Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

OSI Systems, Inc.

F4Q08 Earnings Call

August 27, 2008 12:00 am ET

Executives

Alan Edrick – Executive Vice President and Chief Financial Officer

Deepak Chopra – Chairman and Chief Executive Officer

Ajay Mehra – Executive Vice President OSI Systems and President Rapiscan Systems

Victor Sze – Executive Vice President, General Counsel, and Corporate Secretary

Jeremy Norton – Vice President of Investor Relations

Analysts

Joshua Jabs- Roth Capital Partners LLC

Brian Rottenbur – Morgan Keegan & Company

Michael Kim – Imperial Capital

Josephine Millward – Stanford Group Co.

Timothy Quillin – Stephens Inc.

[John Zora] – [BCN]

Operator

Welcome to the fourth quarter 2008 OSI Systems earnings conference call. (Operator Instructions) I will now like to turn your presentation over to Alan Edrick, Chief Financial Officer.

Alan Edrick

I’m Alan Edrick, Executive Vice President and CFO of OSI Systems. I’m here today with Deepak Chopra, our President and CEO; Ajay Mehra, President of our Security Division, Rapiscan Systems; Victor Sze, our General Counsel; and Jeremy Norton, our VP of Investor Relations.

Welcome to the OSI Systems 2008 fourth quarter and year-end conference call. We’d like to extend a special welcome to anyone who is a first-time participant on our conference calls. Please also note that this presentation is being webcast and will remain our website for approximately two weeks.

Before discussing our financial and operational highlights, I’d like to read the following statement. In connection with this conference call, the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking statements under the act. Such forward-looking statements could include general or specific comments by company officials on this call about future company performance, as well as certain responses to questions posed to company officials about future operating matters.

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 complete information regarding non-GAAP measures, the most directly comparable GAAP measures and quantitative reconciliation of these figures, please refer to today’s press release regarding our fourth quarter results. The press release will also be filed with the SEC as part of a Form 8-K.

The company wishes to caution participants on this call that numerous factors could cause actual results to differ materially from any forward-looking statements made by the company. These factors include the risk factors set forth in the company’s SEC filings. Any forward-looking statements made on this call speak only as of the date of this call, and the company undertakes no obligation to revise or to update any forward-looking statements whether as a result of new information, future results, or otherwise.

With that disclaimer out of the way and before turning the call over to Deepak, I will provide a high level of overview of recent accomplishments.

As highlighted on each of our conference calls over the past year, we have placed significant emphasis on specific initiatives to improve our profitability; and we continue to be pleased with the rapid progress we are making. Our fiscal year 2008 financial results demonstrated significant improvement and provide clear evidence that the changes we embarked upon in fiscal 2007 and continue to build upon in fiscal 2008 are leaning to sustainable improved earnings performance.

Q4 and fiscal year highlights are as follows: First, we reported a 12% increase in fourth quarter sales. For the year, we achieved a 17% increase on the top line with all three of our divisions reporting double digit growth.

Second, as mentioned on our last call, the changes we have made throughout the organization, including the successful cost rationalization efforts, are clearly paying off as our operating income, excluding impairment, restructuring, and other charges, increased 55% in Q4 on a 12% increase in sales, demonstrating the leverage we have been speaking to. For the full year, our operating income increased approximately $29 million, excluding non-recurring amounts. Each division contributed significantly to this turnaround in fiscal 2008.

Third, excluding non-recurring charges, the combination of increased sales coupled with our streamline cost structure led to EPS of $0.36 for the fourth quarter of 2008 compared to $0.16 last year. For the full year, coming off fiscal 2007 where we lost approximately $0.30 per share on a normalized basis, we provided aggressive initial earnings guidance last year as $0.60 to $0.75 per share for fiscal ’08 excluding non-recurring charges. We are pleased to report that we delivered EPS of $0.74 for fiscal 2008, again, excluding one-time charges, which was at the high-end of our initial range and an improvement of $1.04 from fiscal ’07.

Fourth, we showed significant improvement in our goal of generating positive free cash flow. In the fourth quarter of fiscal ’08, we generated over $9 million of operating cash and $5 million of free cash flow after generating $2 million in our third quarter. This was our strongest operating cash flow in our company’s history.

