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OSI Systems, Inc. (NASDAQ:OSIS)

Q1 2013 Earnings Call

October 23, 2012 12:00 pm ET

Executives

Deepak Chopra – Chairman and Chief Executive Office

Alan Edrick – Executive Vice President and Chief Financial Officer

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

Analysts

Tim Quillin – Stephens, Inc.

Brian Ruttenbur – CRT Capital Group LLC

Jeff Martin – Roth Capital Partners, LLC

Mike Greene – The Benchmark Company, LLC

Yair Reiner – Oppenheimer & Co.

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2013 OSI Systems Earnings Conference Call. My name is Tony, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a Question-and-Answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Alan Edrick, Chief Financial Officer. Please proceed.

Alan Edrick

Thank you. Good morning, and thank you for joining us today. I am Alan Edrick, Executive Vice President and CFO of OSI Systems. I am here today with Deepak Chopra, our President and CEO; and Victor Sze, our General Counsel.

Welcome to the OSI Systems first quarter fiscal 2013 conference call. We would 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 on our website for approximately 2 weeks. Earlier today, we issued a press release announcing our first quarter 2013 financial results.

Before we discuss 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 maybe deemed to be forward-looking statements under the act.

Such forward-looking statements could include general or specific comments like company officers on this call about future company performance, as well as certain responses by company officers to questions posed about future operating matters. 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 or its officers. These factors include the risk factors set forth in the company’s last Annual Report of Form 10-K and other 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.

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, please refer to today’s press release which has been furnished to the SEC as an exhibit to our current report on Form 8-K.

Before turning the call over to Deepak, I will provide a high level overview of our financial performance. And we will again touch on several themes that we discussed during past conference calls. Highlights for our first quarter of fiscal 2013 are as follows; first, we achieved record first quarter sales revenues of $182 million, representing 13% growth over the prior year.

This represents our eighth straight quarter of double-digit revenue growth. In fact, each of our divisions generated double-digit revenue increases. Leading the way was our Security division with 14% growth, followed by our Optoelectronics and Manufacturing division with 12% third-party growth, and our Healthcare division which grew by 11%.

Second, our strong EPS momentum continued as Q1 diluted earnings per share increased 30% to $0.31 per share, which is a record first quarter performance for us. This marks the 13 consecutive quarter in which we have generated year-over-year EPS growth in excess of 20%.

Third, bookings remain strong, leading to a record first quarter backlog of $1.1 billion, or 155% increase over Q1 of last year. Fourth, we generated $42 million of operating cash-flow, or over four times higher than last year’s Q1. This strong cash flow was used to fund the significant CapEx associated with our Mexico turnkey program.

And finally, speaking of our Mexico program, we continue to make great progress to move towards operational radius. We are pleased to report another outstanding quarter of financial results. We completed the transformative year in fiscal 2012, and have kicked of fiscal 2013 in strong fashion.

I’ll provide additional financial details and we will discuss our fiscal 2013 guidance. But first, let me turn the call over to Deepak.

Deepak Chopra

Thank you, Alan, and again, good morning, and welcome to the OSI Systems earnings conference call for the first quarter of fiscal 2013. As Alan mentioned, we had an impressive first quarter where we not only delivered overall revenue growth of 13%, but also achieved double-digit growth at each of our divisions in Security, Healthcare, and Optoelectronics.

Each division started the year in a strong passion much and the same way that each finished fiscal 2012. These results provide us with great confidence and our ability to achieve our performance targets through the remainder of the fiscal year.

Within the highlights for the quarter starting with our Security division, Rapiscan revenue has increased 14% to $83 million. During the quarter, we had many key accomplishments that should serve as seats for future growth.

Highlighting few of these activities, Rapiscan’s 620 Dual View baggage and parcel inspection system received the European Standard 2 approval for threat detection of liquid explosives. The 620 DV can differentiate between threatening and benign liquids.

I should note here that the 620 DV has also been approved for use by the UK’s Department of Transport and the TSA in the U.S. for both aviation checkpoint screening and air cargo screening. As mentioned earlier, we have the broadest product portfolio for air cargo screening compared to any of our competitors.

620 DV’s are in other applications also such as military checkpoints, customs, and boarder security. 620 DV is a part of a board portfolio of checkpoint screening solutions that we provide our customers to secure aviation and other critical or structure security.

