Q1 2020 Earnings Call
Speaker lift listen only mode. After the speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone.
Please be advised of today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Mr., Alan Edrick, Chief Financial Officer, Sir Please begin.
Hi, good afternoon, and thank you for joining us I am Alan Edrick Executive Vice President and CFO , Although OSI systems and I'm here today with Deepak Chopra, our president and CEO .
Welcome to the OSI Systems' fiscal 2021st quarter Conference call.
We would like to extend a warm welcome to anyone who is a first time participant on our conference calls we're glad that you can join us.
Earlier today, we issued a press release announcing our fiscal year 2021st quarter financial results before we discuss the results I'd like to remind everyone that today's discussion will include 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.
Back of 90 95 with respect to statements that may be deemed to be forward looking under the securities laws.
These forward looking statements are based on management's current expectations and are subject to uncertainties risks assumptions and contingencies, many of which are outside the company's control.
Such statements include without limitation.
Information regarding the expected financial and operational performance of the company and its operating divisions, including the company's expected revenues earnings and growth.
Undue reliance should not be placed in our forward looking statements as actual results could differ materially from forward looking statements due to numerous factors, including but not limited to factors described in the company's periodic reports filed with the SEC from time to time.
All forward looking statements made in 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 a subsequent events or new information or otherwise.
During today's conference call, we may refer to both GAAP and non-GAAP financial measures for information regarding non-GAAP measures and comparable GAAP measures of the company's results in a quantitative reconciliation of those figures.
Please refer to todays earnings release.
Which has been furnished to the FCC as an exhibit to a current report on form 8-K.
Before turning the call over to Deepak to discuss the company's general business and operations.
Ill take a few minutes to provide a high level financial overview of the fiscal 2021st quarter results.
First.
I am pleased to announce that we reported record first quarter revenues of 291 million, representing a 9% year over year increase driven by solid performance in each of our three divisions.
Second.
We reported Q1 GAAP diluted earnings per share of $1.10 compared to 50 cents in the same prior year period.
non-GAAP , EPS, which exclude certain items specified in our earnings release and also to be reference later on this call came in at a record 91 cents per diluted share for Q1 fiscal 20 compared to 81 cents per diluted share for Q1 fiscal 19.
Third our fiscal 2020 Q1 cash flow from operations was approximately 25 million a significant improvement over the negative 3 million in the same period last year, primarily due to stronger profits and improved working capital management.
Our Q1 2020 book to Bill ratio for equipment and related services non turnkey was 0.9 X as certain anticipated orders shifted to the right.
Before diving more deeply into our financial results and discussing our fiscal 2020 guidance, let me turn the call over to divide.
Thank you Alan and good afternoon to all of you.
We started with fiscal 2020 with record revenues and EPS in the first quarter.
All three divisions grew their revenues from the prior year plus quarter and delivered nice profitability.
Getting into each division's performance starting with the security Division.
Where we have reported revenues of approximately 189 million.
An increase up 11% over the prior year period.
The security Division continues to see an expansion.
Office opportunity pipeline and most product categories, both internationally and domestic us.
Although some orders that the anticipated in Q1 in the security group have pushed to the right.
Backlog continues to be strong specifically in the RTT and cargo solution equipment, where we have clear visibility through fiscal 2020.
A few examples of Q1 activities and our key end markets, starting with fortson borders.
During Q1.
We continue to support the U.S. government on its initiatives to strengthen border security can prevent contraband illegal drugs and people smuggling entering the country.
A few of our products utilized for these critical efforts, our cargo and vehicle inspection systems, both fixed and mobile excellent portals.
Explosive trace detection units fraud, Doug drug detection, and baggage and parcel inspection accident systems.
We are nearing the completion of the build out phase for that Don Good service projects at the ports in Guatemala, and in Asia and look forward to both becoming operational in the next few months.
The Middle East Integrated service project continues to make progress.
Our existing programs and Mexico vertical and Albania are continuing to perform well and our checkpoints have resulted in numerous caesars and introduction of illegal cargo shipments.
On the Mexico Turnkey program, we are in active discussions with the customer for an extension to the contract which as you know originally had a six year down that started in 2012 and Ben we received a two year follow on in 2018.
In which ends in January 2020.
As you can understand we can't comment on the details of the discussions.
In aviation passenger and cargo air cargo security, we continue to be very active worldwide on tenders for rapid scan 600 dual fuel baggage and parcel inspection systems and the already on 900 series the new platform offices.
Comes.
Together with the EGD systems, and real time, Kaumography RTT seating inspection systems.
During the quarter, we have strategic wins at European airports and Asian airports for these products.
We also have been very successful with air cargo customers that utilize our RTT and bps systems at various logistic hubs and we see a robust growth in this sector globally.
RTD with this throughput.
And image quality has significant advantage for air cargo applications compared to our competitors.
For critical infrastructure security during the quarter, we worked with several us and international customers, specifically for radiation monitoring bottles hdds and BPCI machines.
Of note we received an order from a government agency to provide multiple units of RPM 700 radiation monitoring portal, which is used to screen individuals entering secured locations for radioactive substances.
We also received several awards from private and government customers for Apple scan 600 series BP eyes, as we've mentioned before our installed base globally for the rapid scan MBI extra units exceeds 15000 units.
Going forward, we believed that the breadth of activity that we are seeing across critical regions and our customer base positions. The security division well for the remainder of fiscal 2020.
Moving onto the Optoelectronic and manufacturing division.
Upto delivered record Q1 revenues exhibiting 4% growth over the prior year with improving margins.
The topline was helped slightly but the benefit of a full quarter from the acquisition of an Optoelectronics Trust strategic product line completed at the end of July 2018.
The profitability of the October was also helped by more favorable revenue mix and operating efficiencies.
We will continue to make investments and pursue strategic acquisition opportunities to expand in the areas of growth in this division.