As the financial turnaround is in full swing, we have done so while continuing to position the company for future growing, including substantial R&D investment of 7.3% of sales. The year was also marked by strategic initiatives, including the repurchase of 100% of Spacelabs and it’s subsequent delisting for the aim, the opening of a new healthcare manufacturing facility in China, which we believe will open up new markets to our sales channel as well as provide a lost manufacturing environment, successfully obtaining a new credit facility and the launch of several new successful products by our security division.

We still have many challenges ahead of us, but we believe we are situated to capitalize on our plan for both near-term and long-term earnings growth. I’ll be updating you further on the financial performance of the company, but first let me turn the call over to Deepak.

Deepak Chopra

This has been a very good year for the company. 2008 was a challenging year. We committed to you the people over the last couple of quarters that we are focused to grow our top line wisely and bring more emphasis on the bottom line.

We are happy to announce, as Alan has mentioned, that year-on-year revenue increased by 17% to a record $623 million. While excluding the impact of impairment restructuring and other one-time charges, operating income improved by approximately $29 million to an operating profit of $24 million versus a loss for the year before; and earnings per share improved by approximately $1.04 resulting to $0.74 per diluted share on a normalized basis from last year earlier.

On a divisional basis, all three businesses finished the year on a very positive note. Security: Our Security Division, Rapiscan System, again reported solid revenue with the revenues for the fiscal year increasing by approximately 20% to $226 million. Booking for the fiscal year was strong as represented by the company’s backlog of $212 million at the end of the fiscal year, although down slightly but the year a Security backlog was up. Since June 30, 2008, we have announced the receipt of $4 million in check baggage inspection systems and a $27 million contract for multiple Rapiscan Eagle mobile cargo and vehicle inspection systems. We believe our Security Division is on track to achieve strong bookings in the first quarter of fiscal 2009.

As you know, we’ve said before on the last year’s conference call that Q1 which coincides with the U.S. Government’s ending year, time is a big thing for us bookings. Obviously during question-and-answer, we will take some questions. But again like last year, we are very cautious and might not be very open to talk about it because it involved in trying to get a big share of this year-end money.

Bookings in fiscal 2008 were led by a strong improvement in product sales for our cargo and vehicle inspection product line. The market for this product line has increased with petition levels again at an all time high, both domestically and globally to some extent as a result of the U.S. Government’s initiative to provide 100% inspection of all inbound cargo by 2012. We continue to invest money in R&D. Our product line we believe is the broadest in the industry, and we believe that we are positioned to continue to capitalize on this market.

During the fiscal year, we announced the introduction of many new products like the new advanced technology baggage and parcel inspection systems for carry-on. The Rapiscan 620 Dual View and the Rapiscan MVX1 are a result of changing trends within the aviation security market with extra systems going from single to multiple view systems. These systems are expected to not only improve detection capabilities, but also will expedite the inspection process.

In August 2007, we announced the receipt of an indefinite delivery indefinite quantity order from the TSA for our Rapiscan 620 Dual View. The TSA is currently going through a replacement cycle to upgrade the checkpoint inspection process. To date, we have essentially shared this replacement cycle approximately 50/50 with one other competitor. Looking to fiscal 2009, we expect to see continued replacement cycle business both from the TSA and also internationally.

In summary, the short-term catalysts that is driving the growth in this business for us is the continued growth in the cargo/vehicle inspection market globally, the continued deployment by TSA of the next generation advanced baggage and parcel inspection systems, the U.S. Government initiative for 100% of air cargo to be inspected by February 2009, the U.S. Government initiative for 100% of inbound shipping containers to be inspected by 2012. All these we believe will continue to grow this market both domestically and internationally. Not to mention, as we have said in the previous conference calls, that we are also getting a lot of success in the department of defense business for protection their facilities in the international arena.

Lastly on the Security, we continue to invest in our high-speed CT real-time tomography product. As we have said before, we will start showcasing that product some time in the late 2008, beginning 2009 calendar. We are very excited about it. That market will open up new opportunities, especially in the area of check baggage worldwide.

