currently believe the 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 certain issues.

We expect to achieve year-over-year growth in fiscal ‘15 non-GAAP diluted earnings per share, excluding the impact of impairment, restructuring and other charges and the impact of certain tax elections of approximately 12% to 20% bringing us to $3.45 to $3.70 -- $3.75 per diluted share.

We currently believe this guidance reflects reasonable estimates. Actual results could vary from the anticipated ranges. However because of the risks and uncertainties applicable to our business and industry, including again, the timing of certain awards and the outcome of certain issues including those previously discussed.

During the past few years, we've built a strong foundation for growth. The investments that we made have enabled us to become the leader in turnkey screening solutions and to continue 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’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Ruttenbur with CRT Capital. Please proceed.

Brian Ruttenbur - CRT Capital

Yes. Thank you very much. Congratulations on a good fiscal year and a good quarter. The questions I have are pretty straightforward. Something that we’re not supposed to ask you about is Albania. Can you tell us if there is a potential for a write-off in terms of Albania?

Alan Edrick

Brian, this is Alan. Most of the costs that we've incurred to date that have been capitalized really relate to equipment, and that equipment is fairly standard equipment that can be used for Albania or other customers. The general operating expenses that we've incurred in that program have been expensed as realized.

Brian Ruttenbur - CRT Capital

Okay. So there is not going to be any one-time charge that you envision at this point related to Albania?

Alan Edrick

As we currently sit here today, we do not anticipate any.

Brian Ruttenbur - CRT Capital

Okay. And then in terms of other turnkey wins, this one appears to be going south but are you working on others and what’s the prognosis for additional wins?

Deepak Chopra

Brian, this is Deepak here. We've said it before we continue to look at these kind of turnkey opportunities. I've said it on many calls before that any large cargo sales opportunity can be a service turnkey provider or a turnkey provide opportunity can turn at the last minute to a sale.

So needless to say, I did say in my previous call that our pipeline and the fastest growing segment for our security business is in the cargo, both in equipment sales and turnkey services, and it continues to look very robust.

Brian Ruttenbur - CRT Capital

Okay. And then in terms of the TSA open letter, the big question is just going from history, how long can this open letter go in place or can it just go away. What’s the next thing that potentially could happen in terms of the DHS and the open letter?

Deepak Chopra

Well, as we have said before, we continue to work with DHS. We don't have any other input to give at this time, and I can't speculate on any timing either.

Brian Ruttenbur - CRT Capital

Okay. And then -- thank you Deepak. The question for Alan would be CapEx in fiscal ‘15 and cash flow in ‘15, you gave revenue and EPS, but it appears that cash flows would be very high and what is your CapEx for fiscal ‘15?

Alan Edrick

Sure, Brian. So excluding potential new turnkey wins, which we’re always optimistic about achieving, our general CapEx is -- should be somewhat below $30 million for the company, overall. So that would imply some pretty good potential free cash flow for us.

Important to note for fiscal ‘15 that differs from fiscal ‘14 are the taxes that we’ll pay given the election to accelerate depreciation in Mexico, which made a lot of sense from a business and a cash flow perspective, it lead to very low taxes in ‘14, will lead to a little bit higher taxes in ‘15. So that’s just one of the variables to factor into that equation, overall.

Brian Ruttenbur - CRT Capital

Okay. In ‘15 though, at least how I do back of the envelope, it appears that cash from ops or something should be approaching $100 million given your guidance range around the $100 million mark? Is that -- is that correct in ‘15 -- fiscal ‘15?

Alan Edrick

We do not think that’s unreasonable.

Brian Ruttenbur - CRT Capital

Okay. Very good. I’ll let somebody else jump in there. Thank you.

Alan Edrick

Thanks.

Operator

Your next question comes from the line of Tim Quillin with Stephens, Incorporated. Please proceed.

Tim Quillin - Stephens, Incorporated

Hi. Good morning.

Deepak Chopra

Good morning.

Tim Quillin - Stephens, Incorporated

I think I -- if I heard you correctly, the amount of Iraq FMS order that shipped in 4Q was $23 million. Is that correct?

Alan Edrick

Tim, this is Alan. Yes, that is correct.

Tim Quillin - Stephens, Incorporated

Do you have a sense, is that -- is that the way we should think about the pace of deliveries of the $102 million over the next few quarters or how do you expect that to be recognized as revenue?

Alan Edrick

Sure. Tim, this is Alan again. The pace won’t be linear. In fact, while we don't necessarily provide guidance by quarter per program, I would tell you that Q1 for FMS should be something like half of that number for Q1. And then we would expect it to accelerate beginning in Q2.