As mentioned on the previous call, our RTT, the Real Time Tomography high-speed hold baggage screening mid-system passed the European Civil Aviation Conference ECAC standard 3 threat detection test, the highest standard test by ECAC for the detection of explosive threat in passenger baggage.

The RTT continues to be evaluated by the TSA to inspect check baggage at airports and we look forward to a successful outcome of the certification in the near future. Our pipeline of the potential RTT customers is very robust and we expect to book orders in the second half of this year.

During the quarter, we launched a trace detection product, a new product for us a handheld system that is designed for applications some security, rapid transit security, border protection and law enforcement, where mobility, ease of use and high-throughput security screenings are vital. The modest HE50, which is the first of the whole line of products, can detect a wide range of explosives more reliably and faster than alternative security screening systems as it does not require calibration for IT use. This is a new market for us and we have very excited about it and we expect to generate revenue in the second half of this fiscal year.

Turning to the turnkey services program, the Puerto Rico’s turnkey services program continues to perform exceptionally well. We are operating at about 85% of our internally projected run rate. While the timing of the final remaining site remains uncertain, which by the way there are pretty small site compared to the other ones, we’re aware to hand over from the customer, it is relatively immaterial to the overall project.

During the quarter, we made excellent progress in Mexico and I’m proud to tell you that we are tracking ahead of schedule for this turnkey services project. We have invested a significant amount of capital and company resources for this important effort and we will provide more details on the progress as operations begin. We continue to expect significant revenues from this project in the second half of our present fiscal year.

Our turnkey services operations in Puerto Rico and Mexico are excellent examples of our ability to innovate and fine-tune our offerings to the needs of our customers. The progress and resulting success in turnkey services has generated a lot of worldwide interest and we are proud to announce that we are in active discussions with several potential customers.

Over the past few years, Rapiscan has made tremendous progress in separating itself from the comparators by leading the way in innovation and not just by developing new products like to trace solution or our high-speed check baggage inspection, RTT systems. That is currently at the TSA under evaluation, but by creating new service-based security offerings like Mexico and Puerto Rico.

Going forward, we are well poised to thrive in our core markets and newly created market areas such as the turnkey security services that we can help to save.

Moving onto the Healthcare division, Spacelabs revenues grew 11% in the quarter to $52 million, making it the third consecutive quarter of double-digit revenue growth for this division driven by deep market in the U.S. especially. This can be attributed to several factors. First, our currently launched products enable our sales team to differentiate by offering the latest technologies with improvement platforms with an open architecture that can be fully integrated to existing systems.

Second, our strategic relationships with group purchasing organizations or GPOs have provided new growth opportunities that will not accessible in the past. And finally, the impact from the contribution of the divisions of management team cannot be ignored.

As mentioned in the prior earnings call, we are realizing the benefits from strengthening our senior management and sales team with an emphasis on better understanding, and then delivering on the needs of the customer. This helps capture revenues of the sort-term and targets our product development efforts for the long haul.

As we have in the last few quarters at Spacelabs, we also introduced new products during this quarter. We introduced the BleaseFocus anesthesia system to the U.S. market, which have an ideal solution for smaller hospitals and surgery centers. And we also received 510(k) clearance for Capnography Pod, a compact, sidestream gas analyzer compatible with a new qube patient monitor.

Our new anesthesia workstation, Arkon will be officially launched and made available to the market during the current quarter. As we have mentioned, the initial feedback from potential customers have been extremely positive and we are truly exited to provide Arkon to our customers in the U.S. and overseas.

As an example of our continued commitment to invest in our divisions and people, we have made a decision to relocate the headquarters of Spacelabs based in Issaquah, Washington to a state-of-the-art building that we recently bought near Snoqualmie. The new headquarters will highlight an open office environment, minimizing the use of separate offices, thereby promoting communication and facilitating collaboration among employees. The move was expected to be completed in the spring timeframe and should result in better productivity and efficiency as well as occupancy and cost savings. Looking ahead, Spacelabs is in a very nice position as we continue to benefit from the recovery in hospital spending with the fresh product portfolio.