Healthcare: Our Healthcare Division, Spacelabs Healthcare also had a strong turnaround in fiscal 2008. The revenues for the fiscal year increased by approximately 10%, while the division improved, excluding the impact of impairment and restructuring charges, from an operating loss of $3 million in fiscal 2007 to an operating profit of $15 million in fiscal 2008. Our sales funnel remains robust indicating we expect to see continued growth in fiscal 2009. To date we have not been impacted by slowing Medicare reimbursements here in the U.S. market. However, as we have said on every conference call for the last two or three quarters, we continue to monitor the situation very closely, both domestically and internationally.

Our monitoring business reported growth in all regions of the world, meaning domestic, Europe sector, and Asia Pacific. In February 2008, we announced the opening of our manufacturing and R&D facility in China. The facility once fully integrated into our manufacturing and supply chain operations is expected to positively impact gross margins for the company. One of the key initiatives of the facility is to develop a dedicated product line offering for the emerging markets.

This month we announced the launch of the elance product line, a revolutionary change in the design of lightweight patient monitors. Its compact design is suited to a broad range of international markets providing connectivity and high performance in the critical care environment. It is the first product designed by the Spacelabs Healthcare Global Development Team based at Spacelabs Healthcare new facility in China.

Short-term catalysts for this business going forward for 2009 are as follows: launch of the elance product line in selected markets globally, especially the emerging markets in Asia Pacific and Latin America, build out of dedicated product offerings for the emerging markets, continued growth of the anesthesia business within the U.S. market, and continue to work on our R&D to launch our next generation products in the near future.

Optoelectronics and Manufacturing Division: Our Optoelectronic and Manufacturing Division, OSI Optoelectronics, performed well in fiscal 2008 with external sales increasing by 25% year-on-year, while operating income, excluding the impact of impairment and restructuring charges, also increased by approximately 25%. Intercompany sales during the fiscal year also increased by approximately 24%.

The growth in external sales in fiscal 2008 was primarily a result of contract awards for electronic subassemblies for the U.S. Department of Defense, MRAP, Mine Resistant Ambush Protected armored vehicle program. After the conclusion of the fiscal year, we announced a further contract award of $10 million, bringing the total value of contract awards to date for this critical program to approximately 65 million.

As mentioned in our previous conference calls, one of the segments in the Optoelectronics [inaudible] Group that was dragging us down, was the last generating Orlando-based weapon simulation business. That business, finally, we can announce we have put it behind us; it has been closed and as of today, we have zero employees left in Orlando on this business.

In conclusion, as mentioned, bookings in fiscal 2009 have been positive for the company as evidenced by the Security division has become the year positively with our recent announcements. This has provided us with good visibility for the remainder of the fiscal year to achieve our fiscal 2009 earnings guidance of $1.07 to $1.22 with revenue in $660 to $680 million.

With that, I’m going to hand over the call to Alan for financial details. After that, we’ll take the questions.

Alan Edrick

Consistent with the message from each of our calls this past year, our management team remains highly focused on driving earnings and cash flow improvement. I’ll speak more about this shortly, but first let me review the financial results of the fourth quarter. As previously mentioned, net sales for the fourth quarter increased 12% to a record $171 million in fiscal ’08 from $153 million in fiscal 2007.

On a divisional basis, our Security Group reported another solid quarter with 10% growth in sales coming off a strong Q4 in the prior year, leading to 21% for the full growth. Our Opto Group had another outstanding quarter reporting a 45% increase in third party sales led by strong shipments on a contract associated with the U.S. Government’s MRAP Program, as Deepak mentioned. As expected, our Healthcare Division reported Q4 sales in line with the prior year’s strong performance and for the full year saw a 10% top line growth.

Our bottom line for the fourth quarter in 2008 markedly improved as we reported net income of $5.5 million or $0.31 per diluted share compared to $4.3 million or $0.24 per diluted share for the same period in fiscal 2007. Excluding certain non-recurring items in both ’08 and ’07, primarily impairment restructuring and other charges and normalizing the tax provision, net income for the fourth quarter of fiscal 2008 would have been approximately $6.4 million or $0.36 per diluted share compared to net income of approximately $2.8 million or $0.16 per diluted share for the comparable quarter of last year.