Looking ahead, we continue to see sustain momentum in the key markets and customers for optimal.
Moving onto the healthcare Division, where Q1 sales were up 5% as compared to the first quarter of fiscal 19.
Significantly improved operating income.
Over the past couple of years, we are broad and deep talent made operational improvements and shifted the business focus to the core products of patient monitoring cardiology and related supplies and accessories.
We will continue to focus on opportunities, where we can differentiate among our peers by offering innovative tools and accessories, highlighting our customizable and open architecture based solutions.
The backlog remains strong and we remain focused.
The new President Shalabh Chandra who joined US in early September is making good progress.
Overall I'm pleased with our Q1 performance excited about our future and look forward to the coming quarters.
I want to take a moment to tank all our employees for their efforts with that I will hand, the call back over to Alan the talk in detail about our financial performance before opening the call for questions. Thank you.
Thank you the back.
Now I will review the financial results for our 2021st fiscal quarter in greater detail.
As mentioned previously our revenues in Q1 fiscal 20 were up 9% year over year.
Revenues in the Security Division Division reached a record Q1 level of 189 million an increase of 11% from Q1 fiscal 19, driven primarily by growth in the cargo and RTT product lines.
The Opto Division continued its impressive performance with revenues, increasing 4% year over year to a new Q1 record of 74 million.
This increase was driven by 6% growth in external revenues, partially offset by a reduction in intercompany revenues.
Our health care Division posted solid revenue growth of 5% driven by us demand, which was levers to significant growth in profits.
The Q1 gross margin of 34.1% was down from 36% in the same quarter last year.
Though we saw gross margin expansion in our Upto in health care divisions reduced gross margin in the security division due to the mix of revenues resulted in the overall reduction.
With respect to the security mix security product revenues were up 24%, while security service revenues were down 5%.
Security product sales tend to have lower gross margin than security service sales, thus, resulting in a reduced overall gross margin.
As mentioned on previous calls our gross margin will fluctuate from period to period based on revenue mix among other factors.
Moving to operating expenses.
DNA expenses were up slightly by 0.8% year over year, However, as a percentage of sales SDMA expenses decreased to 21.4% in Q1 fiscal 20 from 23.2% in Q1 of the prior year.
Which evidences our diligent efforts across all of our divisions to improve efficiencies and prudently manage our cost structure.
R&D expenses in Q1 were 14.2 million up 4% from Q1 of the prior year largely due to activity in the security Division.
We remain focused on innovative product development, which we view is vital to the long term success of our business.
In Q1 fiscal 20, we recorded a $2.1 million benefit in restructuring and other charges due primarily to insurance recoveries of legal costs compared to a $4.2 million charge. We took in Q1 fiscal 19.
Moving to interest and taxes.
Interest and other expense in Q1 fiscal 20 decreased to 4.7 million from 5.3 million in the same prior period, a year ago. As a result of lower average borrowings due to the strong trailing year cash flow and lower average interest rates under our credit facility.
On the tax side, excluding the impact of discrete tax items, our effective tax rate in Q1 fiscal 20 was 27.9% compared to 28.1% in the first quarter fiscal 2019.
We recognized a discrete tax benefit of 6.2 million for equity based compensation in Q1 of this fiscal year compared to a 1.5 million tax benefit for equity based compensation in the same prior year period.
As a result, we reported a tax benefit in resulting negative tax rate of 2.9% in Q1 fiscal 20 compared to a positive tax rate of 13.9% in Q1 at fiscal 19.
I will now turn to a discussion of our non-GAAP adjusted operating margin, which excludes restructuring and other charges and amortization expense of acquired intangible assets.
The company's non-GAAP adjusted operating margin in Q1 fiscal 2000 was 9.1%.
Comparable to the 9.2% in Q1 fiscal 19.
Similar to gross margin as I mentioned earlier, we saw year over year operating margin increases in our opto and healthcare divisions.
Offset by a reduction in operating margins in the security Division.
The opto division's operating margin expanded significantly from 11.7% in Q1 last year to Q1 record 13.0% in fiscal 2020.
The healthcare Division reported a nice turnaround from negative 4.4% in Q1 last fiscal year to 7% in Q1 fiscal 20.
With incremental investment in R&D.
And the change in gross margin previously noted the security divisions operating margin was 12.2%.
Moving to cash flow.
In Q1 fiscal 20, we generated 24.8 million in operating cash flow compared to negative 2.8 million in Q1 of the last fiscal year.
This strong Q1 fiscal 2000 cash flow was driven by increased profits improved inventory management as days inventory on hand decreased to 128 days in Q1 fiscal 20 from 184 days in Q1 fiscal 19.
In increased customer advances.
This was partially offset by an increase in days sales outstanding to 77 days in Q1 fiscal 20 from 76 days in Q1 fiscal 19.
Capex in the quarter was 6 million, which included investment for turnkey projects, while depreciation and amortization expense was 13.5 million.
We were active in our stock buyback program in the 2021st fiscal quarter acquiring approximately 126000 shares.
As of September Thirtyth, 2019, 436000 shares approximately where available for additional repurchase under the program.
Our balance sheet remains strong we ended the quarter with net leverage of approximately 1.4.
Finally, turning to guidance.
For fiscal year 2020, we are increasing our guidance for revenues to a range of 1.238 billion to 1.273 billion.
And our guidance for non-GAAP earnings per diluted share has increased to a range of $4.61 to $4 an 83 cents. This.
This non-GAAP diluted EPS range does not reflect potential impairment restructuring and other charges amortization of acquired intangible assets and noncash interest expense and their associated tax effects as well as discrete tax items.
We currently believe the sales and non-GAAP earnings guidance reflect reasonable estimates.
Actual sales and non-GAAP earnings however, could vary from the anticipated ranges due to the risks and uncertainties, specifically affecting our business and generally affecting industries in which we operate.