Tim Quillin - Stephens, Incorporated

Okay. And would you expect to complete deliveries under that order by the end of your fiscal ‘15?

Alan Edrick

We think that the majority of revenues will take place in -- by the end of fiscal ‘15. However, there's an expectation that there will be revenues that go beyond that as well for service and other components as well.

Tim Quillin - Stephens, Incorporated

Can you give us a sense of what the service tail is on the initial order, and then what is the hope or the expectations for additional orders?

Deepak Chopra

Well, Tim, this is Deepak here. For competitive reasons, I don't want to break it down but as you know that there is talk about more business there and we are well placed. Right now, our focus is to execute the program and we continue to look favorably to additional business.

Tim Quillin - Stephens, Incorporated

Okay. And then on the turnkey side of the business, do you expect the turnkey business in Mexico to have a little bit of a ramp still ahead of it in fiscal ’15 or was fiscal ’14 relatively full year?

Alan Edrick

Tim, this is Alan. Fiscal ’14 was a strong year. We are still not doing all of the sites. So there is an opportunity, if and when additional sites come online, there could be some additional revenue opportunities there. But fiscal ’14 in and of itself was a very strong year.

Tim Quillin - Stephens, Incorporated

Okay. And I don’t -- I know that you can’t say much about TSA, I don’t know if you said anything in your prepared comments about the FDA notice that you received? Is there anything you can say about that or what the issues were involved in that?

Deepak Chopra

Yeah. Tim, this is Deepak here. The FDA’s warning letter was for the observations with regard to our internal processes to a routine audit that every couple of years they come and do. We have a plan to improve those processes to meet or exceed the FDA expectations.

And like other companies, we continue to do better and have put in place processes -- process improvements and consultancy services to help us meet and exceed the expectations that the FDA has required.

Tim Quillin - Stephens, Incorporated

Okay. Okay. Fair. And then, with regards to the restructuring charge and I think, restructuring and other charges in the quarter, I think, part of that is on going cost and if I get exactly, how you phrased it, but around contractual issues with the government. Is that something and until you resolve your issues with the DHS that level of charge would continue into fiscal ’15 or how should we think about that?

Alan Edrick

Yeah. Tim, this is Alan. I think you are right in your assumption that some of those type of charges will continue into fiscal ’15 and may not be the same level that we just experienced in the fourth quarter, but I think it would be prudent to anticipate that you will see some of those costs in ’15 as well.

Tim Quillin - Stephens, Incorporated

Okay. And then just lastly, excuse me. Do you have specific backlog numbers for the overall company and for the Security business? Thank you.

Alan Edrick

Tim, this is Alan. The backlog number was north of $800 million, so to round it down to the $800 we talked about and the Security number was a little bit north of $700 million. So, very strong in each regard.

Tim Quillin - Stephens, Incorporated

All right. Thank you.

Operator

Your next question comes from the line of Jeff Martin with Roth Capital Partners. Please proceed.

Jeff Martin - Roth Capital Partners

Yeah. Hi, Deepak. Hi Alan.

Alan Edrick

Hi.

Deepak Chopra

Hi, Jeff.

Jeff Martin - Roth Capital Partners

So, could -- Alan could you give a sense of timing, there are two sizable cargo orders, the $13 million and $15 million orders, in terms of timing when that will fall in the fiscal ’15, generally speaking so we can model it with some accuracy?

Alan Edrick

Sure. Jeff, those two orders you are referring too, I think, we announced in May, very nice orders for our Rapiscan division. Generally some lead time associate with cargos, so we would expect those to ship most likely in the second half of our fiscal ’15.

Jeff Martin - Roth Capital Partners

Okay. And then could you give us an update on how things are going, you eluded to it generally, but anything some specifics on the Healthcare sales organization that you are working with? Have you added any? Are you seeing progress with certain of them and less with other system detail that would be helpful?

Deepak Chopra

Well, Jeff, this is Deepak here. We are disappointed, but confidently we can say, we did not lose any orders, it just getting pushed. So we have focused ourselves, as I mentioned in my presentation, working with GPO organizations on the IDNs. We are focusing more on our ARKON launch not just domestically in U.S. but internationally.

So, we are optimistic cautiously and we continue to look at where we can efficiently increase productivity. And overall, we are very much focused on to it and we think that 2015 we are going in with a much more confidence than 2014.

Jeff Martin - Roth Capital Partners

Okay. Great. And then, if you had to characterize your top three U.S. opportunities in Security what would those be in specific order?

Deepak Chopra

Well, we always maintain that the two fastest growing segments are cargo, both cargo equipment sales and turnkey, and the other opportunity is in the RTT, in the checked baggage, whole baggage screening opportunity.