For the fourth quarter of fiscal ’08, our gross margin decreased 220 basis points, primarily due to significant growth in our Opto Group sales. As our Opto Division reported a 45% increase in sales, which inherently carry a lower gross margin than our other two divisions, our consolidated gross margin is adversely impacted. While our gross margin will vary from quarter-to-quarter as a result of a number of factors including product mix, unit volumes, pricing, inventory reserves, and capacity utilization, we do expect to see overall improvements in fiscal 2009.

During the fourth quarter and fiscal 2008, we realized the operating leverage that the organization worked so hard to achieve. Our SG&A expenses, as a percentage of sales, decreased by 360 basis points for the fourth quarter and 410 basis points for all of fiscal 2008. For the quarter, SG&A expense declined to 21.7% of sales form 25.3% compared to the same period last year. Looking at it from a slightly different perspective, despite a 12% increased in Q4 revenues, we actually decreased SG&A expenses by 4% in absolute dollars compared to the same period last year.

Research & Development: Our expenses for Q4 2008 were $11.9 million or 6.9% of sales compared to 7.2% of sales in the same period last year and in absolute dollars such costs increased $0.9 million from that of the prior year. We continue to make significant investments across many technologies in both our Security and Healthcare product offerings. We believe these programs position the company to capitalize on major opportunities in the future, which address large global markets and as such anticipate that our investment as a percentage of sales in fiscal 2009 will comparable to his year.

During the fourth quarter, we had an income tax expense of $2.6 million compared to a benefit of $3.7 million for the same period last year. For the full year, though, we had a total income tax expense of $600,000 which included a tax benefit of $4 million as a result of non-recurring items impacting the tax revision, the largest of which was a $4.3 million tax benefit associated with the repurchase of the minority interest of Spacelabs Healthcare.

To normalize things, excluding the impact of these non-recurring items, the effective tax rate for the current year was 31.3% compared to 42.3% in the prior year. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences amongst such countries, as well as due to the impact of permanent taxable differences.

Moving to cash flow, during the quarter, we generated operating cash flow of $9.2 million as a result of improved profitability, coupled with our continued focus on working capital management with notable improvement in inventory turns on a sequential basis. Capital expenditures were $4.3 million and depreciation and amortization was $4.7 million. While we are proud of reporting the strongest quarterly operating cash flow in our history, we believe this provides just a glimpse of what we can produce in the future and generating strong operating cash flow will continue to be a top priority in fiscal 2009.

Now moving to our fiscal 2009 guidance, as Deepak mentioned, we anticipate fiscal ’09 sales will be between $660 and $680 million. While we do not provide guidance by division, we do anticipate continued strong double digit Security sales growth. Our guidance is inclusive of the significant sales windfall we benefited from in fiscal 2008 in our Opto Division from the previously mentioned government contract. As a result, we anticipate that our Opto sales will be relatively flat, but will have stronger operating margins. We expect to continue to demonstrate significant operating leverage resulting in 45% to 65% earnings per share growth equating to $1.07 to $1.22 per diluted share, excluding the impact of impairment, restructuring, and other one-time charges.

Fiscal 2008 was an important year for OSI as we transformed our financial profile from three consecutive years of losses to a year of meaningful earnings and created a sustainable organization that paves the path for significant future earnings power. Building long-term shareholder value through increased financial performance is our highest priority. We made important progress in fiscal 208. We are optimistic about our future prospects and we look forward to reporting our results in the coming months.

Thank you for listening in on this conference call and at this time, I’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joshua Jabs - Roth Capital.

Joshua Jabs- Roth Capital Partners LLC

So if I look at the cost savings impact, operating expenses actually came right in line with our expectations for the quarter. I know the improvements on the gross margin that take a little longer to materialize, but can you give us a little color on where the margins are currently between other divisions and where that’s likely to go over time, maybe excluding the impact of the MRAP orders?