These risks and uncertainties include items beyond our control such as site readiness or product installations evolving government trade policies customer acceptance of our products and the timing of orders and contract renewals and East Division and other risks and uncertainties discussed in our SEC filings.
We have continued to focus on the growth of our business, while investing in product development, making selective strategic acquisitions and managing our cost structure.
We believe these efforts will enable lowest side to continue our leadership role with innovative products and solutions across our various industries.
Thank you for participating on this conference call and at this time, we would like to open the call the questions.
As a reminder to ask a question, ladies and gentlemen, yearning to press Star then one or your telephone to withdraw your question. Please press the pound cake.
Please standby, we compile becoming a roster.
Our first question or comment comes from the line of Larry Solow from CJS Securities. Your line is open.
Great. Good afternoon, thanks for taking my questions.
Just on the security.
So just can you just give us some more color on the on the.
Little bit light on the orders in terms of your visibility do you.
Sounds like there's some specific orders that you were shifted a little bit to the right.
Yes.
We still expect those to happen this year or is it sounds like its purism were timing than anything else.
Good question this deeper care.
Yes, I did say that.
And ill just this business, especially globally.
Hi, planning very strong.
We have a lot of opportunities out there, but as you accusing these orders are lot of these orders depend upon the readiness of the customer even of placing the owners and as you get into both the carnival equipment orders and do looking at the RTT orders globally.
Some of them got pushed to the right.
But at order pipeline continues to be very strong we have said it before in the previous calls that as deadlines are approaching in Europe .
2020 to 2021.
Force continue to move forward, there's a lot of activity in us Im sure Youve seen latiff, perhaps going on what's happening on the southern border. Paul There is one of activity, we have very well placed.
So we have very we have any confident about the orders.
Okay, so that customers have necessarily gotten more hesitant on.
On a macro level just more.
Or is that something that you don't know or no.
Bob.
90. This this is mostly timing related.
None of them have gone away because they need those products right and what happens is that if the airport terminal is not ready if they don't out of that ending system in time, they got to get that construction looked at it it changes the timing of it and we're excited not only just for the order placement, but it also has an impact on the actual shipments.
Thats why as some of the revenues assemble from one quarter to the other.
Right and pretty impressive on the other product revenue being up 24% year over year.
And there was no acquisition, there or anything else so was there.
Yes, that's somewhat on the timing side, but.
And then the flip side question broadly what drove the.
Service piece down 5%.
But basically it's inter related again to the mix and it can also what we say is as the 24% increase.
And the equipment sales have gone up remember our business lending equipment is placed it requires a lot more service people installation and staff that consumes a lot and then it had a capability or service later on after the warranty period. So as we are shipping a lot of product and Alan Alan mentioned this quarter was quite heavy.
In the equipment sales and that required lot more support work in the service personnel.
And at some of that.
On that protocol with some of that helped by the initial start from somebody I know you had a couple of.
Sort of.
Quite a turnkey deals that big I think we're beginning now let my mistake and does that did that contribute at all this quarter.
Yes, the X. Ray this is Alan the actual turnkey deals.
We're not part of Q1, yet, though becoming here in the next few months and the the one that was kind of a hybrid deal. We have recognized some revenues associated with that so that has been helpful. For US. Okay. And then just switching gears. Your first on the health care side. Obviously Q1 is usually on terms of profit.
A down quarter are probably fairly profitable.
7% obviously.
A couple of million dollar, so but but.
It seems like you hopefully you should be for the full year without I know you don't guide.
Segments, but.
For the double digits this year on operating margin level, that's something.
Sure for this year.
Hey, Larry This is Alan yes, you're right, we only provide guidance on the overall OSI systems that we think theres nice opportunities in healthcare to to expand margins with it being our highest contribution margin division. So is it becomes very sensitive to the topline.
Okay, great. Thank you very much.
Thank you. Our next question or comment comes from the line of Amman Colonic from B. Riley FBR. Your line is open.
Hey, guys. Thanks for taking my question and congratulations another solid quarter.
Yeah nice to see some lift in Optum margin.
Can you provide more color on what's driving improved margins. There is like a particular end market that.
Driving the margin a little bit higher.
Sure. This is Alan I'll take a shot at that yeah. We're real pleased with the opto division's performance the operating margins without were outstanding.
What was really driving it was sort of an improved mix week, we have gotten more into the flex circuit business over the past several years, we did a few acquisitions a couple of years ago and those businesses, our higher margin in general and they have continued to perform a outstanding that coupled with the strong performance in our core.
Two electronics and our core contract manufacturing.
Has really helped.
Over over the time, we've we've shed some customers that were other low margin or or no margin. So overall the mix is just improved leading up to much stronger operating margins for the group.
Got it thank you and then.
Any color on the European check baggage conversion.
I know last quarter, you said youre about 30% to 40% through that is that.
Gone up.
From the prior quarter.
Pilot it doesn't depot cap it continues.
I said in my.
Mark So we won some contracts in Europe and Asia.
It continues to to get more to install base out there.
But I still believe strongly that the heavy lifting and the big Big numbers are going to be in later part late 2020, and 21 as they come more closer to the deadline.
Got it. Thank you and then last question for me I know you've been talking about occurring.
Client in the Middle East figure integrated services on you did mention that was progressing.
Smoothly.
When do you think you could side generating meaningful revenues from that contract.
As as Alan I think we'll see some some meaningful revenues from that contract in this fiscal year fiscal 2020. So we think we're on track for that.
There's a deeper just to add onto what Alan said.
We have said it and we've been very carefully and saying it say integrated services contract. We've also said in previous calls that it is going and go to phases phase 1234. So it can continue to expand.
Depending upon the performance and satisfaction to the customer we feel very good about it and to us that looks like there will be a continued long term growth.
And a good profitable contract a long term in that area.
Okay. Thank you I'll pass it on.
Thank you. Our next question or comment comes from a line of Jeff Martin from Roth Capital Partners. Your line is open.
