OSI Systems' (OSIS) CEO Deepak Chopra on Q3 2016 Results - Earnings Call Transcript

| About: OSI Systems, (OSIS)

OSI Systems, Inc. (NASDAQ:OSIS)

Q3 2016 Earnings Conference Call

April 27, 2016 04:30 PM ET

Executives

Alan Edrick - CFO

Deepak Chopra - CEO

Analysts

Josephine Millward - Benchmark & Company

Brian Ruttenbur - BB&T Capital Markets

Jeff Martin - ROTH Capital Partners

Les Sulewski - Sidoti and Company

Juan Molta - B. Riley & Company

Operator

Good day, ladies and gentlemen, and welcome to the OSI Systems’ Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference maybe recorded.

I would now like to introduce your host for today’s conference, Mr. Alan Edrick, Chief Financial Officer. Sir, please go ahead.

Alan Edrick

Thank you. Good afternoon and thank you for joining us. I’m 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’ third 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 this presentation is being webcasts and is expected to remain in our Web site located at www.osi-systems.com for at least two weeks.

Earlier today, we issued a press release announcing our third quarter fiscal year ‘16 financial results. Before we discuss these results, I would like to remind everyone that today’s discussion contains forward-looking statements. 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 Litigation Reform Act of 1995 with respect to statements 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 and statements regarding the expected 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 herein and 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 third quarter results, which is 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. Fiscal 2016 has been a challenging year, partially resulting from a tough comparison to the prior year, in which our security division recognized over $70 million in revenues on a foreign military sales contract. In several cases, we saw bookings and the timing of revenue push further out, stemming in part from customer decisions to delay purchases due to global economic conditions that are affecting budgets. In addition, we experienced difficulties in our healthcare division, which Deepak will discuss later.

During this call, we will provide our view on the current state of the Company’s markets and why we believe the Company remains well positioned for long-term success. The overview of our financial results for the third quarter of fiscal ’16 is as follows. First, we reported third quarter revenues of $211 million, a 2% year-over-year decrease. We entered the quarter with a difficult comparison with approximately $16 million of revenue recognized in the prior year period associated with the foreign military sales contracts with the U.S. Department of Defense for use in Iraq. Excluding this FMS contract, sales were up by 5% for the quarter due to the performance of our security division, which included revenues associated with a large Middle East contract in Albania, our latest turnkey program, where all sites became fully operational during Q3.

Strong security division sales were offset by significantly weaker than expected sales in our healthcare division. Second, we reported Q3 non-GAAP diluted earnings per share, excluding impairment, restructuring and other charges, of $0.64 compared to $0.78 in the prior year quarter. This change is primarily driven by the decline in sales in the healthcare division, which delivers the highest contribution margin of our three divisions.

Third, free cash flow, which redeploy as operating cash flow less capital expenditures, was $17 million for the quarter. This cash flow was used to complete throughout the acquisitions in the quarter. In addition, we were active in our stock buyback program, repurchasing nearly 5% of our outstanding shares in Q3. And fourth, our non-turnkey Q3 book to bill ratio was about 1.0. For the first nine months of fiscal year 2016, bookings were up 30% over the first nine months of fiscal ’15, driven primarily by the security division.

Before diving into more depth behind the numbers, let me turn the call over to Deepak.

Deepak Chopra

Thank you, Alan. And again good afternoon and welcome to the OSI Systems earnings conference call for the third quarter of fiscal 2016. During the quarter, we focused on meeting the challenges in the global markets while continuing to drive ongoing improvement initiatives throughout our organization. For example, in security, we reduced our cost base and are in the midst of improving certain manufacturing process to enhance efficiency and lower product cost.

In opto division, we effectively completed efforts to shift the business mix to a more profitable revenue base. In healthcare, we recently brought a new leader, which I will talk about a bit later in my presentation. With the backlog of approximately $661 million and a strong pipeline of sales opportunities, we believe that we are well positioned with our customers over the longer term.

Let's review the highlights for the quarter for each division, starting with the security division Rapiscan. Q3 sales were $111 million or about 11% higher than the prior year. We are pleased with this revenue growth given that Q3 comp was made tougher with the prior quarter as it contained about $16 million in the FMS revenues that Alan mentioned. Our bookings during the quarter were approximately $73 million or about 9% higher than the level achieved in Q3 of the prior year, and about 10% higher sequentially from Q2, representing a non-turnkey book to bill ratio of just under 1.