Moving to our Optoelectronic division, external revenues were 12% higher than the prior period. Opto has broad geographic exposure from OEMs in various industries including medical, defense, test and measurement and industrial. In spite of some headwinds in certain regions, for example Europe, Opto was able to attain new customers and the security ID, home health care and retail industries resulting in solid revenue growth. With the global manufacturing and sales presence, we expect to continue gaining new customers and deliver profitable growth in the coming portion of the year.

I would like to thank our employees in delivering a strong startup to the new fiscal year. I’m confident of our company’s abilities, as we have risen to meet past challenges head on and come out stronger. We are excited about what lies ahead and look forward to delivering top gear performance to our customers and shareholders. All three divisions are expected to grow in the second half of the present fiscal year.

With that, I’m going to hand the call back over to Alan to give a detail about our financial performance before opening the call for questions. Thank you.

Alan Edrick

Thank you, Deepak. Our ongoing focus on growth initiatives and operating improvements throughout the company has succeeded and delivering continued double-digit revenue growth for significant earnings leverage. Strong momentum across each of our division coupled with our $1.1 billion backlog position us well for strong top line growth going forward in addition of margin expansion. I will speak to our updated fiscal 2013 guidance shortly, but first let me review in more detail of the financial results for the first quarter.

As mentioned earlier, net sales were up 13% on an overall basis. Our Security division grew 14% in the first quarter. This solid growth was seen across many different business lines, inline by the contribution from the London Olympic Games. Our Healthcare division also continued the strong momentum seen in the second half of fiscal ‘12 reporting a 11% top line growth, again driven by strong performance as Deepak mentioned in the United States, which continues to gain good momentum.

We continue to leverage our Healthcare division’s infrastructure to increase operating income by 62%. These results once again highlight, there are focus on improving operating efficiencies will simultaneously introduce a new products to drive growth is working. And finally, our Opto-electronics and Manufacturing division rebounded from a flat fourth quarter to deliver 12% external sales growth as a result of the success of a broadening customer profile.

The Q1 gross margin for the company was 33.8%, up by a 100 basis points from Q1 of last year. This increase was mainly attributable to a favorable sales mix in our Security division as well as strong healthcare sales, which carry higher gross margins, which were partially offset by a reduce gross margin in our Opto division due to a less favorable sales mix. We anticipate our margins will continue to improve as our product mix changes with increased turnkey revenues from our Security division.

Moving to OpEx; Q1 SG&A expansions as a percentage of revenue increased slightly to 22% in preparation for our turnkey operations in Mexico. For the full-year, we expect to see a reduction in SG&A as a percentage of sales as we further leverage our infrastructure and sales growth. We continue to invest significant resources in R&D to enhance both our Security and our Healthcare product offerings. To this end, our R&D spending increased 4% in the first quarter to a $11.3 million were such incremental investment primarily focused on our Security business.

As a percentage of revenues, R&D expenses were 6.2% in the first quarter of fiscal 2013 as compared to 6.8% in the first quarter of fiscal ‘12. We believe these efforts well enable us to capture major opportunities in our core markets in a feature. We continue to see the results of these efforts and the significant number of new products that are being realized.

Taxes, our effective tax rate for Q1 was 29.7% as compared to 30.1% 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 among such countries, as well as the impact of permanent taxable differences, valuation allowances amongst other items. Our strong sales growth and gross margin improvement led to a 30% increase in our first quarter diluted EPS to $0.31 per share, a new record first quarter EPS for OSI Systems.

Moving to cash flow, as we mentioned on each of our last two calls, we expect to see significant volatility in cash flow of fiscal 2013 as result to the Mexico program. We started off the year strong generating Q1 operating cash flow of $42.4 million. This cash flow was used to partially fund our capital expenditures, which total $62.7 million in Q1, which as expected was significantly higher than historical norms in support of our Mexico program.

In addition, as Deepak mentioned, we acquired a new property to service the feature headquarters and domestic manufacturing center of our Healthcare division. This property was acquired for approximately $14 million and was financed within a $11 million term loan in addition to our internal cash.

In addition, we effectively repurchased approximately $9 million in stock. Further, depreciation and amortization was $4.9 million. We ended the quarter with $74 million of cash, which although lower than last quarter because of the significant CapEx, was much better than we expected due to the excellent operating cash flow.