As you know, that everywhere post 9/11, there's a lot of replacement demand up there, but what's happened in the last couple years in Europe, everybody has sort of pushed the deadlines, but sooner or later they have to replaced. And we are well-positioned our Oslo win has been a great success for us. We now have a -- what I call a Western Airport under our belt.

So, we are looking at these two opportunities, not to mention that the other ones on the trace detection and other places, but these are two major opportunities, cargo and whole baggage screening.

Jeff Martin - Roth Capital Partners

Okay. Great. Thanks very much guys

Operator

(Operator Instructions) Your next question comes from the line of Josephine Millward with Benchmark. Please proceed.

Josephine Millward - Benchmark

Hi, Deepak. Hi, Alan.

Deepak Chopra

Hello.

Alan Edrick

Hello.

Josephine Millward - Benchmark

Deepak, I was wondering if you can give us an update on timing of potential certification with TSA on RTT. Do you think we could see that happening in your fiscal year ’15?

Deepak Chopra

Josephine, hi. I mean, I do feel…

Josephine Millward - Benchmark

I know that’s your favorite question.

Deepak Chopra

Yeah. No. The thing is that. The first thing I want to emphasize is that whatever is happening with TSA on the DHS has no indication of any delay in our ability to get certification at DSA. We can confidently say that.

We are indeed in the test phase. It goes the same way because the blind test and I would like to make the same statement I’d made before that by the end of calendar year maybe, if you're lucky, by the end of fiscal year we are hoping that we will pass that hurdle.

Josephine Millward - Benchmark

Great. And can you talk about how potential U.S. government continuing resolution or shutdown or impact your outlook in the coming year?

Deepak Chopra

Well, obviously, we look at it cautiously. Keep in mind that our total focus of our business has been directed at the international arena, though in many places we still depend upon U.S. government funding like the FMS program.

But most of the programs that we are working with are funded and we look at the global picture and I meant it when I said that our pipeline has never been as healthy as strong as we've seen in the last quarter. We said we are going to have a very strong booking and we did that.

We believe the 2015 and it reflects in our guidance that there is a lot of opportunity all over internationally in Middle East and Africa, in Asia and Latin America. So we believe that overall, we will definitely have impact with the U.S. government’s sequestration, but we have maybe better position than some of our competitors.

Josephine Millward - Benchmark

Okay. Let me switched gear to Healthcare. You mentioned that ARKON contributed to your healthcare in Q4. Can you give us the number? And can you also expand on what gives you confidence in the recovery in ’15 given macro-environment remains as you know, quite uncertain?

Deepak Chopra

Well, number one, on ARKON, we started shipping in Q4. I did mention in my presentation that we have ramped up for volume production. Definitely 2015 we are expecting relatively a bigger growth in the revenue in Healthcare from the anesthesia ARKON product line than what happened last year.

What gives us confidence is that, there has been a tremendous push in the Healthcare system of EMR, electronic medical record. That is now sort of done and hospitals now are focusing from what we are hearing back to capital equipment procurement and our focus working with the GPO groups and with the IDN groups make us feel confident that 2015 will be a good year. We've also said, we did not lose any business and that gives us the confidence that some of that got pushed from 2014, we will book and ship in 2015.

Josephine Millward - Benchmark

Thank you and congratulations on the great year.

Deepak Chopra

Thank you very much.

Operator

Your next question is a follow-up from the line of Brian Ruttenbur with CRT Capital. Please proceed.

Brian Ruttenbur - CRT Capital

Yes. Thank you very much. I just want to drill down a little bit more on the medical weakness? I was wondering if there was a specific line, specific product that you're seeing weakness on?

Deepak Chopra

Brian, there is no specific product. The region wise, as you know we are very much dependent on U.S. still. U.S. was weak and again it got pushed. I think the important thing is that where the people could delay buying, they delayed it and we were expecting some bookings to happen in Q4 that we could ship out, it didn't happen in time. There is no product weakness as such. It's just geographic.

Brian Ruttenbur - CRT Capital

Okay. So the FDA situation didn't contribute at all to this weakness, right?

Deepak Chopra

No at all. As a matter of fact, the warning letter, we announced it before even the FDA published the letter, it happened after the quarter was over.

Brian Ruttenbur - CRT Capital

Okay. Thank you very much.

Operator

There are no additional questions at this time. I will now like to turn the presentation back over to Mr. Deepak Chopra for closing remarks.

Deepak Chopra

Thank you. I would like to thank everybody for joining our call. We are very excited about fiscal 2015 going into it with a strong backlog, with good products and we want to thank all people, especially the employees of the company for a job well done and we continue to look forward to an exciting year. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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