Thanks, Good afternoon Deepak.
And Illinois.
Hi, Jeff.
Yes, I was going if you could expand a little bit on the competitive positioning that you've got in aviation passenger and cargo you mentioned.
Higher throughput and better image quality I was wondering if you could.
Elaborate on that.
Yes, just because you have good question.
Ill be waters maintain that our DTC.
Has some great significant advantages over what you call to rotating entry.
And Thats moving parts it hasnt fundamentally high speed image quality is very good and it this quarter on very well the cargo carriers, who want to increase the two portal package inspection and they want to do better imaging of the packages. So that has become the big success story for us and we continue to fall.
Focus on it can be spending on R&D money to optimize our detrick, what that David Acquirements and that continues to see growth on top of that in the aviation checked baggage sectoral. So we've got low enough progress made we continue to ship more machines and as the deadline in Europe comes more closer week.
Thank you can see more action on top of that we have set of the last couple of conference calls. We have also started focusing on what we call checkpoint CP.
Outside the us.
And that does going on a lot of traction does a lot of interest we are doing a lot of demos and a flushed seat would be missed customers, especially in Asia and in Europe .
And we think that that long term that growth market has also want to be there and what we call. The checkpoint ninetwenty see key for the checkpoint. So all in all bolting cargo and in checked baggage and now into checkpoint CTG. We look at that the next couple of years the growth momentum moment.
Okay, and then could you repeat your comments around the radiation monitoring monitoring opportunity is this something like you've been in for some time, you mentioned 15000 units, but I didnt capture if that was the addressable market. If that's your installed base now tax good question I want to clarify the two different things I said.
One we have shipped already ideation monitors to some places what inspection and we are in that business for a long time, it's not a big business.
But you got confused the second sentence I said is.
On installed base worldwide for our baggage for not checkpoint BPCI machines.
Globally, that's the extra machines, not delineation portals and stuff and we think that machine that yet that the quantity maybe more than 15000 installed base. So they're two different things sorry for the confusion.
Okay I appreciate that and then final question, if and add these orders pushed to the right what would your book to Bill been and security.
Well, obviously north of one.
Okay.
Okay, Great nice quarter, guys and Jeff just to clarify that again, we've said that before you've followed us for a long time.
This business is lumpy both in bookings and into shipments none of them have disappeared or anything else to just pushed.
And we continue to look at it and some of these bookings also become little bit more lumpy the bigger the size of it because when you're selling one or two versus if you want to sell the airport blow machines. It becomes a big difference and takes longer time to predict wet.
Great point, thanks deeper.
Thank you. Our next question or comment comes from the line of Sheila from Jefferies. Your line is open.
Hey, good afternoon, guys and thank you for the time.
I was wondering if you could give a little bit my comments on security just what you're seeing on a global basis.
Are you seeing any impact from China trade or projects that.
Business and then.
And market color that you have is well within whether its aviation or stadiums there.
Finding some of the products Frank.
Thank you.
I'll take that there's a deeper cash Sheila.
We've said before we continue to monitor it we have had no impact from any of these China candidates at all.
At the same time.
As we've said before more turmoil in the world more requirement for security.
So we continue to see very robust pipeline.
Continued to be very very proactive and.
Though it takes a long time, we have said it but our pipeline for turn key businesses continues to grow.
On that long cycle and some of them are difficult to predict when but this is not more interest the more we talk the more we succeed more we take our customers to the places and I've said in last couple of conference calls.
We're very fortunate that we're going to have a turnkey project in Asia is going to have a turnkey project. The already know in Puerto Rico, we have it Albania, we're winning middle East we have on Latin America in Mexico. So all those things become what I call showpiece for the customers of that region to come and look at it.
And is catching on quite well. So we think that there is no what I call. It showstopper.
For the continuous growth of the security business as well as the new applications that have come out into the air cargo area are the checked baggage.
The European airports have to get were deadline now that Jack talking about the checkpoint cdte added checkpoint.
Got new applications. So the growth continues we are not impacted but we are watching it carefully.
Got it and then.
Is there any color as the services business and turnkey about a quarter or the portfolio.
That does the Keith.
Sheila this is Alan it it would be less than than that it was that it was a higher percentage on the under the initial Mexico contract in the Mexico revenues were larger and before the rest of our business grew so significantly. So so turnkey is very nice part of our program, but it's not as large as that.
Okay, and so turnkey and services bucket into line.
We classify turnkey as part of services.
If you're talking about turnkey and services together, then yes that represents a far more substantial part of our portfolio.
Okay.
And then Alan just on the free cash flow at good quarter in terms of 25 million is that sort of the run rate, we should be thinking about and I guess, how do you think about capital deployment from here given that you do have.
Yes, you've lowered your leverage.
Sure, Yes, we're real pleased with a with our with a free cash flow, our operating cash flow and our free cash flow.
I wouldn't necessarily say, that's a run rate on each quarter I think you'll see some quarters, where it will be larger than that and I think you'll see some quarters, where it may be significantly below that lot of that we'd be reflective of our need to build inventory and the timing of collections, but overall, we're very pleased with where our cash flow is how we.
Look to deploy our capital allocation with our strong cash and low net leverage is first and foremost we like winning these these new turnkeys and they require some capex, which.
Nice returns on investment for us.
We also look at at M&A as you know we've been active throughout our history.
And any residual cash we use for opportunistic stock buyback as well as paying down any debt that that we might have.
Thank you for the color.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Thank you I want to thank everyone for joining our call I look forward to speaking to you on the next quarter call and again one of thanks.
All the employees for for a good deliverance and execution for the quarter. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful.
Ladies and gentlemen, thank you for standing by welcome to the.
So these are incorporated first quarter 2020 conference call at this time, all participants why don't I must be here.
No.
Speakers presentation, there will be a question and answer session.
The question during the session you will need to press Star then one all your telephone.