Although, we expect to continue to experience greater than usual variability around free cash flow over the coming quarters. We remain very well positioned to meet future requirements with our cash on hand, cash flow from ongoing operations in our credit facility, which has a total capacity of $425 million.

And finally, turning to an update of our fiscal 2013 guidance, with a strong outlook for each of our businesses, we are increasing our earnings guidance. Therefore, we now expect diluted earnings per share of between $2.77 and $3 per share, excluding the impact of restructuring and other charges, which represents an increase of 21% to 31% as compared to fiscal 2012. In addition, we are increase the upper end of our sales guidance with a range of $870 million to $895 million, which represents a 10% to 13% increase over fiscal 2012.

During the past few years, we have transformed over sign to company that generate strong and sustainable top line growth along with an organizational framework that positions us for significant earnings growth. We believe we are well positioned for continued operating margin expansion in the coming years, and we look forward to sharing our progress on the coming calls.

Thank you for listening to this conference call. And at this time, I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tim Quillin of Stephens, Inc. Please proceed, sir

Tim Quillin - Stephens, Inc.

Hi, nice quarter again. Alan, do you happen have the more precise backlog numbers in the front of you and then also the security backlog?

Alan Edrick

Sure, Tim. The security backlog was about $943 million. The total backlog for the company was about $1.1 billion, which rounded up to $1.1 billion, so it’s a little bit less than that on a precise basis.

Tim Quillin - Stephens, Inc

Got it.

Alan Edrick

Yeah, the bookings for Rapiscan continue to be solid. We had a book-to-bill ratio of north of one.

Tim Quillin - Stephens, Inc

Okay. And on the security bookings, what would be the outlook over the next six months, U.S. government is facing a potential budget sequestration, International Government sometimes have some economic sensitivity, and the global economy seems uncertain. So what do you see in security pipeline over the next six to nine months?

Deepak Chopra

Tim, this is Deepak here. Ajay is traveling today, so I’m going to take that question. Definitely, there are headwinds in U.S., but some other programs we are working on, they are already funded. And as I said in my speech, we look at the international arena as strong as we’ve ever seen. There’s a tremendous amount of activity and interest generated in Asia, in Latin America, in Mexico, and in Europe, though there are some countries in Europe that as you know are going through some tough times. But overall, our sales funnel is as strong and as healthy and we expect the rest of the year to have a very robust bookings.

Tim Quillin - Stephens, Inc.

Okay, good. And one of the opportunities that I think that is out there for you is a potential foreign military sales for the government of Iraq. And I was wondering if you could help us, size that up a little bit and how far along that is and if you face competition for the potential order there?

Deepak Chopra

Tim, you’ve known us for a long time. The only thing that we would say is that, we don’t actively talk about things that have not booked yet. So we don’t want to comment or anything. All we say is that, Iraq, Afghanistan, and the other parts of the world, they are very exciting areas for us, for specially in security, and we continued to monitor that area with lot of excitement.

Tim Quillin - Stephens, Inc.

Yeah, I am sure. And you Deepak, you had mentioned Mexico as well, is that separate or are you talking about an expansion of the current turkey contract?

Deepak Chopra

We look at Mexico as a potential for other businesses. We won’t go into detail about the expansion. We continue to look at other opportunities, it’s an exciting area. We have a strong presence in there, good name, and reputation, and we plan to continued to look at other opportunities in Mexico and in other countries.

Tim Quillin - Stephens, Inc.

Okay. And then, excuse me, in terms of the Mexico start-up and it does sound like, it’s going smoothly and that’s great. It has this implied annual revenue run rate of about $150 million. I’m just wondering how quickly you can get to that run rate, or how steep is the ramp up once you start revenue?

Victor Sze

Well, maybe Alan can put shed some more light. I’ll just give you a high-level picture of, we are working towards finishing up the installation, construction other things and expect significant revenue contribution in the second half of the year. When it starts or what it ends up and maybe that’s one of the reasons that the range that we have given for our revenue is that dependent upon when we actually start in the second half. Alan, do you want to add on to it?

Alan Edrick

Yeah, just add on to that. It is going very, very well Tim, and the ramp we expect to be a swifter ramp than perhaps what you saw on Puerto Rico. Even though the project is much larger, the lessons learned from Puerto Rico and other items that we are able to successfully negotiate and this contract allow us to ramp up faster. So as we move into fiscal 2014, we expect if we are not fully ramped, we will be pretty close by that point in time.