Few business highlights. Momentum with our new Rapiscan real time topography offering continues as we see a number of RFPs in this space as European airports continue to upgrade their baggage screening infrastructure to meet the latest standards by 2020. Manufacturing capacity for this product line has improved and the ramp up will continue over fiscal 2017. Although, we still have some manufacturing inefficiencies that come to any new introduction, and in the short term affects the product margins that are ultimately achievable.

As we mentioned in our last conference call, a push out in an ongoing project in the Middle East, which delay the revenues in Q2 is now progressing well and generated approximately $23 million in revenues in Q3. Further revenues from this project are anticipated in Q4 and the first half of fiscal 2017. During Q3 we continued our expansion in emerging markets, with significant wins in Asia for both cargo and conventional products.

We believe that our wide range of products for screening people, baggage and cargo, combined with our ability to offer global maintenance service and support provides a compelling value for our customers globally. To that end we also had notable successes closer to home where we were awarded multiple contracts from both government and commercial entities in Canada, for security initiatives for Canadian land and sea borders utilizing our cargo inspection system Eagle G60 and our check point baggage inspection systems Model 620 and 628 Blue Wheels. On the turn-key services front Mexico, Puerto Rico and Albania turn-key screening service contracts continue to perform well and we continue to add new opportunities to the turn-key pipeline.

We are pleased that the ramp up in Albania went as expected and by quarter end all sites are fully operational. We are working actively on multiple other turn-key opportunities but as you know given the size and the complexity of these projects and geographic locations the timing of such awards is difficult to predict. Our overall long term pipeline the Rapiscan products and screening services continues to be strong but global economic uncertainties in various regions have definitely affected near term timing and visibility in several instances. We believe that long term upgrade cycles at airports, government responses to recent events in Europe continuing security threats across the Middle East and a strong desire by nations to minimize contraband flow across borders will remain our growth drivers. At Rapiscan we are continuing our efforts to upgrade technology so we can be well positioned to capitalize on long term growth opportunities.

Over the next few months we will implement initiatives aimed at further reducing the cost to improve this divisions operating performance as we deal with any resulting delays in customer orders and manufacturing inefficiencies. Moving to the healthcare division, Spacelab revenues declined in the third quarter to 49 million which was disappointing. As you know hospital spending has been generous over the last couple of years and we saw even less activity in Q3. In addition to market dynamics the division's operational execution and performance contributed to the disappointing results. I should note here that we had a very tough fourth quarter comp in healthcare as we had 79 million in revenues in the fourth quarter of the prior year. A record quarter that included large wins for major hospital networks that we do not expect to repeat this quarter.

We recently hired a new president of Spacelabs Mr. Sujit Kumar who is an industry veteran having served in various global leadership capacities at GE Healthcare, Philips Healthcare, Healtheon Group and Roper Technologies. We are excited to have Sujit on board earlier this week and he will initially address the division's execution gaps and help renew the team's focus o customers, quality and dedication to meeting all commitments. Moving to our Opto Electronics and manufacturing division in Q3 profits were again up despite revenues declining by about 6% year-over-year. Operating margin was approximately 9.6% excluding impairment, restructuring and other charges making it the ninth consecutive quarter of operating margin expansion at Opto. The Opto team also completed two small acquisitions during the quarter which were both accretive to the margin.

The first acquisition was an electronics manufacturing service provider based in the United Kingdom, this acquisition increases our manufacturing footprint and customer base in a region we consider to be strategic for growth. The second acquisition was an engineering services provider based in northern California to expand our technical capabilities for the OEMs. These acquisitions demonstrate our commitment to growing our capabilities and increasing win strategy with OEMs in growth market involving technology to industry leaders. At Opto a couple of years ago we embarked on improving the sales mix and focusing on identifying opportunities for margin expansion. We have been able to shed unprofitable or low margin contracts and drive improved profits even as sales decline during this transition.

In fiscal 2017 and beyond we expect to return to growth in our Opto division with a full impact from the acquisitions and a customer and revenue base that we can build upon and summary other than in healthcare Q3 performed in line with our expectations.

Now let’s discuss Q4 and the future. As you know, we reduced full year guidance midway through the year to account for some shortfalls in healthcare and timing of security revenues. Unfortunately, the healthcare challenges have continued and the timing of certain security awards was further out than expected. As a result, we are reducing our revenue and earnings estimate for Q4. Alan will go into this in more detail. But let me now provide a few thoughts on the low revenue and earnings guidance.