Please be advised of today's conference is being recorded if you require any further assistance. Please press Star then zero Oh, no write down in the car. So what's your speaker today Mr., Alan Edrick, Chief Financial Officer, Sir Please begin.
Good good afternoon, Thank you for joining us.
Alan Edrick executive Vice President and CFO about whats I systems.
I'm here today, with Deepak Chopra, our president and CEO .
Welcome to the always I systems fiscal 2021st quarter Conference call.
We would like to extend a warm welcome to anyone who is the first time participant on our conference calls we're glad that you can join us.
Earlier today, we issued a press release announcing our fiscal year 2021st quarter financial results.
Before we discuss the results I'd like to remind everyone that today's discussion will include 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 under the securities laws.
These forward looking statements are based on management's current expectations and are subject to uncertainties risks assumptions and contingencies, many of which are outside the company's control.
Such statements include without limitation.
The information regarding the expected financial and operational performance of the company and its operating divisions, including the company is expected revenues earnings and growth.
Undue reliance should not be placed in our forward looking statements as actual results could differ materially from forward looking statements due to numerous factors, including but not limited to factors described as the company's periodic reports filed with the FCC from time to time.
All forward looking statements made in this call are based on currently available information and speak only as of the data this call and the company undertakes no obligation to update any forward looking statement that becomes untrue, because the subsequent events or new information or otherwise.
During today's conference call, we may refer to both GAAP and non-GAAP financial measures.
Information regarding non-GAAP measures and comparable GAAP measures of the company's results in a quantitative reconciliation of those figures. Please refer to todays earnings release.
Which has been furnished to the FCC as an exhibit to a current report on form 8-K.
Before turning the call over to deep AUC to discuss the company's general business and operations.
I'll take a few minutes to provide a high level financial overview of the fiscal 2021st quarter results.
First.
I am pleased to announce that we reported record first quarter revenues of 291 million.
Representing a 9% year over year increase driven by solid performance and each of our three divisions.
Second.
We reported Q1 GAAP diluted earnings per share of a dollar Ted compared to 50 cents in the same prior year period.
non-GAAP , EPS, which exclude certain items specified in our earnings release and also to be reference later on this call came in at a record 91 cents per diluted share for Q1 fiscal 20 compared to 81 cents per diluted share for Q1 at this school 19.
Third our fiscal 2020 Q1 cash flow from operations was approximately 25 million.
A significant improvement over the negative 3 million in the same period last year, primarily due to stronger profits and improved working capital management.
Our Q1 2020 book to Bill ratio for equipment related services non turnkey was 0.9 X as certain anticipated orders shifted to the right.
Before diving more deeply into our financial results and discussing our fiscal 2020 guidance, let me turn the call over to device.
Thank you Alan and good afternoon to all of you.
We started the fiscal 2020 with record revenues and S and the first quarter.
All three divisions, we do their revenues from the prior year plus quarter and delivered nice profitability.
Getting into each division's performance starting with the security Division.
Where we have reported revenues of approximately 189 million.
An increase up 11% over the prior year period.
The security Division continues to see an expansion.
Opex opportunity pipeline and most product categories, both internationally and domestically you watch.
Although some orders that we anticipate didnt get one indicator didn't grow up pushed to the right.
Backlog continues to be strong specifically in the R D and cargo solution equipment, where we have clear visibility through fiscal 2020.
A few examples of Q1 activities and our key end markets starting with fortune borders.
During Q1.
We continue to support the U.S. government on its initiated to strengthen border security to prevent contraband illegal drugs and people smuggling entering the country.
A few of our products utilized for these clinical efforts, our cargo and vehicle inspection systems, both fixed and mobile excellent portals.
I'm also curious detection units fraud, dropping detection and baggage and parcel inspection exit of systems.
We are nearing the completion of the build out phase for the hot dog instead of us projects at the ports in Guatemala, and in Asia and look forward to both becoming operational in the next few months.
The Middle East integrated service project.
Good news to make progress.
Our existing programs and Mexico analytical and Albania are continuing to perform well I'm not checkpoints habit resulted in numerous caesars and interconnection of illegal cargo shipments.
On the Mexico Donkey program, we are in active discussions with a customer for an extension to the contract which as you know originally had a six year.
That started in 2012 and then be received it do you have follow on in 2018, which ends in January 2020.
As you can understand we can't comment on the details of the discussions.
In aviation passenger and cargo air cargo security, we continue to be very active worldwide on denbury, well wrap a scan $600 revealed baggage and parcel inspection systems and the already on 900 series the new platform after.
Systems.
Together with the EGD systems, and real time, demography, RTT CTG inspection systems.
During the quarter, we add strategic wins after European airports, and Asia and airports for these products.
We also had been very successful with air cargo customers that are utilized RTT NBP I systems at various logistic.
And we see a robust growth in this sector globally.
Our duty with this throughput.
And image quality has significant advantage for aeronautical applications.
Back to our competitors.
Well critical infrastructure security during the quarter.
Well what sets us on international customers.
Specifically for radiation modern thing portals.
Ladies and BPCI machines.
Of note we received an order from a government agency to provide multiple units of RPM 700 radiation monitoring portal, which is used to screen individuals and drink secure locations for radioactive substantially as.
We also received several awards from private and government customers for Apis down 600, Cdis BP eyes, as we've mentioned before our installed base globally, followed thereafter scan MBI apps today, you enter succeeds 15000 units.
Going forward, we believed that the breadth of activity that we're seeing across critical regions and our customer base positions does it get worked in division well for the remainder of fiscal 2020.
Moving onto the Optoelectronic on manufacturing Division.
Outdoor delivered record Q1 revenue is exhibiting 4% growth over the prior year with improving margins.
The top line was helped slightly but the benefit of a full quarter from the acquisition open Optoelectronics Trust strategic product line.
We did at the end of July 2018.