Tim Quillin - Stephens, Inc.

Okay, very good. And just excuse me, one last question and I will jump back in the queue. But Deepak, you mentioned that you are in active discussions with several customers around other turnkey opportunities. And I haven’t checked, but I mean, it sounded relative to what you’ve said on previous calls, maybe a little bit more optimistic. I guess the word active discussions maybe a little bit different. And I’m just wondering, what exactly that means, or how far along you might be on signing another turnkey contract? Thanks.

Alan Edrick

Well, number one, it’s true what I said. We are more positive now than before. Obviously, our sales team have been working on it. We are in discussions and looking at other opportunities, more than that I won’t comment except we are very, very excited about the turnkey services business.

Tim Quillin - Stephens, Inc.

Thank you.

Operator

Your next question comes from the line of Brian Ruttenbur of CRT. Please proceed sir.

Brian Ruttenbur – CRT Capital Group LLC

Thank you very much, great quarter. A couple of questions, on Mexico revenue and I know that this has already been asked from Tim. But in your guidance, there is a $20 million difference and you are saying all that range differences dependent on Mexico ramp, is that correct?

Alan Edrick

So Brian, this is Alan. I think what Deepak is referring to was, as we increased our guidance and increased it by $5 million that largely accounted for some of the positive feelings that we have with respect to Mexico. The overall range of $870 million to $895 million includes different variabilities throughout all of our business is not only the Mexico, but sort of the core Rapiscan business, as well as Spacelabs and Optoelectronics.

Brian Ruttenbur – CRT Capital Group LLC

Okay. Maybe we can talk about this quarter that you just finished reporting and how much revenue did Puerto Rico contribute and how much profit, was it profitable, I guess is the first question?

Alan Edrick

Sure, Brian, it’s Alan again. Puerto Rico is very profitable for us this quarter. As we said on our past calls, we do not intend to breakout the revenues or the profits associated with Puerto Rico. Now, we’re in the feature. But what we can’s say is that, the profitability profile and the margins are significantly higher than the corporate averages. So we are exceptionally pleased with the performance of Puerto Rico and I look forward to that continuing really over the next 10 years.

Brian Ruttenbur – CRT Capital Group LLC

Okay. And then the Mexico impact in the quarter, was is it a drag in the quarter, I assume?

Alan Edrick

Yes, Mexico was a headwind to us in the quarter as we described on our last call. And the guidance that we put forth incorporates Mexico, so we’re not pro forma-ing out any Mexico costs, or anything else associated with it. So we’re kind of looking at it, it’s just part of our business going forward, so we’re not looking to breakout costs or contributions from the business going forward.

Brian Ruttenbur – CRT Capital Group LLC

Okay. So last quarter if you could refresh my memory, Mexico was a drag of 10% or 12%, is that correct?

Alan Edrick

Yeah, I believe, it’s a little bit higher than that last quarter.

Brian Ruttenbur – CRT Capital Group LLC

Okay. Is the drag, can you at least give me directional, is it going up or down these next couple of quarters for Mexico?

Alan Edrick

Sure, it’s actually going down a little bit. You might imagine in the early startup period, we have a lot of sort of one-time costs associated with legal, with consultants, with some professional advisors that was largely what was responsible for some of the stuff in the second half of our fiscal 2012. So as we’ve gone forward in this past quarter at least to Q1, the drag would have been a little bit less than you had seen in Q4.

Brian Ruttenbur – CRT Capital Group LLC

And then the drag goes away a 100% in third quarter or forth quarter?

Alan Edrick

Well, we haven’t kind of given out specifics. We do except it to be profitable in both of those quarters.

Brian Ruttenbur – CRT Capital Group LLC

Okay. And there is no drag whatsoever on Puerto Rico anymore, now that we’re 85%, is that correct?

Alan Edrick

That’s correct. It’s a nice solid profit contributor.

Brian Ruttenbur – CRT Capital Group LLC

Okay. And then I believe this was asked too. The book-to-bill was one and you expect book-to-bill for on a quarterly basis for the remainder of this fiscal year?

Deepak Chopra

Just to correct it, Alan said book-to-bill was larger than one. As you know in the Security business especially, the bookings are pretty lumpy. So my comment on that specifically for quarter, but I think our expectation is that our book-to-bill ratio will continue to remain healthy.

Brian Ruttenbur – CRT Capital Group LLC

Great, thank you very much.

Operator

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

Jeff Martin – Roth Capital Partners, LLC

Thanks. Good morning, guys.

Deepak Chopra

Good morning.

Jeff Martin – Roth Capital Partners, LLC

I was just curious if you’ve talked about a new market, the trace detection market. Can you help characterize the opportunity in the market size?

Deepak Chopra

It’s difficult to characterize the market shares. As you know it’s a pretty segmented fragmented marketplace. We believe that this market is not what I would call the checkpoint market. It’s not as big as the cargo market. But it fills a niche and a product necessity for us to be able to bundle the products together. So specifically, I can’t put down a number of what the trace market is. But I would venture as a guess that worldwide including desktop, handheld, the trace detection market is a couple hundred million dollars.

Jeff Martin – Roth Capital Partners, LLC

Okay. And then jumping over to turnkey solution side of the business, how would you characterize your capacity for taking on the large contract. I assume you’re in discussions where contracts that would be somewhere in the size between Puerto Rico and Mexico? How quickly could you take on the sizable new projects, or is that even an issue or do you want to get Mexico ramps first and how that another proof point, or are you ready to assume additional medium to large size contract at this point?

Deepak Chopra

This was also asked by Brian in the last conference call. Obviously, we would like very much to smoothen it out. But this business is if we land something, we are very confident that we have the infrastructure in place both in the manufacturing capacity, as you know in this field, we are the only vertically integrated company. So we can more on a dime to get resources in our multiple facilities of Rapiscan to manufacture the product and the variability of different designs. As far as manning the show, getting the people and the infrastructure, and the engineering, and civil work sensed up. We are very well tune into it. We have demonstrated it as Alan as mentioned, we are doing well to our expectations in Mexico, what we have learned from Puerto Rico, and the ramp up would be faster.

We think that anything that we land and when we land, we are not shy about, because we are in one Mexico. We can handle multiple contracts. And the other thing in this business does lend itself to be, but it’s not a quick fast our requirement. It’s a longer process, well thought out and we are ideally suited for it and we have the infrastructure in place. That’s what we are building the company for. We have invested last five years, four years in this business. So we have the infrastructure, and frankly that’s what differentiates us from our competitors.

Jeff Martin – Roth Capital Partners, LLC

That’s helpful insight, thank you. And then a couple of modeling questions for Alan. I deduced from your comments that you expect margins, gross margins to trend higher over the course of the year, is that a fair interpretation?

Alan Edrick

Hi, Jeff that is a fair interpretation, yes.

Jeff Martin – Roth Capital Partners, LLC

Okay. And then your interest expense for the quarter was a bit lower than I had thought. Is that a run rate we should use or that pickup, model about $1.5 million and I think about $1.1 million?

Alan Edrick

Yeah, Jeff it will pickup for two reasons. One, we took on a new $11 million term loan for the purchase of a new Spacelabs headquarters in Snoqualmie, Washington. So that will contribute a little bit more interest expense. We also had that line is interest in other and we had a couple $100,000 benefit from some hedges on FX in this particular quarter, which we wouldn’t count for necessarily future quarters. So yes, we would expect to see the line item trend up a little bit.

Jeff Martin – Roth Capital Partners, LLC

Okay. And is a $1.5 million of quarter conservative enough?

Alan Edrick

That is conservative enough, yes. We would expect little bit less than that.

Jeff Martin – Roth Capital Partners, LLC

Okay, great. Thanks guys, good luck.

Operator

Your next question comes from the line of Mike Greene of the Benchmark Company. Please proceed.

Mike Greene – The Benchmark Company, LLC

Good morning. I missed the first part of the Q&A, but I apologize if you already answered any of my questions. Deepak, I think you’ve mentioned you expect RTT orders in the second half of this fiscal year? With that the time for revenue recognition in fiscal 2013 or is that more likely in 2014?

Deepak Chopra

More likely in 2014.

Mike Greene – The Benchmark Company, LLC

Okay. Great, thanks. And is it possible you’d get TSA EDS certification this fiscal year?