Alan Edrick

Josh, while we don’t give gross margin detail by division, let me kind of give you some high perspectives. I think as we look forward, I think we could anticipate that we could see up to 200 basis point improvement in fiscal ’09. We think that can be generated by a number of initiatives. One, as Deepak mentioned, the pure closure of the weapon simulation business which was a drag on our gross margin will clearly help in fiscal ’09. We couple that with the growth in our business that we’re projecting for next year is highly focused to Security and Healthcare, which have higher margins than the Optoelectronics business, so this year’s gross margin was dragged down a little bit by the strong sales in our contract manufacturing group within Optoelectronics, which while they provided nice operating margin and a nice contribution to our earnings per share, adversely impacted our gross margin. So we think those things coupled with some supply initiatives that we’re doing, the closures of certain facilities in Healthcare, which currently while we’re operating multiple facilities while the closure is taking place negative impact our gross margin on the short-term will all contribute nicely. Those closures are essentially done now. So as we move into fiscal ’09, we feel pretty confident that we’re going to see some nice gross margin improvement.

Joshua Jabs- Roth Capital Partners LLC

Then on the backlog, you finished at $212 million which looked pretty good given the revenue beat, but you’ve had some pretty orders here the first part of this quarter. Where does the backlog stand today?

Deepak Chopra

It’s in the middle of the quarter, but approximately it’s end of July, the backlog was close to $240 million, and the big increase is in Security. Keep in mind that this is the quarter where it’s not over yet and this is a very important quarter for the Security and we believe that Security backlog at the end of the quarter would be higher than it was at the end of June significantly.

Joshua Jabs- Roth Capital Partners LLC

Last one here: Alan, do you have the headcount and maybe by division versus what it was a year ago?

Alan Edrick

Sure, maybe kind of you give a broad sense. Overall from a headcount perspective year-on-year, we’re down 2% compared to last year. If you kind of look at it on a security division basis with some of the cost savings that we did this year, we’re down about 6%, Opto we’re down about 4%, and Healthcare we’re up slightly given the new manufacturing facility that we opened in Suzhou.

Joshua Jabs- Roth Capital Partners LLC

With the dual facilities running that you had close them down, will that number come down on the Healthcare side?

Alan Edrick

Yes, we anticipate it will.

Deepak Chopra

Just to add on it, one of the other things that you should look at it is not just the headcount but where the headcount is. Obviously the headcount in the western world, in United States, cost more money than the same comparable headcount in China or India. So as we move those little people around, the total payroll cost maybe a much bigger impact than the headcount reduction.

Joshua Jabs- Roth Capital Partners LLC

Then Deepak, I guess one last question for you. I know there’s some diversification going on. Any chance we get on a funnel plan there?

Deepak Chopra

I have been talking to Victor. The answer is yes. I think the first time you dive into it, it’s more difficult. Keep in mind that I’m still the largest stockholder and over the last couple of years my holdings have not sort of changed. I’m not running to the knock to the hills.

Joshua Jabs- Roth Capital Partners LLC

I think that’s a good, should get rid some of the noise there.

Operator

Your next question comes from Brian Ruttenbur - Morgan Keegan.

Brian Rottenbur – Morgan Keegan & Company

Where was backlog in Q407?

Deepak Chopra

$209 million.

Brian Rottenbur – Morgan Keegan & Company

Litigation with L3, is that dead? Is that something that’s just totally in the past now and just pressing on?

Victor Sze

The court of appeals has remounted the case for [inaudible] proceedings at trial level and that’s where it stands right now.

Brian Rottenbur – Morgan Keegan & Company

So that does mean that you’re going to have more expenses and how much do you expect in 2009 in terms of legal?

Victor Sze

It’s sort of in between proceedings right now and it’s [inaudible] pending litigation and it’s difficult as you can expect for us to make any firm comments on that, but we’re got all options open to us.

Brian Rottenbur – Morgan Keegan & Company

So is the automatic appeals, I mean what all are you going to have to consult outside legal advice for?

Victor Sze

So where it stands right now is that the second circuit has made its initial ruling. We filed a petition for rehearing. Obviously we disagree with their results, so that is a petition that’s pending right now. But as I mentioned earlier, the initial ruling was to remount the case.

Brian Rottenbur – Morgan Keegan & Company

On a worse case scenario, what does that mean for you guys?

Deepak Chopra

Business as usual.

Brian Rottenbur – Morgan Keegan & Company

So I mean do you pursue tings on a worse case and ask for a retrial or what?

Victor Sze

Like I said earlier, it is life pending litigation and you’re asking for some strategic questions here, but it’s different, as you can imagine, for us to make any firm statements on life pending litigation.

Deepak Chopra

Brian, just to add on it, we’re looking at all our options, but we don’t think about it. WE got a business to run and our focus is of running the business, but this is one of those things that will continue and we look at it as the next hand is dealt to us.

Brian Rottenbur – Morgan Keegan & Company

Can you talk a little bit about, maybe this is for Alan, cash generation in 2009, what the plan is? You’re at roughly $49 million of debt. Is the plan to generate – - can you talk about what kind of cash you expect to generate to the balance sheet in 2009 since you give revenue and earnings guidance.

Alan Edrick

Yeah, we don’t give cash flow guidance, but what I can say, Brian, is coming off of five straight years of generating negative free cash, were very optimistic. I think the plans that we’ve been putting in place for the better profitability and greater focus on working capital initiatives such s DSOs and inventory turns is going to lead - - we’re optimistic it’s going to lead to positive free cash next year. We think the Q4 and even Q3 was some indication of that, so we’re very positive on our operating cash flow sort of projections, internal projections for next year in free cash overall, but we don’t give free cash flow guidance.

Brian Rottenbur – Morgan Keegan & Company

Maybe you can tell us capex expected in 2009.

Alan Edrick

I think it’ll be with sort of our historical run rates which tend to be in that 15 to 17 million range.

Brian Rottenbur – Morgan Keegan & Company

Let me just back into cash flow. We’re expecting operating, according to your guidance, operating income or even net plus DNA, you’re talking about 20 to 30 million of, I probably used a broader brush there, 20 to 30 million kind of cash flow and then you subtract out capex. Is there anything else that I should be looking at in there that I’m missing in terms of cash flow? Is there something else going on?

Alan Edrick

I think you’re in the ballpark. I mean I think as we grow particularly within the Security Division there’s different inventory requirements that take place, but I think generally speaking it’s in the ballpark.

Brian Rottenbur – Morgan Keegan & Company

Then the last question is target model, as you stand now kind of two to three years out from now, you expect to grow your top line at a, what, 7% to 8% total revenue and gross margin should go 100 basis points up a year and net should go up 100 basis points. Can you give us some kind of broad brush on business model where it should go and over what period of time?

Deepak Chopra

One of the things is that we’ve been so focused onto the bottom line for the last couple of quarters. 2008 has been a challenging year. We focused on 2009 and frankly speaking all through the company. Bottom line is more important than top line, not that top line is not improvement. But I think that our internal targets are close to the double digit growth, continue to improve a point or so in the gross margin as we move production over, as we look at repeat orders in cargo and in other things and continue to look at that the SG&A to keep it down. R&D spend wisely, and that famous thing for Tim Quillin, that 5% net is the 2010 target. That’s the target we’re working towards.

Operator

Your next question comes from Michael Kim - Imperial Capital.

Michael Kim – Imperial Capital

In regards to the Security Division, can you talk a little bit about the sales mix in the quarter, the fourth quarter and the relative growth for between cargo and vehicle and other Security products, the baggage, parcel, and people products?

Ajay Mehra

I think what you’re seeing really everybody talks about cargo. We’re seeing growth over there from a sales standpoint. Obviously we’ve always said that depending on when the product ship, it’s going to make a difference. So we’ve had some very good bookings. We expect to have good sales. I think on the conventional side, we’ve also seen very strong sales, not just for the quarter but for the year as well, and we’re looking at double digits on both sides.

Michael Kim – Imperial Capital

Just based on the commentary, it sounds like you’re starting to see a stronger momentum on the cargo side, or would you still characterize it as pretty much across the board?

Ajay Mehra

Well I think cargo side is definitely very strong for us, but we’re seeing growth in other areas as well, so there might be a little different in terms of what percentage growth we’re seeing, but we’re seeing good growth in the entire security product line.

Deepak Chopra

Just to add on to it, keep in mind that the ticket for cargo is much bigger number. So as those systems get shipped out, the numbers start looking very big. So we think that both areas will continue to grow, but we also want to emphasize that longer term, not this year, but longer term we also have the check baggage product line coming on line. We already have the MVX systems, the R&D systems hopefully we’ll start generating revenue in 2010/2011. So we look at it that all sectors we can look at very significant growth. But right now you’re absolutely right; cargo is driving much faster than the other sector.

Michael Kim – Imperial Capital

In terms of the margins with cargo tracking higher, would you expect that from a mixed perspective to drive margin along the lines with the progress we’ve seen in the last number of quarters?

Deepak Chopra

The answer is yes. As production repeat orders get shipped out, we continue to look at improved margin in cargo. One of the things that we’re trying to put a model together, it’s not just the gross margin of a product line that we look at. It’s what the net contribution to the bottom. Cargo might have a lower margin than some of the other products, but they also might require less R&D. They might require less support, so might drop significantly the same or better to the bottom line.

Michael Kim – Imperial Capital

Switching gears on the Healthcare Division, can you talk a little bit about the contribution from international growth in the quarter versus domestic and also your expectations for the growth in newer products versus sort of existing products? It sounds like you’re pretty excited about the entry level products going into next year, if you think that’ll drive the majority of the growth for ’09?

Deepak Chopra

Well for 2008, all three sectors are, Alan also mentioned, the emerging markets, the Western Europe, and United States all had increases. The elance or the new product launch of the lower cost products, specifically for the emerging markets, has zero contribution today in 2008. In 2009, it will start showing some contribution, and we believe that since that sector’s economies are growing faster than the rest of the world that we will see more growth coming out from that product line, keeping in mind that has nothing to do with our other R&D for the next generation launch of our higher end products which will start coming online somewhere in the near future. We can’t give you a date for competitive reasons. The other contribution is from the anesthesia product line and the cardiology product lines. They’ve all shown significant growth in all sectors geographically.

Operator

Your next question comes from Josephine Millward - Stanford Group.

Josephine Millward – Stanford Group Co.

How much of the bookings for MRAP in Opto have you shipped, and do you expect additional orders from ITT in the future?

Deepak Chopra

I mentioned that our booking to date is about $65 million and, yes, we expect more bookings. Regarding shipments, I don’t think so we have an exact number, but, Alan, would you take a macro level whether it’s 20% shipped, 30% shipped, 40/50% shipped?

Alan Edrick

Yeah, I would venture to say just it’s roughly two-thirds of that amount was shipped fiscal ’08 with the balance to be shipped in fiscal ’09.

Josephine Millward – Stanford Group Co.

Alan, you talked about the 200 basis point improvement in gross margin driven by a change in your product mix, are you also planning on more cost cutting initiatives? Can you give us more color on what to expect in terms of one-time charges and what areas you’ll be focused on?

Alan Edrick

As you know, Josephine, over the past two years we have been highly focused on some of the efficiency programs and some of the cost rationalization efforts. While that will always be a continuing process, I think a lot of the heavy lifting is behind us and now it becomes more fine tuning of the business operations focusing more on some supply chain initiatives and continuing to optimize sort of our product portfolios and manufacturing methods. So as a result, I don’t believe we are anticipating at this point the impairment restructuring charges to be as significant. We will see them going on for at least the first few quarters of fiscal ’09, particularly within the Healthcare Division where some of the closures of a facility that we’ve been in process gets completed and due to just accounting rules, we couldn’t accrue for that all in fiscal ’08. So we will see them, but we believe the magnitude will be less than fiscal ’08.

Deepak Chopra

Just to add on to it, Josephine, that as we introduce the new product line, new R&D initiatives with the launch of the new products, they command higher margins. So that’s another variable that should help us in getting our margins better as the new products come online.

Josephine Millward – Stanford Group Co.

Deepak or Ajay, can you talk more about the TSA air cargo opportunity? Do you expect the TSA to pilot your event x-ray system for that sometime soon or is that in the works already?

Ajay Mehra

I think you’re all aware, you’re aware what TSA is doing. They’ve had some hearings [inaudible] talked about their cargo. We are involved with TSA. We are involved with talking to them. We have some products they’re looking at and really for me to comment any further would be inappropriate at this time, but we are definitely involved with the TSA and working with them closely.

Operator

Your next question comes from Tim Quillin - Stephens Inc.

Timothy Quillin – Stephens Inc.

I apologize, I missed the first part of the call, but I know you don’t give quarterly guidance, but I think you’ve had a loss in the first quarter in the past over the past couple fiscal years. Could you just comment on whether you expect to be profitable in the first quarter of fiscal ’09?

Alan Edrick

You’re right, we don’t have quarterly guidance and the trend you see in the past is that the first quarter’s generally been our lightest quarter. That being said, all the changes that we’ve been making, our goal and our intent is to be profitable in each and every quarter of the year, which includes Q1 as well.

Operator

You have a follow-up question from Joshua Jabs - Roth Capital.

Joshua Jabs- Roth Capital Partners LLC

Alan, just to follow-up here on the tax rate, what are you looking at for a consolidated tax rate going forward.

Alan Edrick

Really depends a lot on the mix of where our profits are generated, Josh. But I think what we are using as a model is roughly 35%. We think we might be able to do a little better than that next year, but 35% is about where we’re going.

Joshua Jabs- Roth Capital Partners LLC

How big do you think that range is based on mix? Have you looked at that?

Alan Edrick

Yeah, it really can be plus or minus as much as 4%. I would say not so much the plus but through some tax strategies it could actually be less. But we would 35% is probably a pretty good number to use and we would hope to do a little better than that.

Joshua Jabs- Roth Capital Partners LLC

Just looking at the way that you reported the pro forma, it’s $0.36 for Q4. If I just run the number straight through without the tax adjustment and take out the one-time costs, I get $0.38 so that sort of starts to back into that tax adjustment, but that also means I guess if you’re getting the $0.74 for the year that some of the prior quarters would have been bumped up a little bit.

Alan Edrick

It may just be a little bit of a rounding issue between quarters when you look at the whole annualization, but I think you’re on target.

Operator

Your next question comes from John Zoro - BCN.

John Zora – BCN

I have a quick question, and I missed part of the call, so if it’s already been asked I apologize. The manufacturing cost savings, just over and above sort of closing duplicate plants and things like that, can you talk about that? I know when I had met with you before, you had talked about implementing some new manufacturing, new people in the manufacturing side and a potential cost savings there.

Alan Edrick

Certainly. I think the manufacturing opportunities for us are really multifold. One as we’ve introduced the Suzhou, China, factory, we think that will help. As we finalize the closure of our U.K. based Healthcare facility, that will certainly contribute because as of Q4, we were still operating two manufacturing facilities in that regard and that is ending in Q1 more or less. In addition to that, we have brought on some new talent throughout the organization on the manufacturing side that we think will greatly improve the supply chain, the manufacturing processes themselves. That really will allow us to expand the margin and expand our ability to manage our working capital as well. So we’re optimistic in that regard, and that’s across the board from Security, Healthcare, and Optoelectronics.

Operator

We’re currently showing no more questions in queue at this time.

Deepak Chopra

Thank you, everybody. In conclusion and summary, we think that 2008 was a very good for us. The management, the employees of the company worked very hard. We focused very much over the last couple of quarters of delivering predictable results to the Street. We’re going into 2009 with a very good visibility. Our backlog is up. Security, Healthcare, Opto all feel very good for the year. Obviously we have to put up a visor, though we have not been impacted yet by the economy, we continue to look at it both domestically, internationally. But we will rise to the challenge. Our focus is to grow wisely the top line, but keeping in mind that predictable earnings is very important. So we continue to do it and hope to talk to you next quarter. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OSI Systems, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
This Transcript
All Transcripts