The profitability of the October has also helped by more favorable revenue mix and operating efficiencies.
We continue to make investments and or so strategic acquisition opportunities to expand into areas of growth in this division.
Looking ahead, we continue to see sustain momentum into key markets and customers for optimal.
Moving onto the healthcare division.
Q1 sales, what up 5% as compared to the first quarter fiscal 19.
Significantly improved operating income.
Over the past couple of years, we have broad and deep talent made operational improvements and shifted the business focus to the core products, so patient monitoring cardiology and related supplies and accessories.
We continue to focus on opportunities, where we can differentiate among our peers by offering innovative ddos and accessories, highlighting our customizable and open architecture based solutions.
The backlog remains strong and we remain focused.
The new President Shalabh, John drop we joined US in early September is making good progress.
Overall I'm pleased with our Q1 performance I'm excited about our future and look forward to the coming quarters.
I want to take a moment, thank all our employees for their efforts with that.
Ill hand, the call back over to Alan the talk in detail about our financial performance before opening the call for questions. Thank you.
Thank you Deepak.
Now I will review the financial results for our 2021st fiscal quarter in greater detail as.
As mentioned previously our revenues in Q1 fiscal 20 were up 9% year over year.
Revenues in the Security Division Division reached a record Q1 level of 189 million an increase of 11% from Q1 fiscal 19, driven primarily by growth in the cargo and RTC product lines.
The Opto Division continued its impressive performance with revenues, increasing 4% year over year to a new Q1 record of 74 million.
This increase was driven by 6% growth in external revenues, partially offset by a reduction in intercompany revenues.
Our health care Division posted solid revenue growth of 5% driven by U.S. demand, which was levers to significant growth in profits.
The Q1 gross margin of 34.1% was down from 36% in the same quarter last year.
Though we saw gross margin expansion in our opto and health care divisions reduced gross margin in the security division due to the mix of revenues resulted in the overall reduction.
With respect to the security mix security product revenues were up 24% well security service revenues were down 5%.
Security product sales tend to have lower gross margin then security service sales, thus, resulting in a reduced overall gross margin.
As mentioned on previous calls our gross margin will fluctuate from period to period based on revenue mix among other factors.
Moving to operating expenses.
Yes, you're going to expenses were up slightly by 0.8% year over year. However, as a percentage of sales SGN a expenses decreased to 21.4% in Q1 fiscal 20.
From 23.2% in Q1 of the prior year, which evidences our diligent efforts across all of our divisions to improve efficiencies and prudently manage our cost structure.
R&D expenses in Q1 were 14.2 million up 4% from Q1 of the prior year largely due to activity in the security Division.
We remain focused on innovative product development, which we view is vital to the long term success of our business.
In Q1 fiscal 20, we recorded a $2.1 million benefit in restructuring and other charges due primarily to insurance recoveries of legal costs compared to a $4.2 million charge. We took in Q1 fiscal 19.
Moving to interest and then taxes.
Interest and other expense in Q1 fiscal 20 decreased to 4.7 million from 5.3 million in the same prior period, a year ago. As a result of lower average borrowings due to the strong trailing year cash flow and lower average interest rates under our credit facility.
On the tax side, excluding the impact of discrete tax items.
Our effective tax rate in Q1 fiscal 20 was 27.9% compared to 28.1% in the first quarter fiscal 2019.
We recognize the discrete tax benefit of 6.2 million for equity based compensation in Q1 of this fiscal year compared to a 1.5 million tax benefit for equity based compensation in the same prior year period.
As a result, we reported a tax benefit and resulting negative tax rate of 2.9% and Q1 at fiscal 20 compared to a positive tax rate of 13.9% in Q1 at fiscal 19.
I'll now turn to a discussion of our non-GAAP adjusted operating margin, which excludes restructuring and other charges and amortization expense of inquired intangible assets.
The company's non-GAAP adjusted operating margin in Q1 at fiscal 20 was 9.1%.
Comparable to the 9.2% in Q1 fiscal 19.
Similar to gross margin as I mentioned earlier, we saw year over year operating margin increases in our opto and health care divisions.
Offset by a reduction in operating margins in the security Division.
The opto division's operating margin expanded significantly from 11.7% in Q1 last year to a Q1 record 13.0% in fiscal 2020.
The health care Division reported a nice turnaround from negative 4.4% in Q1 last fiscal year to 7% in Q1 fiscal its way.
With incremental investment in R&D and the change in gross margin previously noted the security divisions operating margin was 12.2%.
Moving the cash flow.
In Q1 fiscal 20, we generated 24.8 million and operating cash flow compared to negative 2.8 million in Q1 of the last fiscal year.
This strong Q1 fiscal 20 cash flow was driven by increased profits improved inventory management as days inventory on hand decreased to 128 days in Q1 fiscal 20 from 184 days in Q1 fiscal 19.
In increased customer advances.
This was partially offset by an increase in days sales outstanding to 77 days in Q1 fiscal 20 from 76 days in Q1 fiscal 19.
Capex in the quarter was 6 million, which include an investment for turnkey projects, while depreciation and amortization expense was 13.5 million.
We were active in our stock buyback program in the 2021st fiscal quarter acquiring approximately 126000 shares.
As of September Thirtyth, 2019, 436000 shares approximately where available for additional repurchase under the program.
Our balance sheet remains strong we ended the quarter with net leverage of approximately 1.4.
Finally, turning to guidance.
For fiscal year 2020, we are increasing our guidance for revenues to a range of 1.238 billion to 1.273 billion.
And our guidance for non-GAAP earnings per diluted share has increased to a range of $4.61 to $4 an 83 cents.
This non-GAAP diluted EPS range does not reflect potential impairment restructuring and other charges.
Amortization of acquired intangible assets and noncash interest expense and their associated tax effects as well as discrete tax items.
We currently believe the sales and non-GAAP earnings guidance reflect a reasonable estimates.