The primary factors for lowering our revenue guidance are as follows. First, delayed timing of security orders has made it difficult to achieve the corresponding product deliveries in Q4. These order delayed are due in part to lower government budgets as a result of government revenue shortfalls stemming from oil prices, global economic weakness and various other macro economic factors. With higher Q4 revenue contribution from RTT and cargo, we will also experience a shift to a less favorable mix that will adversely affect margins. As we have mentioned, RTT is still in an early ramp up phase for production and we expect that margins will improve for this product over time.

Second, the reorganization efforts taking place in the healthcare division to improve sales, operational and leadership issues will take time to positive impact results. We have started these efforts in earnest and think it will take another quarter or so to see the positive impacts from these efforts. So, we would consider Q4 to be a transition quarter where sales are expected to be up sequentially but down substantially from Q4 of the prior year, against the tough comp as mentioned earlier, which would have an impact both on revenues and EPS. And the third is general global market uncertainty. As we’ve all seen in recent months, global concerns about, both across industries and regions, have risen and in short term these have effective buyer behavior in the healthcare and security divisions and to a lesser extent in the industrial markets which opto serves.

We are confident of the future, however, as the overall bookings are being solid. Heading into fiscal 2017, we believe the Company is in a good position in its core markets as our products, services and global support capabilities stand out in the marketplace. We have demonstrated innovation, and also demonstrated in the past, the ability to successfully address internal and external challenges, while continually improving our organization. We look forward to build the momentum heading into next year. As always, I would like to thank our employees, customers and stockholders for their continued support.

With that I am going to turn the call back to Alan to talk in detail about our financial results before opening the call for questions. Thank you.

Alan Edrick

Thank you, Deepak. Third quarter results were largely in line with expectations as Deepak mentioned, except for the healthcare division, which was considerably softer than anticipated. As we said, revenues in the third quarter of fiscal ’16 decreased 2% year-over-year, security division revenues increased by 11%. If we exclude the impact of the FMS contracts, previously mentioned, security division revenues increased 32%. These fiscal 2016 results reflected $23 million of revenues for previously announced large order for customer in the Middle East. This was offset by reduced, albeit at higher margin revenues in the opto division, as well as by the disappointing healthcare revenues which were down 17% in Q3.

In Q3, gross margin was 33.2%, down 50 basis points from the prior year, mostly due to the decline in sales in our healthcare division, which as noted earlier, delivers the highest gross margin, highest contribution margin of our three divisions. 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 Q3, selling, general and administrative expenses, or SG&A, were up slightly by $1.2 million as a result of higher professional fees and transaction costs associated with M&A activities. Our goal continues to be to hold the SG&A growth rate below the rate of sales growth, for individual quarters may vary from this as has been this past quarter. As noted on previous calls, we remain committed in all of our divisions increasing efficiencies and prudently managing our cost structure.

We continue to make significant investments in research and development in both our security and our healthcare divisions to expand our product offerings and improve our existing offerings. The R&D spending of $12.9 million in the third quarter was slightly higher than the same quarter in the prior year. And as a percentage of revenue, this represented an increase of 6.1% from 5.8% in the same quarter in the prior year. We remain focused on growth platforms and new innovative products our teams are developing, which we view as vital to the long-term success of our business.

The company's effective tax rate was 26.3% for the third quarter and 27% for the first nine months of the fiscal year '16. Our provisions for income tax is dependent on the mix of the income from the US and foreign jurisdictions due to tax rate differences among countries as well as the impact of permanent taxable differences, taxable actions and valuation allowances among other items. Q3 impairment restructuring and other charges were 4.5 million which included severance charges in acquisition and legal cost. Now let's turn to a discussion of our operating margin excluding impairment restructuring and other charges. The OSI adjusted operating margin was 8.5% in Q3 compared to 6.0% in Q2. We are pleased again to see strength in the Opto division as the adjusted operating margin increased to 9.6% in Q3 this year from 8.4% in Q3 last year, marking the ninth consecutive sequential quarter that Opto's operating margins have improved.

The security division's adjusted operating margin was 14.3% in Q3 as compared to 15.5% in Q3 last year. On a sequential basis comparing Q3 of this year with Q2 of this year the security division's operating margins improved 490 basis points. The healthcare division's operating margins however are extremely sensitive to the topline, given the strong contribution margins and most of the product lines in that division. Therefore when sales go up the operating margin generally follows but as we mentioned before the inverse is also true but the decrease in the healthcare division's revenue the adjusted operating margin declined to 3.0% in Q3 this year from 7.9% in Q3 of last year. Moving to cash flow and the balance sheet for Q3 of fiscal '16 we reported operating cash flow of approximately 21 million, capital expenditures were 4 million while depreciation and amortization was 14.5 million.