Deepak Chopra

Well, this is one thing we’ve been taking about it for the last couple of quarters, and as you know, it’s a tough call. We hope this would be a great hope for us to do it. We are working diligently on it. But keep in mind that it’s something that there is a moving target. But we are more confident now than we were sometime ago, but this is one area where I’m sure most of you feel to be keep saying that, some companies have had seven or eight attempts. It’s a tough blind test, but we feel very, very good about our product and we feel that ultimately we’ll succeed.

Mike Greene – The Benchmark Company, LLC

And then on the additional turnkey opportunities you are pursuing, are they largely the fixed costs like Mexico or the deeper stand variety like Puerto Rico or is that largely customer dependent?

Deepak Chopra

Well, it depends on what the customer launch. We don’t have any preference. Basically, this is a one of those areas where you have to develop in relationship with a customer. Customer is the ultimate decision maker, how they want it. And as I mentioned before in many conference calls that the alternative also is that the customer can buy the equipment. So we have the various variety we try to do the best what the customer wants, but ultimately it’s a customer decision and we are ready for both.

Mike Greene – The Benchmark Company, LLC

Okay, great. Thanks so much.

Operator

Your next question comes from the line of Yair Reiner of Oppenheimer. Please proceed.

Yair Reiner – Oppenheimer & Co.

Great, thank you. And most of my questions have been asked, but just a couple of follow-ups. First again on RTT, you’ve had certification in Europe now for a number of month. Can you give us just a flavor of what you’re experiencing in the market as you’re kind of saw the product?

Deepak Chopra

Yes, this is Deepak here. As you know that portion of the business is very different from selling a conventional extra machine at a checkpoint. The ASPs are much higher. You have to integrate with the baggage handling people. And though that’s true we’ve had certificate for sometime. We are in active discussions with multiple potential customers.

On the other hand as you see, Europe does have a lot of turmoil in the country. There are also regulatory reasons where though there are some of the requirements are for 2014, some of the countries are pushing back. So I would call the market is in a flux, and that’s why we said that we believe very strongly that we will start booking business. But our best estimate, it might not result into any revenue recognition or revenues in the second half, but bookings will definitely take place.

Yair Reiner – Oppenheimer & Co.

Got it. And then Alan, in Opto margins were, I guess good by historical standards a little bit lower than they were through most of 2012. Can you give us a sense of what’s driving that, is it mix, is it other factors and what should we expect for the rest of the year there?

Alan Edrick

Sure, good question, Yair. We had very strong sales growth in Opto, but that strong sales growth was a little bit shift in the business. We saw a little bit stronger sales on the contract manufacturing aspect of Opto, which carries lower margins than sort of the sensors sales in the OSI Optoelectronics sort of the core Opto keys. So as a result although sales increased, the operating margins came down a little bit.

As we look forward, we’re seeing some strength in both sides of the business and therefore, we’d expect to see operating margins improve throughout the remainder of fiscal 2013.

Yair Reiner – Oppenheimer & Co.

Great, thank you.

Operator

(Operator Instructions) We have a follow-up question from the line of Tim Quillin of Stephens Inc. Please proceed, sir.

Tim Quillin – Stephens Inc.

Hi, thank you for taking my follow-up. Just first a couple of quick questions on, moiré questions on RTT. But Deepak, when some of these opportunities come to provision with RTT, could it be, could they come in at a dozen units at a time, or will it start smaller?

Deepak Chopra

Tim, basically, it can be both ways. If it’s going to be a larger airport and it’s changing over from the incumbent to a new platform, the tendency would be that it will be a wholesome transformation from the incumbent to us, in that case it will be multiple units. But also this units are ideally suited because of its speed and the size for smaller airports where they just want one system or two systems. And if they go to a lower speed competitor system from other people, they might have to buy more numbers. So it could be both ways, and we are in actively looking at it and send quotations out and talking to potential customers in both environments.

Tim Quillin – Stephens Inc.

Okay. And from the outside anyway the system that’s Smiths/Analogic have certified by EU and hope to get certified by TSA, it looks similar to your RTT product, do you have a competitive advantage versus that or what’s the dynamic there?

Alan Edrick

Well, it does the same job from the end user point of view, except their system is based on a different technology. It’s much bigger in size. It’s based on the same way the other older systems with what we call the rotating gantry, where you have this big gantry like a doughnut spinning at a very high speed, which needs brushes and needs power conversion, and noise and weight, and wear and tear, and downtime. We have a completely solid state system, which has no moving parts. So we really believe that as a performance, uptime of price to performance we definitely have advantages. And we believe one of the things that we believe very strongly that with another party entering into this business is not a negative.

Basically, it shows that it is a requirement as it goes forward for the high-speed will become more useful politically by the regulatory two competitors are better than single source. And we believe that as this market moves forward especially in Europe, we definitely have significant advantage and performance.

Tim Quillin – Stephens Inc.

Okay. And then there were three different vendors that were awarded AIT to development contractors for next-generation body scanners, Rapiscan so far hasn’t received one of those development contracts, is that a market opportunity you are still pursuing?

Alan Edrick

Tim, as you know many, many conference calls before, I remember Brian especially asking, I think you are asking. Our whole focus is at broad product portfolio. Definitely, body scanners are an important porion of our portfolio, but it’s insignificant revenue. As a matter of fact, I think Alan made a comment couple of conference calls ago that our revenue intake in 2012 was zero.

Once we say that, it doesn’t mean that, we don’t have a great product. There is a throughput issue at the TSA feels at larger airports. The L3’s unit is faster than our unit. So they decided that for that sake of a throughput, they would like to get more units of the faster speed, and are putting our units in the smaller airports. Then you leave aviation away that the throughput does not matter, performance matters maybe more.

And we are very well entrenched into the non aviation sector especially the DOD and some of the high security areas like nuclear facilities. We continue to push through these area and as you know though we did not get a contract and this time around, we do have an active ID/IQ with the TSA on our product, and we can always go back into it unfortunately the strew that we did not win at this time and we just continue to move forward.

Tim Quillin – Stephens Inc.

Okay, fair. Is the $98 million army integration contract, is that completely finished now?

Alan Edrick

Tim, it’s Alan, just a small immaterial amount to go.

Tim Quillin – Stephens Inc.

Okay. On the healthcare side, bookings at least looked exceptionally strong in your fiscal fourth quarter and revenue growth was obviously strong in this quarter. How do bookings looks, is there any signs of hospital capital spending tailing off and impacting that business?

Alan Edrick

Well, from quarter-to-quarter bookings definitely change and we have had three quarters of double-digit revenue in the healthcare area. Going into this quarter, the bookings were maybe little lighter, but I won’t put any to it. There is a great potential with the GPO win that we’ve had, we have a new product introduction and we have said before in our conference call, the second half will be stronger than the first half.

Tim Quillin – Stephens Inc.

Okay. And do you have any specific expectations or hopes in terms of revenue from the new anesthesia delivery system?

Alan Edrick

Tim, this is Alan. We are very optimistic about the product. We think the revenue contribution in fiscal 2013 will be relatively modest as hospitals take a look at it and probably buy smaller quantities, and as they grow comfortable with it, our expectation for fiscal 2014 and beyond is that, we will have a real nice contribution from it going forward.

Tim Quillin – Stephens Inc.

Okay. And just a couple of more questions, but Alan, I think you mentioned that you use $9 million for a buyback during the quarter. And I am just wondering what the rationale was for that?

Alan Edrick

We continue to believe it’s a strong investment, and we use it to offset some dilution.

Tim Quillin – Stephens Inc.

Right. And then lastly, do you have a specific CapEx plan at this point for the year?

Alan Edrick

Well, there is a lot of variability in that related to the overall Mexico project. We would anticipate that our CapEx outside of Mexico and outside of the new building acquisition that we did up in the Seattle area for Spacelabs will be more or less in line with what you’ve seen in past years.

Tim Quillin – Stephens Inc.

All right, thank you.

Operator

There are no further questions from the listening audience. I would now like to turn it over to Mr. Deepak Chopra for closing remarks.

Deepak Chopra

Thank you very much for listening to the conference call. I want to thank all the employees and the customers, and it’s an exciting time for us. We look forward to talking to you again and by the next conference call, we should be able to give you more clarity. We are very much focused into our Turnkey business, our Healthcare business, our RTT, bookings in the check baggage area, and the Opto growth, so it’s great time for the company. We are very optimistic and excited and look forward to talking to you on next quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect, and have a great week.

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