Actual sales and non-GAAP earnings however, could vary from the anticipated ranges due to the risks and uncertainties, specifically affecting our business and generally affecting industries in which we operate.
These risks and uncertainties include items beyond our control such as site readiness or product installations evolving government trade policies customer acceptance of our products and the timing of orders and contract renewals in East Division and other risks and uncertainties discussed in our SEC filings.
We have continued to focus on the growth of our business, while investing in product development.
Making selective strategic acquisitions and managing our cost structure.
We believe these efforts will enable lowest side to continue our leadership role with innovative products and solutions across our various industries.
Thank you for participating on this conference call and at this time, we would like to open the call the questions.
As a reminder to ask a question, ladies and gentlemen, you're willing to press Star then one of your telephone to withdraw your question. Please press the pound cake. Please standby, we compile becoming a roster.
Our first question or comment comes from the line Larry Solow from CJS Securities. Your line is open.
Good afternoon, Thanks for taking my questions.
Just on the security.
So just can you just give us some more color on the on the.
Little bit light on the orders in terms of your visibility do you know it sounds like some specific orders that you were shifted a little bit to the right.
Yes.
Still expect those to happen this year or is it sounds like it's purely as a more timing than anything else.
Good question does a deeper care.
Yes, I did say that.
And ill just this business, especially globally.
Plenty very strong.
We have a lot of opportunities out there, but as you accusing these orders a lot of these orders depend upon the Dennis up the customer even while placing the orders and as you get into both the cargo equipment orders and due to looking at the R&D orders globally.
Some of them got pushed to the right.
But at order pipeline continues to be very strong we have said it before in the previous calls that as deadlines are approaching in Europe up 2020 to 2021 at force continue to move forward.
A lot of activity in us Im sure Youve seen latiff, perhaps going on what's happening on the southern border. Paul There's lot of activity. We have any belt placed also we have very we have any confident about the orders.
Okay, so that customers have necessarily gotten more hesitant on.
Macro level is it just more.
Or is that something that you don't know or no.
Bob.
Thank you. This this is mostly timing related.
None of them have gone away because they need those products.
Right and what happens is that if the importance terminal is not ready if they don't have the baggage handling system in time, they got to get that construction looked at it it changes the timing of it and that had not only just for the order placement, but it also has an impact on the actual shipments that's why some of the revenues as symbol for one quarter to the.
Right and pretty impressive on the other product revenue being up 24% year over year.
And there was no acquisition, there or anything else or was there I guess at someone on the timing side, but.
And then the flip side question, Brad is what drove the.
The service piece down 5%.
Well basically it's into related again to the mix and that can also what we say is as the 24% increase.
And the equipment sales have gone up with a member of our business lending equipment is placed it requires a lot more service people installation and stuff that consumes a lot and then it has delayed or service later on after the warranty period. So as we are shipping a lot of product and Alan Alan mentioned this quarter was quite heavy.
In the equipment sales and that requires a lot more support work and the service personnel.
And that some of that.
On that product saw with some of that helped by the initial start from some of the I know you had a couple of.
Sort of.
Turnkey deals that big I think we're beginning now lot mistake and is that did that contribute at all this quarter.
Yes, the X. glare. This is Alan the actual turnkey deals.
We're not part of Q1, yet they'll be coming here in the next few but and the the one that was kind of a hybrid deal. We have recognized some revenues associated with that so that has been helpful. For US. Okay. And then just switching gears on health care side, obviously Q1 is usually.
It was a profit.
A down quarter, our brawley barely profitable.
No, 7%, obviously only couple of million dollar, so but but.
Seems like you hopefully you should be for the full year without I know you don't guide for segments, but perhaps a double digits. This year on operating margin level is that something that target for this year.
Hey, Larry This is Alan yes, you're right, we only provide guidance on the overall OSI systems that we think theres nice opportunities and health care to to expand margins with our highest contribution margin division. So is it becomes very sensitive to the topline.
Okay, great. Thank you very much.
Thank you. Our next question or comment comes from the line of Amman Galanis from B. Riley FBR. Your line is open.
Hey, guys. Thanks for taking my question congratulations another solid quarter.
Yes, I see some lift in the optimum margin.
Can you provide color on what's driving improved margins. There is like a particular end market that.
Driving the margins.
Hi.
Sure. This is Alan I'll take a shot at that yes, we're real pleased with the opto division's performance the operating margins without were outstanding.
What's really driving it was sort of an improved mix. We we have gotten more into the flex circuit business over the past several years, we did a few acquisitions a couple of years ago and those businesses our higher margin in general as they have continued to perform.
Outstanding that coupled with the strong performance in our core opto electronics and our core contract manufacturing.
Has really helped.
Over over the time, we've we've said as some customers that were other low margin or or no margin. So overall the mix is just improved leading up to much stronger operating margins for the group.
Got it thank you and then.
Any color on the European checked baggage conversion.
Last quarter, you said youre about 30% to 40% through that is that.
Going up.
From the prior quarter.
Pilot it doesn't deep again it continues.
I said in my.
Mark sell we won some contracts in Europe and Asia.
It continues to to get more installed base out there.
But I still believe strongly that the heavy lifting and the big Big numbers are going to be in later pot late 2020, and 21 as they come more closer to the deadline.
Got it. Thank you and then last question for me I know you've been talking about securing.
Client in the Middle East figure integrated services.
You Didnt mention that was progressing.
Notably.
When do you think.
You could side generating meaningful revenue from that contract.
This is Alan I think we'll see some some meaningful revenues from that contract and this fiscal year fiscal 2020. So we think we're on track for that.
There's a deeper just to add onto what Alan said.
We have said it and we've been very careful in saying it say engagement services contract. We have also said in previous calls that it is going on goal two phases phase 1234, so it can continue to expand.
Depending upon the performance and satisfaction to the customer we feel very good about it and to us that looks like that would be a continued long term growth.