Days sales outstanding or DSO was 69 days for this quarter as compared to 70 days in Q3 of last year. Inventory increased 10 million from Q2 and was up 61 million from the beginning of the fiscal year, this increase was primarily to support future sales in the security division and includes a significant number of Rapiscan RTT units which have been shipped but for which revenue has not been recognized and that continues to be accounted for as inventory. In addition inventory in the healthcare division was up as sales were expected to be significantly higher in the quarter. We spent approximately 17 million to complete the two acquisitions and also we purchased 902,000 shares in Q3 at an average price of about $56 leaving 53,158 shares available on the buyback authorization as of March 31st. Subsequent to quarter end our board approved an additional 1 million share buyback program.

Our balance sheet remains strong and our gross and net leverage ratios at quarter end was below one. Our credit facility continues to provide the company with the flexibility necessary to execute our business plan. Finally turning to the updated guidance. With the challenges that Deepak described in the healthcare division coupled with defining changes in security we've adjusted our fiscal year 2016 guidance. With one quarter to go Q4 revenues are currently projected to be between 230 and 255 million. This reflects the significant expected year-over-year Q4 decrease in healthcare which is anticipated to have a big impact on EPS as this division carries the highest contribution margin of the three divisions. Given the April sales guidance fiscal year 2016 non-GAAP diluted earnings per share which excludes the impact of impairment, restructuring and other charges is accordingly being revised. With Q4 expected to be $0.45 to $0.70 per share.

We currently believe that this sales and earnings guidance is based on reasonable estimates, actual sales and earnings however could vary from this range because of the risks and uncertainties that affect our business and industries generally, including items that are often not entirely within the company's control such as site awaiting its product installation, customer acceptance and the timing of orders in each division.

Over most of the past decade we've demonstrated a strong track record of sales and earnings growth with strong free cash flow generation while simultaneously investing in the future, our investments have enabled us to continue our leadership role in the turn-key screening solutions market space and allowed the company to introduce innovative products and services to the market across our industries. Though this year have not been in line with our consistent past strong results we look forward to improvements and sharing our future progress in upcoming calls. Thank you for participating in this conference call and at this time we would like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Josephine Millward with Benchmark Company, your line is now open.

Josephine Millward

Yes, good afternoon Deepak, Alan. Can you help -- can you expand on what's driving the continued weakness in healthcare? What are these operational and execution gaps, because your healthcare competitors are not facing the same level of contraction in their business?

Deepak Chopra

Josephine we talked on the last conference call so I'll give you a little broader so, one is that, some of the -- we have introduced -- of new products over the year and whenever you have new products basically anticipate some challenges, but you are working at that time for the acceptance of the new products in the marketplace. But you’ve also said that a year ago we got a very good success with a lot of what we call the placement from other peoples install base with Spacelabs that generate some extra bit of variation where you want to make people start working more differently to our products than what they are used to.

We miscalculated, the management miscalculated the amount of time and training and handholding that was needed, which we talked about in the last conference call we have chained it and that also resulted in our decision that we wanted to change the leadership, which we have done as we mentioned that we got a new President on Board this week. But the focus is to put more focus on customers’ acceptance of the change as they go through from other competitors’ products to our products.

Josephine Millward

Deepak, can you also comment on Smiths’ acquisition of Morpho Detection. How do you see that changing the competitive landscape? And do you anticipate further industry consolidation?

Deepak Chopra

Well, it's a -- we were aware of it, and more than that I won’t say in terms of make it a pretty small industry. Definitely they become a formidable player. But we have all the products accepting phase, we don’t have much presence in it. But in all the other areas, we have heavily invested for a long time our own product line. We have an install base. We have an engineering base. We have a sales channel. We have a large installation all over the world. We’re getting success with our RTT. So, we are ready for the challenge, but definitely that combination makes it stronger and stronger competitor and they still have some hurdles to go from the anti-trust side.

Josephine Millward

And last question is for Alan. Alan, can you tell us what is the revenue contribution from your opto acquisitions?

Alan Edrick

Josephine it was about $4 million in the quarter between the two acquisitions, they’re two small acquisitions that were done that did not get a full quarter’s worth of revenues so they’re done throughout the quarters.

Josephine Millward

And for the full year for Q4, what do you accept?

Alan Edrick

We’ll say it increase to $5 million to $6 million.

Operator

Our next question comes from the line of Brian Ruttenbur with BB&T.

Brian Ruttenbur

So, Josephine asked lot of the good questions already, but I am going to hit you with another ones. In terms of tax rate, you mentioned -- what is the tax rate going to be in the fourth quarter on your EPS guidance?

Deepak Chopra

We’re presently anticipating it to be in the mid-20s.

Brian Ruttenbur

And then Albania started, you said in the third quarter, how much revenue did that contribute?

Deepak Chopra

No, we don’t generally talk about revenues by project. But as you know, Albania at full run rate is in the neighborhood of the $12 million to $13 million a year, increasing on an annual basis.

Brian Ruttenbur

In terms of the third quarter security revenue, was the strong security revenue in the period related to delays that happened in the second quarter?

Alan Edrick

Brian, this is Alan. Yes, that was partially attributable. We had $23 million in revenues from a Middle East order, part of that was anticipated to ship in Q2 so that move from Q2 to Q3. So, you’re right.

Brian Ruttenbur

And then we already got the acquisitions of size on the opto side impairments going forward in the fourth quarter, in third quarter you had I think $3.5 million, $1.2 million of that was related to security. Can you talk about those impairments? What was in the security division, the specific impairment, was it a write off of bad equipment or something?

Alan Edrick

No, some cost reduction efforts we were doing, so primarily severance.

Brian Ruttenbur

And then planned impairments in the fourth quarter, do you have any -- I assume you have some impairments or reductions in the fourth quarter?

Alan Edrick

We will. We’re continuing as Deepak mentioned with further cost reductions in the security division and looking elsewhere in the Company as well. So while we don’t have a number, but that restructuring charge will be in Q4. We should plan on there being restructuring charges in Q4.

Brian Ruttenbur

And your guidance of $0.45 to $0.70 excludes restructuring. Is that correct?

Alan Edrick

That’s correct Brian.

Brian Ruttenbur

And then just understanding the guidance for the fourth quarter, and I’ll be quiet, is the -- a lot of the shortfall, it appears to be happening in two divisions in the healthcare and the security, opto for the most part is performing as planned, is that correct? Is that a correct summary?

Alan Edrick

That is a correct summary.

Brian Ruttenbur

And then Deepak last one, and I said it was last one, but one more. You expect to recovery of Healthcare and Security sometime in 2017, beginning of 2017, mid 2017, when do you expect both divisions to recover to former glory.

Deepak Chopra

We are planning very focused on it in 2017 now, I mean depending on what you define by early, we're going to -- as Alan mentioned, as I mentioned we're going to take some impairment charge even in Q4 so we'll start looking at efficiency and productivity improvements as we go into the 2017 and we'll continue.

Brian Ruttenbur

Great, thank you very much.

Operator

Our next question comes from the line of Jeff Martin with Roth Capital Partners.

Jeff Martin

Thanks, good afternoon guys. Was just curious if you could outline maybe a high level summary in terms of the benefits of additional operating efficiencies that you're putting in place, and do you have a timeline on when those should be largely completed.

Deepak Chopra

Well, this is Deepak here, on the efficiency as I've mentioned on the RTT manufacturing side it'll continue, I said in my script that it's going to take us a quarter or so, at the same time I've mentioned Alan and both of us said we are looking at some cost savings by looking at the total structure in the security area, our target is that when all done it will result into a annualized saving approximately of 10 million bucks,

Jeff Martin

Okay and that's just on the security side of that's companywide.

Deepak Chopra

That's on the security side, we're looking at the healthcare side too, our focusing right now is on the security side with additional looking at both security and on the healthcare.

Jeff Martin

Okay and then can you remind us when your contract with Mexico is up for renewal and shed any light on, that the progress, if there are any discussions on the renewal at this point.

Deepak Chopra

The [indiscernible] age is 2018, and we said in the last conference call I think Brian asked obviously too early to talk about renewal sometime by this time next year we will start into discussions, we're a very satisfied customer.

Jeff Martin

Okay, great. And then, in terms of the guidance revision, could you touch on in security which particular product lines you're seeing pressure within. Is it across the borders, specific to cargo and RTT or cargo and something else.

Deepak Chopra

Primarily it's cargo, as I mentioned that some of the orders that we got we just don't have enough time to ship them out, some of the orders, just like what happened in Q2 that pushed by the customer, no fault of ours, by the customer's request and that is what we're seeing in the global press in the cargo primarily and on the RTT side it's not push outs it's the acceptance and when we can recognize that and we said that in the last conference call also that 2016 was trying to push some of that [indiscernible] into 2017, Alan you want to add something.

Alan Edrick

Yes, that's correct.

Jeff Martin

Okay. And then are you expecting revenue growth in 2017 at this point?

Alan Edrick

Jeff we haven't given 2017 guidance, we'll be doing that in our next call our goal as a company overall is always grow.

Jeff Martin

Okay. Thanks for taking my question.

Operator

Our next question comes from the line of line of Les Sulewski with Sidoti & Company.

Les Sulewski

Good afternoon. Thank you. Deepak could you provide a bit of a high level regional breakdown on what you're seeing in your security and also if you'd expect any increase RFP in turnkey solutions given some of the global weakness?

Deepak Chopra

We said it in -- we've seen no degradation in our pipeline, there's a lot of activity everywhere and what’s changed little bit in the marketplace is the predictability of when a certain order is booked and then the new variable is when the customer expects and wants the delivery of that order. Our pipeline is quite strong, cargo specifically the RFP activity in RTT especially in Europe is quite strong. BPI product line has also very good strength and on the turn-key side definitely with all the volatility everywhere and you can’t open the paper any day without seeing some bad things happening in places. Our activity is out there, it's very difficult to predict the closure of whatever we're working on.

Les Sulewski

Okay, that's helpful. Alan perhaps your fourth quarter guidance and if we're looking at the midpoint EPS there and outside of contribution margins from the healthcare since that will be lower, are there any additional expenses that you expect for 4Q that move into the next year as well. And also that EPS assume a share repurchase there in the quarter?

Alan Edrick

So Les, there are no incremental expenses of material nature in Q4 that are anticipated that at this point in time so nothing that would carry over into next year. And that guidance does not imply, at this point, any incremental share repurchase, so that certainly at our option.

Operator

Our next question comes from the line of Juan Molta with B. Riley.

Juan Molta

On the healthcare, could you talk about what lines of business in healthcare you’re seeing weakness in, and if it's more international or more domestic?

Deepak Chopra

I think at this stage, definitely internationally it's very-very weak and unpredictable. But we’ve seen some push outs even in the U.S. side. It’s basically globally the way we look at it. And we have to say that since we are primarily then take into the patient monitoring side. There is weakness there, especially in international site.

Juan Molta

In the past you’ve released a healthcare book to bill. Is that something that you can release and have at this time?

Alan Edrick

Our book to bill in healthcare, almost always is right around 1, because it really is a book and shift business. And so it always will vary plus or minus right around 1, not just on a big backlog business.

Juan Molta

And my another question on healthcare. Have you lost out in any way to gauge if you’ve lost out on competitive situations and getting product solid to hospitals?

Deepak Chopra

Well, we like to say no. But frankly speaking I am sure that some -- we win some, we lose some. We haven’t seen what would say any significant losses. We see lot of push outs. Last year, year ago, we have a very successful Q4 where we do a lot of conversions from our competitors to Spacelabs products. We haven’t seen that aggressive activity at present.

Juan Molta

And then another one, since you your new leader in place, is there any more color you can provide as to what the kind of action is to get that healthcare segment backup and running and growing again? Anything else you can share.

Deepak Chopra

Well, I think it's kind of the pace, we’ve said focused and to ripped up execution of what we got in the product line. We place the product. We want to make sure the customer is happy. We want to place it in a timely fashion. And we want to get more -- protect both of timing and the specification and product definition and the R&D. We want to look at better leadership role of what I would call execute the commitments made to customers, and at the same time, defining the vision of new product introductions.

Operator

I am showing no further questions in queue at this time. I’d like to turn the call back to Deepak Chopra for closing remarks.

Deepak Chopra

Ladies and gentlemen, thank you once again for attending our conference call. We look forward to speaking with you all once again in August for Q4 and our year-end call. I want to emphasize that the management is very much focused into it. Some of the things, especially healthcare have been disappointing. We are addressing it. We’ve got a new leader in place this week. Alan and I are committed to reduce the cost in the security side and to look at more predictability in our book and ship in a timely fashion the healthcare products and the quality of the products. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program, and you may now disconnect. Everyone, have a great day.

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