Good profitable contract long term in that area.
Okay. Thank you I'll pass it on.
Okay.
Thank you. Our next question or comment comes from line of Jeff Martin from Roth Capital Partners. Your line is open.
Thanks, Good afternoon Deepak.
How are you.
Right.
I was one if you could expand a little bit on the competitive positioning that you've got in aviation passenger and cargo you mentioned.
Yeah, Hi, throughput and better image quality I was wondering if you could.
Elaborate on that.
Yes duplicate you have good question.
Ill be what are the maintain that RTT.
Has some great significant advantages over what you call duplicating entry nest moving parts the CASM fundamentally high speed image qualities very good and it does part on very well the deep cargo carriers, who want to lead pleased the throughput of package inspection and they want to do better imaging.
Packages, so that has become the big success story for Us and we continue to focus on it can be spending on R&D money to optimize that require that David acquirements and that continues to see growth.
Top of that in the aviation checked baggage sector also we've talked a lot of progress made.
Continue to ship more machines and as the deadline in Europe comes more closer we continue to see more action on top of that we have set of the last couple of conference calls. We have also started focusing on what the checkpoint CP.
Outside the us and that does going on a lot of traction does a lot of interest we are doing a lot of demos and a flushed seat with media customers, especially in Asia and in Europe .
And we think that long term that growth market has also want to be there and what because a checkpoint ninetwenty see key for the checkpoint. So all in all bolting cargo and in checked baggage and now into checkpoint CD. We look at that the next couple of years the growth momentum momentum will continue.
Okay, and then could you repeat your comments around the radiation monitoring monitoring opportunity is this something like you've been in for some time, you mentioned 15000 units, but I didnt capture if that was the addressable market or if that's your installed base now. Thanks. Good question I want to clarify didn't do different things I said, one we have shipped.
At aviation.
Monitors to some places what inspection and we are in that business for a long time, it's not a big business.
But you got confused the second Santander said is on installed base worldwide for our baggage put out a checkpoint dbi machines.
Globally, that's the accident machines, not that aviation portals and stuff and we think that machine that yet that the quantity maybe more than 15000 installed base. So there are two different things sorry for the confusion.
Okay I appreciate that and then final question. If you hadn't had these orders pushed to the right what would your book to Bill been and security.
Well, obviously molotov one.
Okay.
Okay, Great nice quarter, guys and Jeff just to clarify that again, we've said before you'll formats for a long time.
This business is lumpy both in bookings and into shipments none of them have disappeared Anthony answer just pushed.
And we continue to look at it and some of these bookings also become little bit more lumpy the bigger the size of it.
When you're selling one or two versus if you want to sell the airport blow machines. It becomes a big difference index longer time predict wet.
Great point, Thanks, Dave Buck.
Thank you. Our next question or comment comes from the line of Shiva. Okay from Jefferies. Your line is open.
Hey, good afternoon, guys and thank you for the time.
I was wondering if you could give a little bit more comments on security just what you're seeing on a global basis.
Are you seeing any impact from China trade or projects that with that business and then.
Any end market color that you have is well within whether its aviation or stadium.
That's driving some of the product strength.
Thank you.
I'll take that there's a deeper cash Sheila.
We've said before we continue to monitor it we have had no impact from any of the China candidates at all.
At the same time.
As we've said before more turmoil in the world more requirement for security.
So we continue to see very robust pipeline.
Can you can be very very proactive and.
Though it takes a long time, we have said it but odd pipeline for turn key businesses continues to grow.
As long cycle and some of them are difficult to predict when but this is not morning, just the more we talk the more we succeed more we take our customers due to places and I've said in last couple of conference calls.
Very fortunate that we are going to have a turnkey project in Asia, they're going to have a turnkey project. The already know in Puerto Rico, we'll be able to Albania. We at one in Middle East we have on Latin America in Mexico. So all those things become what I call showpiece form the customers up that region to come and look at it and it.
Catching on quite well. So we think that data is no what I call. It showstopper for continuous growth helped the security business as well as the new applications that have come out into the air cargo area are the checked baggage.
The deep deep.
European airports have to get where deadline now that youre talking about the checkpoint cdte added checkpoint.
Well, we've got new applications. So the growth continues we are not impacted but we are watching it carefully.
Got it and then.
Is there any color.
Services business, and turnkey about a quarter or the portfolio.
That sounds like Keith.
Sheila this is Alan it it would be less than than that it was that it was a higher percentage on the under the initial Mexico contract on the Mexico revenues were larger and before the rest of our business grew so significantly. So so turnkey is a very nice part of our program, but it's not as large as that.
Okay, and so turnkey services, you would bucket into line.
We classified turnkey as part of services.
If you're talking about Turkey and services. Together, then yes that represents a far more substantial part of our portfolio.
Okay.
And then Alan just on the free cash flow good quarter in terms of 25 million is that sort of the runway we should be thinking about.
I guess, how do you think about capital deployment from here given that you do have.
You've lowered your leverage quite a bit.
Sure Yeah, we're real pleased with a with our with our free cash flow, our operating cash flow and our free cash flow.
I Wouldnt necessarily say, that's a run rate on each quarter I think you'll see some quarters, where it will be larger than that and I think you'll see some quarters, where it may be significantly below that lot of that we'd be reflective of our need to build inventory and the timing of of collections.
But overall, we're very pleased with where our cash flow as how we look to deploy our capital allocation with our strong cash and low net leverage is first and foremost we like winning these these new turnkeys.
And they require some capex, which have nice returns on investment for us.
We also look at and M&A as you know we've been active throughout our history.
And any residual cash we use for opportunistic stock buyback as well as paying down any debt that that we might have.
Great. Thank you for the color.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Im showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Thank you I want to thank everyone for joining our call I look forward to speaking to you on the next quarter call and again want to thanks.
All the employees for quite a good deliverance and execution for the quarter. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful.