Q2 2022 OSI Systems Inc Earnings Call

January 27, 2022

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Good day and thank you for standing by welcome to the OSI Systems, Inc. Second quarter 2022 conference call. At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question during that session you will need.

Press Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to OSI, Chief Financial Officer, Alan Anthony. Please go ahead.

Thank you good morning, and thank you for joining us.

Alan Edric Executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, our president and CEO welcome.

Welcome to the OSI systems fiscal 2022 second quarter conference call.

We are pleased that you can join us as we review our financial and operational results.

Earlier today, we issued a press release announcing our second quarter fiscal year 'twenty two financial results.

Before we discuss these results I would like to remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095 with respect to such forward looking statements.

All forward looking statements made on this call are based on currently available information and the company undertakes no obligation to update any forward looking statements based on subsequent events or new information or otherwise.

During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.

For information regarding non-GAAP measures.

And GAAP measures of the company's results and a quantitative reconciliation of those figures. Please refer to today's earnings release.

I will begin with a discussion of our financial performance for the second quarter of fiscal 'twenty two.

And then turn the call over to Deepak for an overview of our business performance.

I will then finish with more detail regarding our financial results and a discussion of our outlook for the 2022 full fiscal year.

We are pleased with our results this quarter, despite global marketplace challenges, including heightened impacts from Covid with the emergence of the omicron variant and increasing supply chain delays and logistics costs as.

As we continue to work through this environment.

Priority at OSI systems remains to.

To deliver on our commitments to our customers and to our partners and position the company for long term success, while preserving the safety of our employees.

Now we will go through a high level summary of our financial results.

Q2 revenues of $277 million were comparable with that of the prior year Q2.

Increased sales in the Opto division along with a slight increase in sales in the security Division were mostly offset by a 4% reduction in year over year Health care Division sales as expected.

Q2, non-GAAP earnings per share were $1 28 down 5% from Q2 of fiscal 'twenty, one due primarily to increased R&D higher supply chain costs and a change in product mix.

For the first half of fiscal 'twenty, two we reported record non-GAAP diluted EPS of $2 44 per share up 5% year over year.

Bookings were a bit softer in the second quarter of fiscal 'twenty. Two following a Q1 book to Bill of one six.

Q2 book to Bill ratio was <unk> nine resulting in the fiscal 'twenty two first half book to Bill exceeding one two.

We ended the quarter with a backlog of over $1 2 billion, a 12% increase since the beginning of the fiscal year.

Lastly in December we amended our credit facility, increasing the capacity from 535 million to $750 million extending the term to a fresh five years.

And maintaining the very favorable pricing, which as of quarter end with LIBOR plus 100.

This adds increased optionality as our convertible notes come due in September 2022.

Before diving more deeply into our financial results.

I'll now turn the call over to Deepak.

Thank you Alan.

And thanks to everyone joining us on today's call.

We had a good second quarter and first half of fiscal 2022, while working towards challenging macro environment that was significantly impacted by the rapid spread of omicron variant.

This latest Covid wave.

Continues to hamper our supply chain logistics and business related travel.

Security has been the most impacted.

<unk> electronics, and healthcare were less affected and performed to our expectations.

We ended the quarter with a backlog of over $1 2 billion.

And enter the second half of fiscal 2022 with confidence in our ability to execute in a tough environment.

Taking on to each division's performance in the quarter starting with security.

The security Division delivered.

Q2 revenues that were slightly higher than Q2 in the prior year and revenues in the first half that were 5% higher than the flushed half of fiscal 2021.

In Q2.

Omicron Verdi impacted.

Demick challenged environment.

Especially for the aviation security market as certain airports.

Along with that equipment upgrade.

Placement and service cycles.

Local travel restrictions in certain regions of the globe.

Also affected timing for installation test.

And acceptance phases by the customer.

Aviation Port and border should guarantee products.

Discussing some of the highlights during the quarter and the flushed half.

The security team captured several key booking opportunities during the quarter.

We announced one of these wins valued at about $29 million.

From an international customer to provide cargo and vehicle inspection systems baggage and parcel inspection systems related training and maintenance services.

Earlier in the quarter previously, we announced $200 million in orders that were received near the end of Q1 from U S customs and border protection CBP.

Two indefinite delivery indefinite quantity contracts.

IDI cues that collectively have a ceiling value totaling approximately $870 million.

As CBP further strengthens its border security to interdict contraband and illegal drugs hidden in cargo and <unk>. We believe that there are opportunities for additional orders.

Under these <unk> to support our customers non intrusive cargo and vehicle inspection programs.

We have one of the broadest solution offerings in the industry.

As we had mentioned before that the shipments on this contract.

As more towards the Q4 and into 2023.

Internationally. We are currently working on several projects to upgrade and maintain existing rapiscan and <unk> cargo and vehicle inspection systems and new installations.

Our zeb mobile back scheduled advantaged.

Bolton Sixty's high energy and multi energy configurations for drive thru portals, and <unk> fixed gantry configurations. Among others are utilized at one or more of these but these projects provide customs clearance of goods at ports and border crossings.

Some projects. We are also incorporating our proprietary software integration software called search scan, which.

Which is cyber secure and helps manage inspection image data travel vical identification and integration with other systems at cargo and vehicle inspection checkpoints, thereby streamlining and facilitating the inspection process.

Scan was designed to work with third party inspection systems and can be sold as a standalone software.

So we continue to gain traction with our search scan software as a service called SaaS model.

Potential customers that have inspection equipment from multiple vendors to utilize the software platform.

As mentioned before in our $200 million contract that we announced before.

There is a good portion of the search scan software also.

And don't get services.

<unk> in Albania vertical what our model continued to perform well our experience and capabilities derived from operating and managing these darn deep programs have been invaluable as they have allowed us to differentiate ourselves and when critical border security projects.

That have a scope Virgin was equipment installation civil works system integration and operating training and in some cases the search scan software also.

During the quarter, we continued to work with third party global logistics providers to support their infrastructure and expansion efforts that required various solutions for parcel inspection and explosive detection and.

And again, we have a broad set of solutions here that match well to the requirements of these customers.

We're very focused on capturing new opportunities in this growth area, primarily driven by increased E. Commerce goods flow as mentioned before air cargo has become a very good product portfolio for us and we feel that we are best placed as our broad product portfolio.

For that market.

In Q2 secured did a commendable job delivering to our customers while prudently managing the cost structure deals.

<unk> with the ongoing supply disruptions travel bans travel quarantines and test and acceptance delays.

Looking ahead, we believe that security with a solid backlog and opportunity pipeline is well positioned for a strong second half of our fiscal year.

As Melanie will talk later definitely some of the revenue in security got pushed from Q2 into Q3 and Q4.

Moving on to our Optoelectronics Division, we had a strong quarter by leveraging our global operational presence to deliver to our various OEM customers.

All those third party Q2 revenues up $78 million represented yet another new record for the division.

After dealt with instances of material shortages.

<unk> price increases and higher freight costs and still achieved a record quarterly profit.

In an increasingly difficult macro environment. The opto team has done well to anticipate potential supply chain constraints and blend workarounds as needed to maintain deliveries to Oems in aerospace defense healthcare automotive.

And telecommunication industries among others.

During the quarter, we announced an order for approximately $6 million.

To manufacture sub assemblies flight of wireless critic telecommunication provider.

To support growth in Asia.

Especially for our medical products, we are expanding up those India's operation as we transition to a larger facility shortly which will come online in the second half of 2022 looking ahead.

With a record Q2, ending backlog, we anticipate continuing to perform well in the second half of the fiscal year.

Want to make an extra.

Meant that our customers OEM customers in the auto business.

Super Super Cooperative and has helped us in the supply chain and in some cases, we've been able to pass on the price increases over to them.

Moving onto the healthcare Division, we reported revenues of $52 million a bit lower than the same period from year ago, which was expected last year's Q2 revenues still had tailwind from hospitals.

Spending that ICU capacity for the pandemic during.

During the quarter, we announced a couple of key wins totaling $9 million from.

From U S hospitals in the northwest and South regions. These hospitals.

<unk> hundred a wide array of patient monitoring solutions, including our exhibit central stations, Q transport patient monitors and related accessories.

During the quarter, we continued to significantly invest in developing new products for the patient monitoring and cardiology product lines to further strengthen our offering for the future.

For cardiology, we have also invested in building out our U S sales channel that together with new products launched helped drive strong cardiology topline growth in Q2 and the first half.

Do we have a significant portion of our revenues in the U S for patient monitoring.

We're just getting started for establishing our U S presence for cardiology.

Excuse me going forward, we plan to maintain our focus on operational execution and stay agile to handle additional demand that may arise from certain hospitals that need to increase capacity currently being strained by the latest Colgate variant.

Overall, we are pleased with the company's fiscal 2022 flushed half performance.

Considering the conditions that quickly arose due to the omnicom variant.

Is that the overall impact from omicron dissipate as quickly as it started.

Signs already of them thinking it however, due to the ongoing challenges now exasperated by the latest variant we added advising our topline guidance.

Likely lower range, while simultaneously feeling confident of increasing our earnings guidance with expected improvement in operating margins and product mix in the second half, but more security revenue, which Allen will go into more detail.

Since the beginning of the pandemic the company has proven its ability to maintain its focus on helping customers worldwide with their critical roles in providing public health safety and security I would like to thank our employees customers and shareholders for their confidence in us and I look for.

Forward to the second half of our fiscal year.

I will now turn the call back over to Alan to further discuss our financial performance before we open the call for questions. Thank you.

Thank you Deepak.

Now I will review the financial results for our fiscal second quarter in greater detail.

As mentioned earlier fiscal Q2 revenues were roughly the same as that of the prior year Q2 <unk>.

Security Division revenues were up slightly with increased service sales, but reduced product sales as Deepak mentioned the pandemic has impacted the timing of completion of certain projects and acceptance testing, which adversely affected security revenues this quarter.

<unk> sales, including intercompany sales increased 5% year over year, continuing the momentum seen throughout fiscal 'twenty one.

Third party auto sales in the second quarter were up 3% year over year, while intercompany sales in the quarter were up 13% year over year to support the anticipated increase in security sales in the second half of fiscal 'twenty two.

The growth in auto and security sales was partially offset by a 4% reduction in year over year revenues in the health care Division.

This was anticipated given the elevated demand for the patient monitoring products in the earlier stages of the pandemic, creating difficult comps for the division in fiscal 'twenty two.

While this dynamic related to patient monitoring sales is anticipated to continue during the remainder of the fiscal year several initiatives surrounding our cardiology product line, including new product releases and building out the U S sales team are beginning to pay off.

Cardiology related sales increased significantly year over year in each of Q1 and Q2.

The Q2 gross margin was 36, 1% compared to 37% reported in Q2 of fiscal 'twenty one.

Similar to last quarter stronger revenue growth in our Opto division, which carries a lower gross margin than our other two divisions.

A reduced healthcare division revenues, which carries a higher gross margin than our other two divisions.

Places downward pressure on the consolidated gross margin.

The mix of product and service sales within the security Division were also less favorable than the prior year's comparable quarter.

Like many companies, we experienced increases in certain component and freight costs in each division, which impacted the gross margin as well.

Our gross margin will fluctuate from period to period based on revenue mix and volume among other factors.

Moving to operating expenses.

We continue to work diligently across each of our divisions to improve efficiencies and prudently manage our SG&A cost structure.

This quarter's results again demonstrate the success of these efforts Q2, SG&A expenses were 55 million or 19, 8% of sales compared to $56 million or 23% of sales in the prior year Q2.

Research and development expenses in Q2 or $15 million, representing a year over year increase of 9%.

We continue to dedicate considerable resources to R&D, particularly in security and health care.

We remain focused on innovative product development, which we view as vital to the long term success of our businesses.

In Q2 of fiscal 'twenty, two we recorded a zero point $8 million.

Restructuring and other charges.

As compared to a benefit of <unk> 2 million in Q2 of the prior fiscal year.

Moving to interest and taxes.

Net interest and other expense in Q2 of fiscal 'twenty two decreased to $2 2 million from $4 2 million in the same prior year period, primarily due to the adoption of the new accounting standard ASU 2020 that show six which eliminated the noncash interest expense associated with our convertible debt.

We note that adoption of this standard also resulted in increased debt on the balance sheet by eliminating the unamortized discount of approximately $10 million.

On the tax side.

Excluding the impact of discrete tax items, our effective tax rate in Q2 of fiscal 'twenty. Two was 25, 8% compared to 27, 5% in Q2 of fiscal 'twenty one.

We recognized discrete tax benefits of zero point $3 million in Q2 of each of fiscal 'twenty, one 'twenty two and as a result, the reported effective tax rate was 26, 3% in Q2 of fiscal 'twenty two compared to 28, 8% in Q2 of fiscal 'twenty one under GAAP.

I'll now turn to a discussion of our non-GAAP adjusted operating margin.

Overall, our adjusted operating margin decreased to 12% in Q2 of fiscal 'twenty two from 13% in Q2 of fiscal 'twenty, one driven by the previously discussed factors related to gross margin increased investment in R&D and the reduction in revenues in our healthcare division, which tend to carry higher margins.

We were pleased with the increase in the adjusted operating margin in our Opto Division.

Which expanded to a record 15, 4% in Q2 this year driven primarily by gross margin improvement as compared to 12, 8% in the prior year second quarter.

This Q2 record margin in opto was offset by reductions in the other two divisions.

The adjusted operating margin in our health care Division was 13, 8% in Q2 of fiscal 'twenty, two compared to 17, 4% in Q2 last year.

The decrease was driven by higher component and freight costs in this challenging supply chain environment.

Increased investments in infrastructure to support future growth and economies of scale associated with a higher level of sales during the onset of the pandemic.

Similarly, our security division's adjusted operating margin decreased to 14, 2% in Q2. This year from 15, 7% in Q2 of the last fiscal year, primarily due to a less favorable mix of customer revenues and rising costs in the supply chain.

Moving to cash flow.

In Q2 cash provided by operations was $14 5 million.

<unk> was again impacted by our decision to increase inventory levels to mitigate certain supply chain challenges and the timing of payments to vendors and collection from customers as some parties have been delaying payments in the current business environment.

Capex in the second fiscal quarter was $3 7 million, while depreciation and amortization in Q2 was $9 5 million.

We were again active in our stock buyback program.

During Q2, we spent approximately $29 million to repurchase 312790 shares, leaving approximately $2 1 million shares available to repurchase under the current program.

Our balance sheet is solid with net leverage under one 5% with significant capacity for acquisitions and additional stock buybacks.

We have multiple options to satisfy our obligations under the convertible notes, which mature in September .

Finally, turning to guidance.

As Deepak described challenges.

Associated with the pandemic, including the impact on the aviation business and travel, which can impact the timing of product installation and acceptance testing in a more difficult supply chain environment have led us to revisit the guidance.

In addition, and after a customer shifted business to a consignment model. While this last change leads to increase gross margins a decrease as revenues.

As a result, we are reducing our fiscal 'twenty two sales guidance to $1 6 billion to $1 195 billion from $1, one 9 billion to $1 225 billion.

However.

We anticipate stronger operating margins.

As such despite expectations of reduced revenues, we are increasing the fiscal 'twenty two non-GAAP EPS guidance to a range of $5 75 to 602 from $5 72 to $6.

Based upon our projected backlog delivery schedule, we anticipate increasing sequential revenues and non-GAAP EPS in each of Q3 and Q4.

We currently believe this revenue and non-GAAP earnings guidance reflect reasonable estimates and we've taken into account the anticipated impact of the COVID-19, pandemic and supply chain challenges in our guidance.

Given the uncertainties as to the duration and scope of the COVID-19, pandemic and supply chain disruptions as well as other variables. However, the extent of the impact on the company's financial results is difficult to predict and could vary significantly from the anticipated impact currently reflected in our estimates and guidance.

<unk> revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings.

In the face of these challenging times, we continue to remain focused on the growth of our businesses and continued management of our cost structure.

We believe our efforts in these areas will enable OSI to continue our leadership in providing innovative products and solutions.

We delivered solid first half results in an ever changing environment and continue to navigate effectively through uncertainty, while gaining traction in key strategic growth areas and positioning the company to capitalize on improving end markets.

Finally wed like to take this opportunity to thank the global OSI systems team for.

First continued dedication in supporting our customers and contributing to the creation of value for our stakeholders, while maintaining a firm commitment to safety.

At this time, we'd like to open the call to questions.

Thank you and as a reminder to ask a question simply press star one on your telephone to withdraw your question press the pound key.

Question is from Brian Rosenberg with Imperial capital Your line is open.

Great. Thank you very much.

First question is probably towards Allen.

In terms of cash flows operating cash flows can you talk a little bit about where you think operating cash flows are going to be.

This year as a whole and then.

The inventory build and everything else going on how that.

In your opinion is onetime in nature.

And how should recover maybe in the future.

23.

Hi, Brian It's Alan Yeah. Good question.

So as you know we've been a strong generator of operating cash flow.

Each of the past many years here.

In fiscal 'twenty, two we've made some strategic decisions to that will affect our working capital metrics.

We are increasing inventory significantly as you've seen on the balance sheet to mitigate some of that supply chain risk also to prepare for the strong sales that were anticipating in the second half and then continuing into fiscal 'twenty three simultaneous with that although we are increasing the inventory we are paying our vendors a little bit faster as well, which is impacting cash flow.

Given some some challenges there.

Finally on the on the receivables side, our DSO is a little bit elevated so your question's on point.

This year is a bit of an unusual year, we generated $14 5 million of operating cash flow in the second quarter and while we don't provide guidance on cash flow. We are anticipating that our cash flow will be better in the second half of the fiscal year and then as we move into fiscal 'twenty, three and beyond kind of bounce back to more historical levels.

And grow from there so we're expecting to be a strong cash flow generator.

As we enter our new fiscal year here at about five months.

Okay.

As a follow up on that historically, the ballpark on operating cash flow basis.

On the norm has been roughly $80 million to $100 million is that the right ballpark historically.

Yes, we might even comment that thats, a little on the low side. If we looked at a fiscal 19 through 21 or our operating cash flow was was north of a $100 million year.

Great.

Good so the next Brian . The next question is on the competitive front.

So maybe you can talk about book to Bill.

It was a little bit soft in the fourth quarter is that a seasonality issue or is that just everybody is slowing down and tapping the brakes because of omicron and im sure that <unk> will address this.

He can pass it off to Alan Deepak.

Brian .

Question.

It's a very broad question, because you mentioned, the word competitive and which product lines. So I presume that youre, referring to security.

Yes going back to the security thing as you all know because the government fiscal year is September ending that's always a very strong quarter and we did announce that big thing of a 200 plus $1 million from the CBP, which by the way. We've said it was the largest order in and out of all the various competitors we got.

A lot of just sure and there is a lot more runway still in that.

This quarter.

Quarter.

Security revenue.

Definitely was down a little bit disappointing, but the reason was mostly with detection, where somebody orders got pushed out in the aviation side.

But we still had a very strong bookings overall.

And our backlog is very strong we haven't lost anything.

And the other thing is that some of these big orders and staff required face to face travel restrictions that changes our ability to visit the customer to make the customers come and visit us that all has become challenging so it got pushed to the right.

Good news is that the real quick.

Wider mix have not changed.

We still are looking very aggressively and we are very well positioned.

And the other thing that we're very excited about it is that as we launch more and more aggressively not just in U S but globally.

So it is scanned agnostic to equipment software.

That opens up more opportunities.

Going on to the other two product lines, we have had very good strong bookings.

Even in healthcare was expected some of the down.

But still very strong, especially in U S and we continue to see that for the next six months both in the auto and healthcare it will continue to be strong.

Great. Thank you very much.

Thank you. Our next question comes from Josh Nichols with B Riley Your line is open.

Well, thanks for taking my question and really good to see the continued ongoing profitability here strong operating margins. Despite some of those headwinds that you kind of already touched on I guess, the one thing I wanted to ask about is.

Raising the EPS guidance, taking the revenue guidance down a little bit, but considering the backlog still at these record levels.

Two plus 1 billion are these more like push outs.

Would you expect some of that revenue that you're attributing this year to maybe fall into next year. So that there is maybe not make changes to the out year estimate given that your backlog really hasnt decreased at all.

Yes, Josh this is Alan so it's a good question Youre right our backlog remains quite strong.

The timing of a little bit of that deliverables has pushed a little bit to the right, which has changed the revenue guidance. So it moves into fiscal 'twenty three positioning us nicely for next year, we do have good visibility into the second half of fiscal 'twenty 244 that revenue guidance.

Particularly.

Particularly in security and in Opto electronics, where we have a very very strong backlog. So the amount of bookings remaining to fill the gap is a narrow amount.

On the earnings side, we have been experiencing increased operating margins.

So in that respect on lower revenues, we still anticipate that our profitability will actually improve.

And generate higher operating margins as a company overall, which really positions us well as we move forward.

To leverage the growth in sales in future years.

Thanks, and then I think I might have missed it I know you mentioned.

Maybe part of the reason for the reduction was shipped with one the op two customers.

What exactly is going on there and could you quantify how much of the.

Revenue.

Revenue estimate update was related to that versus what's going on in the security Division.

Sure Josh. Thanks. This is Alan again, so we had a customer in the after who shifted to what's called the consignment model so rather than us.

Building.

A product from scratch, securing all the components and selling it with the with that markup in this case some of the more difficult to find items.

That had been resulting in large purchase price variances the customer has taken over that responsibility to find the items and then provided to us.

At no cost and then we sell it back and of course, we can't get a markup on the on the customer consigned material. So we get the markup on the value add so in the end it actually ends up being really good for us our operating margins are stronger our gross margins are stronger we don't necessarily need to carry the inventory. So the working capital metrics are better.

<unk>, but but.

What we do see is lower revenue as a result, but really not much of a change in the operating profit. So just a better operating margin.

Probably 10% to $15 million of the change in the revenue guidance was associated with that that shift and because of that shift doesn't really have a.

And impact on the bottom line.

As another reason why we're able to increase the earnings guidance, despite reducing the revenue guidance.

Thanks for the color.

This is deepak here just to add on to what Alan said. The other thing is we have said at the second half the mix is going to change where it's going to be more stronger in the security side compared to the <unk>, which carries a lower margin. So that we think with the mix changing also that can be a big help and just to add on to what Adam is saying is very important.

That our customers in the auto area, we have to be one of those consignment model. They are a large companies they have a better way of getting product they can get.

They're all macheda better than us.

Over that auto dish goes away they provide that because they desperately need that box. They can buy at any price. They want and we just do the value add unless it's a very good model.

Thanks, and then.

Last question for me then.

I'll take a chance to ask can simply but.

Clearly so the notes are coming due no issues you have a ton of liquidity very easy.

Assuming that you would probably use of available liquidity to pay that off.

Just the fact that you upsize the facility also im just kind of curious.

Our expectations are as far as potential M&A.

Is there a lot of opportunities that youre seeing today farther down the pipe with one or two potential acquisitions, where we might see something like this.

Fiscal year or are you just really expanding that capacity fully ready to act if something does come along but nothing.

That's really exceptional close to being completely at this time.

Wow.

It's a good observation, but you already know our answer is going to be very weak.

Sure.

We are looking at we look at every opportunity to recap.

And definitely.

This strengthens us.

We are well positioned and we're going to capitalize on it.

Whether it's an acquisition.

<unk>, whether it's in stock buyback, whether it's in inventory or whatever we can we are well positioned Adam.

No I would agree we thought it was an opportune time to.

Amend the credit facility to extend the tenure to increase the liquidity that gives us lots of options.

For all those items that Deepak just described and more.

We are always looking at M&A to your question.

Yes.

Makes a lot of sense, obviously at LIBOR plus 100.

<unk>.

That's it for me thanks, guys appreciate it.

Thank you.

Thank you. Our next question is from Larry Solow with CJS Securities. Your line is open.

Great Thanks, and good afternoon.

Good morning, Deepak and Alan.

A few follow ups for you guys just on Brian's question about the bookings.

Can fully appreciate the backlog is at near record highs.

A little bit in terms of looking at security.

And obviously, the CVP were great and hopefully there are more of those but again, if we just take that large order out.

Your book to Bill actually was down.

Decent amount I think in Q1 below one and also down this quarter are below one I should say so is there any concern there just kind of look at the.

It seems like the funnel or the queue of potential <unk>.

Orders is very probably as big as it has ever been so I'm, just trying to get a little bit of a better feel.

And I realize orders or are choppy and sort of the last couple of quarters. They've been again, if you take out that one large order had been under some pressure so.

Color to that would be great.

Larry This is Alan I'll take a shot at it.

So by nature of our security business, we always have one off type orders some larger.

Some smaller so it's always difficult for us to ever exclude certain orders. Our overall bookings level has been strong for the first half, but what we have seen.

Is is a slowdown in bookings on the aviation side that Deepak was describing earlier in his prepared comments as we've seen an intensification of Covid first with Delta and then with the with.

With omicron, so a little bit lighter bookings that we've experienced are principally on the aviation side, but to put it all together and.

We still have a book to bill in security in the first six months of about $1, four which which we feel pretty good about.

Right, yes, okay.

Yes.

Yes, absolutely.

As Alan said.

Always we always said that that the midyear ends in September so that's all visit right in year this year.

Big Order, we also have some other orders from Dod.

Department and other things.

The thing that is challenging and youre very good observing that the bookings.

Aviation side and some of the international bookings.

Pushed to the right.

And I said it in my comments the reason for that is not that they haven't gone away.

Lots of them.

Those kind of bookings youll need a customer interaction youll need to travel youll need to face them or they need to come and visit your site in England Our U S.

That travel restriction has made it difficult to make a closure.

So that really.

That gets happened, but at the same time, the need Hasnt gone away the opportunity Hasnt gone away and some of that stuff will come back as more travel and more customer interaction can happen.

Okay, Thats fair enough and again by no means do I need to discount the the large orders for vehicle screening.

Customs and border patrol and on that subject.

You mentioned that there is over $800 million total Q2 Qs.

I think less than half of that is actually been ordered already so it sounds like you have more coming what about additional IDI cues from other agencies outside of the CBP is that something that you guys in talks with other agencies do you expect.

Others to pick up this product maybe within the U S and maybe also internationally.

Well definitely there is a lot of <unk>.

Interest out there frankly, even in aviation.

<unk> is the way the government does.

Gives you the right to get an order, but at the same time Youll performed well you get more.

There are other departments Dod's State Department.

<unk>.

There's all kinds of them defense. So the answer is yes, but also they don't OLED IQ, but they are also the same kind of concept and internationally.

Got it in phase one order and then you follow that with a phase two order once you have a phase one youre going to get phase II phase III for these kind of things are pretty natural that happened in especially in the security area.

Okay.

A question just on the margins so it sounds like.

Mix and <unk>.

<unk> churn issues certainly hurt you guys in security I'm, just trying to if I look sequentially.

Or even year over year revenues were about the same.

So.

So I guess the margins impacts clearly is not so much on the operating or absorption level, but it really is the mix, but again, if I look deep into service revenues were actually up I thought service revenues generally carry the higher margin.

The product revenues, maybe that's a generalization but.

So I would think that your margins, maybe it would've gotten a lift from better service margin service revenue. It looks like grew 5% year over year. So I assume progress revenue probably declined about that same number.

Give or take so I'm, just trying to get a little better picture of that and that's because it's a pretty considerable drop on the margin side 200 bps and 150 bps year over year and sequentially just in security.

Trying to get a fuel does this sort of stood at these levels for a couple of quarters or do you expect it to rebound.

Thanks.

Sure Larry so.

I think you really have pointed out some of the reasons why the operating margins dropped for security in the second quarter, but as we move.

Forward into Q3, and Q4 on the stronger revenues the economies of scale associated with that we are expecting operating margin expansion in security through the balance of the fiscal year.

Also if I just.

I'd like to add on top of it keep in mind that the security.

The supply chain things so.

Apply chain has has an impact.

But it has an impact so that as those two items have been hooked everybody's talking about it especially freight.

So that as those things changed the margin would improve.

I am correct right.

Maybe it's a generalization service revenues.

Carrying a higher margin is that not true or.

That is true.

Service revenues do carry a higher margin compared to product revenues okay.

Okay. Okay, and then just switching gears real fast on the on the auto side obviously.

Fabulous margin improvement year over year, and your margins have consistently been sort of low double digits.

Does this mix do you feel like there's some mix issue took you up to 300 bps or is there some piece of that.

A portion of that might be sustainable.

Well it was certainly a great quarter for <unk> on the operating margin. It's been the last 10 to 12 quarters have been quite solid for auto.

I would say it was.

A very favorable environment on the margin side for auto in Q2, we would anticipate good strong margins in Q3, and Q4, but not maybe necessarily to the to the same level as we saw in Q2, but should should represent year over year improvement in each of Q3 and Q4.

Okay, and then just lastly, just on health care.

Could you just give us an idea of sort of the scope of the.

The increase on the sales force is it basically essentially.

Most of this business was I guess on the cardiology side was a European or specifically UK based in.

Essentially now.

Bring it sort of maybe not starting this business from the ground but.

Given this business out pretty close to the ground and how many sales reps are you targeting to add how many have you added or maybe you can just give us a.

What inning are you in or some kind of percentage and with the sales force has largely been bigger than it is in the UK.

Larry This is Alan so good question, so our cardiology business historically had been extremely strong in the UK and in Germany.

And then we've sold in other parts of the world as well in the U S, which is which is a good strong market had been our primary focus we use a different sales force selling cardiology than we do for patient monitoring although they do share leads because it's a different type of sale.

We began really building out that salesforce in earnest.

Over a year ago, New sales leader, who has got a tremendous track record.

As well as the team it's not a sales force that's going to be the size of patient monitoring and we're in the near term because it's.

Arent target that we're going that but we do believe that we're basically fully ramped.

On our U S. Salesforce today and that has led us to see good strong double digit growth in.

In each of the first quarter the second quarter.

And we anticipate that to continue and with cardiology, representing our highest contribution margins.

Not only in healthcare, but in all of the OSI systems that can really have a nice flow through effect to the overall bottom line.

Great. Thanks, I appreciate all the color there.

Thank you. Our next question is from Jeff Martin with Roth Capital Partners. Please go ahead.

Thanks, Good morning, Deepak and Alan Nice nice job executing through a really challenging environment.

Thank you.

Wanted to get a sense what was your experience with respect to travel.

Specifically around acceptance.

Security installations with the Delta variant did that ever get back to.

Normal level of travel and pace of.

Acceptance just trying to gain some perspective on how.

How we might see.

Travel open back up for specifically for OSI with respect to be almost $1 billion.

Good question Jeff.

I would say that.

And last quarter.

We were looking at things getting better and then the omicron from then.

Travel is restricted.

And we use the word travel in a very broad sense.

We look at travel two ways. One is you can see customers or the customers can come to your.

Second thing is you have to do installations, many of our products they need a sign off by the customer after installation or some of the other.

That has to be built civil works other things because of all this activity.

With restriction it should become a problem.

Just to give you an idea.

If we have to go back to let's say Asian country out of Middle East country to install it we a percent a person from England that person has to be quarantined for a couple of days then they go back and they want to get the installation done and then find out that the customer has got COVID-19 for the customer is not there then they come back to the hotel than their quarantine again.

And when they come back to England, they get quarantined again, so by the time you finish it's a very efficient system.

And that has put some cost structure and some of the revenues have been pushed out and that thing isn't going to change.

I guess, if the guidance would've mined every indication is gone is at peak, it's got to come down that should open up more.

Positive encouraging news just hope that there is not another.

That comes in so to us in the security business, especially.

Customer interaction is very very very important.

Especially in the international sector and it's also happened in the U S. Some of the U S. Customers are also having a tough time visiting our sites on us being able to go back and sign off so all that stuff is really the thing under the named travel that has been a big issue.

And hopefully as it gets better Omnicom Beach down we will again end up getting that up successes and sign ups with the customers.

That's helpful. Thanks, Steve I.

Wanted to also focus on third scan a bit more could you help us understand what the.

Typical contract looks like in terms of.

Maybe an average revenue size and duration, how many years and then also.

What kind of feedback you are seeing in the sales channel from potential customers.

<unk> be helpful to have that perspective.

Good question.

We ask all those questions all the time.

Basically firstly, it's agnostic software think of it which can interface and connect from one.

If what meant do another central station to another equipment to another site tornado central station and to be able to be accessible by all centralizing it to make it more efficient data flow.

And it's agnostic doesn't matter, whether it's August perhaps cancer stem already Scott competitor system or whatever.

The customer is very interested and excited about it.

And the way the revenue comes in is one is the <unk> sale.

Even the person who has again a competitor if they are system is going to get integrated into it they got to get the software from such scan to use that customer interacts at and then we do training and then as the customer long term users what we call more seats, we get in life.

Sensing feet. So all of that stuff adds up to being a typical I call. It like a Microsoft model or whatever that as we go forward it will start having a cutting revenue.

Tends to be higher margin revenue.

That's the model.

And it's not just in U S.

We are integrating and doing some other stuff internationally and the most important challenging thing that we think and I think it's logical just think about it how efficient the world will become if various trading countries and interact with each other and pass the data back and forth under secured software platform <unk>.

Efficiency of cargo movement will be much better.

Alright, and how long do you target for the average contract or are we talking five to seven year contracts.

When you contract with a couple of del Tin extension, how are those initially targeted <unk>.

It's too early to think about this way for the software business once the cluster monies onto into at all.

Add on options accessories and once the platform is established you got multi multiyear contracts and renewable.

Right right, Okay, and then I think.

Bit more longer term here I know there is an upcoming replacement cycle in the U S, particularly with passenger screening.

What other things are on the longer term horizon that youre excited about particularly within the security segment.

Well you said it one is obviously the replacement cycle duty or aging equipment and passenger screening.

Theres been no set date and there is new new certification model, everybody is going to get to baseline level everybody has to get certified.

That's a big opportunity.

In my mind cardboard side, our integration of all the checkpoints and borders and ports and stop is our biggest opportunity and we will continue to expand and grow because as you know.

One time, many many many years after 911 <unk>.

Congress, the EBIT of 100% inspection and some people said well, it's at 5% and up to 570 years. It got stopped somewhere in between is going to continue to grow and as it grows it requires more product more integration.

And Thats, what I think is the greatest opportunity and then the third one which we have said it on our conference calls and we are having a lot of success and we think about it e-commerce and air cargo.

Has been a dormant area lying there, which are sort of lifestyle app security and they need even more integration and stuff and that becomes a big big plate and we are very well placed we have said it before that thats been one of the biggest growth opportunity for us.

In the air cargo space.

Great. Thanks, Deepak I appreciate the color very helpful.

Thank you. Our next question is from Sheila <unk> with Jefferies. Your line is open.

Hi, Good afternoon, Deepak Alan Thanks for the time, so I wanted to go back to opt out performance was really good in the business.

Yes, Alan you seem to indicate this is a sustainable level.

Maybe for Opco, but as well as the rest of the business, how do we think about inflation raw material costs and pricing overall.

Is this a business that has most lever.

Chip I think I previously thought it I believe.

Hi, Sheila this is Alan yes, so in the auto business, what we tend to see more so than our other businesses, when there is inflation or or or.

Or input cost increases this is the area, where we're dealing with Oems that there is the biggest opportunity to pass it on.

To the customer so we typically have seen that which is one of the reasons why we haven't had a degradation of our operating margins. In fact, we've had an improvement in both our gross and our operating margins as as customers clearly understand whats going on.

The supply chain and then nobody wants to pay more money.

They understand when when we've shown that our costs have gone up that we need to pass that cost on to them.

Okay got it and then.

Security if we could go back to the business. How do you kind of think about the growth trends given the bookings, but the deceleration we saw in the quarter.

And maybe if you could touch upon the different end markets and what sort of growth you saw in Q2, I think you mentioned cargo was a particular standout.

If you could elaborate on the different end markets you serve.

Sheila this is deepak here.

It makes sure that we are.

Emphasized explained.

No business has gone away.

It's pushed to the right.

We've had some some business that the last month last week last day could not get onto a ship up.

To get the freight.

In some cases.

The customer was not there at the site was not ready.

Pushed to the right. So we believe that is not a D explanation.

Pushing to the right and either be there. The backlog is still that pipeline is still very strong and that will continue now Alan did mentioned and I've mentioned that the.

On the aviation side, it really took a big.

Southern dive everybody was expecting up to Q1 after the Delta variant that passenger travel is going to increase and then omicron comes in that pushed it to the right, but ultimately air travel will increase and go back to normal and people need to invest in airports and upgrades and stuff.

That it will happen.

Same thing with air cargo it will pass.

To grow up as there is more demand so as long as that as demand as long as travel as long as there is security needed. This business will continue to grow it just got pushed to the right.

Okay understood. Thank you very much.

Thank you and as a reminder to ask a question simply press star one on your telephone to get in the queue.

We have a question from Christopher Glynn with Oppenheimer. Your line is open.

Thank you good afternoon and good morning.

I think most of my questions have been asked.

Want to ask about security.

Backlog pricing versus cost to execute cost to execute is certainly in flux.

Backlog pricing comes in when you get bookings so.

How does.

This impact.

Volatility in future margins or are there provisions.

Well, maybe you want to take it Alan Im sure. Chris This is Alan so a good question.

Generally when you take an order you're right you lock in price and it's pretty difficult after that period of time to get a customer to increase that price in the security business.

While we have had some.

Increases in our in our supply chain that we've sometimes had to absorb on orders that we had taken.

Many months or many quarters ago, we certainly factor that in to all of the new bookings that we have in place.

All that being said when we put it altogether.

Our outlook looks good for what we have in the backlog, which is why believe why we believe we will see.

Increased operating margins in the second half of the year for the security business.

Is that comment sequential or year over year comment or growth as far as the back half security margins.

It's definitely on the sequential side, it would probably be a year over year as well, but I was thinking sequentially.

Thank you.

I'm not showing any further questions in the queue at this time.

Well, thank you very much and again I want to thank all the employees.

And the patience of our customers.

And the support of our stockholders.

It's been a challenging time, we're not going to say it was easy at the same time. We're also saying we are confident about the second half of our backlog is strong and but there is uncertainty there we are well positioned.

Supply chain is a challenge for it is a challenge, but we are well position and one of the things that I want to again emphasize we distinguish ourselves from our competitors, we had a vertically integrated country manufacturing operations in Asia, and Europe , and Latin America in U S. So we have a lot of flex.

Ability to cater to our customers' needs and to be flexible that has been a big strength for it so I want to thank everybody and.

Talk to you after the third quarter and thank you again for your support.

Goodbye.

And with that ladies and gentlemen, we thank you for participating in today's conference you may now disconnect.

Sure.

[music].

Good day, and thank you for standing by welcome to the OSI Systems, Inc.

Quarter 2022 conference call at this time, all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question during that session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any.

To assistance, Please press star zero.

I'd now like to hand, the conference over to OSI, Chief Financial Officer Island ethnic please go ahead.

Yes.

Thank you good morning, and thank you for joining us.

Alan Edric Executive Vice President and CFO of OSI systems, and I'm here today, with Deepak Chopra, our president and CEO .

Welcome to the OSI systems fiscal 2022 second quarter conference call we.

We are pleased that you can join us as we review our financial and operational results.

Earlier today, we issued a press release announcing our second quarter fiscal year 'twenty two financial results.

Before we discuss these results I would like to remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to such forward looking statements.

During today's call, we will refer to both GAAP and non-GAAP financial measures when describing the company's results.

For information regarding non-GAAP measures.

And GAAP measures of the company's results and a quantitative reconciliation of those figures. Please refer to today's earnings release.

I will begin with a discussion of our financial performance for the second quarter of fiscal 'twenty two.

And then turn the call over to Deepak for an overview of our business performance.

I'll, then finish with more detail regarding our financial results and a discussion of our outlook for the 2022 full fiscal year.

As we continue to work through this environment, a top priority at OSI systems remains to.

To deliver on our commitments to our customers and to our partners and position the company for long term success, while preserving the safety of our employees.

Now we will go through a high level summary of our financial results.

Q2 revenues of $277 million were comparable with that of the prior year Q2.

Increased sales in the Opto division along with a slight increase in sales in the security Division were mostly offset by a 4% reduction in year over year Health care Division sales as expected.

Q2, non-GAAP earnings per share were $1 28 down 5% from Q2 of fiscal 'twenty, one due primarily to increased R&D higher supply chain costs and a change in product mix.

For the first half of fiscal 'twenty, two we reported record non-GAAP diluted EPS of $2 44 per share up 5% year over year.

Bookings were a bit softer in the second quarter of fiscal 'twenty. Two following a Q1 book to Bill of one six the Q2 book to Bill ratio was <unk> nine resulting in our fiscal 'twenty two first half book to Bill exceeding one two.

We ended the quarter with a backlog of over $1 2 billion, a 12% increase since the beginning of the fiscal year.

Lastly in December we amended our credit facility, increasing the capacity from 535 million to.

$750 million extending the term to a fresh five years and maintaining the very favorable pricing, which as of quarter end was LIBOR plus 100.

This adds increased optionality as our convertible notes come due in September 2022.

Before diving more deeply into our financial results.

I'll now turn the call over to Deepak.

Thank you Alan.

And thanks to everyone joining us on today's call.

We had a good second quarter and first half of fiscal 2022, while working to a challenging macro environment that was significantly impacted by the rapid spread of omicron variant.

This latest Covid wave.

Continues to hamper our supply chain logistics and business related travel.

Security has been the most impacted while optoelectronics and healthcare were less affected and performed to our expectations.

We ended the quarter with a backlog of over $1 2 billion.

<unk> entered the second half of fiscal 2022 with confidence in our ability to execute in a tough environment.

Taking onto each division's performance in the quarter starting with security.

The security Division delivered.

Q2 revenues that were slightly higher than Q2 in the prior year and revenues in the first half that were 5% higher than the flushed half of fiscal 2021.

In Q2, the omicron Verdi impacted.

Pandemic challenge environment, especially for the aviation security market as certain airports for along with their equipment upgrade.

Replacement and service cycles.

Local travel restrictions in certain regions of the globe.

It affected timing for installation.

And acceptance phases by the customer all of our aviation ports and borders to guarantee products.

Discussing some of the highlights during the quarter and the first half.

The security deemed captured several key booking opportunities during the quarter we.

We announced one of these wins valued at about $29 million from an international customer.

<unk> cargo and vehicle inspection systems baggage and parcel inspection systems related training and maintenance services.

R&D in the quarter previously, we announced $200 million in orders that were received near the end of Q1 from U S customs and border protection CBP under two indefinite delivery indefinite quantity contracts.

Ikea was that collectively have a ceiling value totaling approximately $870 million.

As CBP further strengthens its border security to interdict contraband and illegal drugs hidden in cargo and vehicles. We believe that there are opportunities for additional orders.

Under these <unk> to support our customers non intrusive cargo and vehicle inspection programs.

We have one of the broader solution offerings in the industry.

As we had mentioned before that the shipments on this contract.

As more towards the Q4 and into 2023.

Internationally. We are currently working on several projects to upgrade and maintain existing rapiscan and <unk> cargo and vehicle inspection systems and new installations.

Our <unk> mobile backscatter advantaged.

Bottled Sixty's high energy and multi energy configurations for drive thru portals, and <unk> fixed gantry configurations. Among others are utilized at one or more of these but these projects to provide customs clearance of goods at ports and border crossings on.

Some projects. We are also incorporating our proprietary software integration software called search scan, which.

Scan was designed to work with third party inspection systems and can be sold as a standalone software.

So we continue to gain traction with our search scan software as a service called SaaS model with potential customers that have inspection equipment from multiple vendors to utilize the software platform.

As mentioned before in our $200 million contract that we announced before.

There is a good portion of the <unk> software also.

In turnkey services.

<unk> in Albania, Puerto Rico, what our model continued to perform well our experience and capabilities derived from operating and managing these turnkey programs have been invaluable as they have allowed us to differentiate ourselves and when critical border security projects.

That have a scope Virgin was equipment installation civil works system integration and operating training and in some cases the search scan software also.

And again, we have a broad set of solutions here that match well to the requirements of these customers.

For that market.

In Q2 secured did a commendable job delivering to our customers while prudently managing the cost structure.

Dealing with the ongoing supply disruptions travel bans travel quarantines and test and acceptance delays.

Looking ahead.

We believe that security with a solid backlog and opportunity pipeline is well positioned for a strong second half of our fiscal year.

As Melanie will talk later.

And at least some of the revenue and security got pushed from Q2 into Q3 and Q4.

Moving on to our Optoelectronics Division, we had a strong quarter by leveraging our global operational presence to deliver to our various OEM customers.

Are those third party Q2 revenues up $78 million represented yet another new record for the division.

After delta with instances of material shortages component price increases and higher freight costs and still achieved.

Quarterly profit in an increasingly difficult macro environment. The opto team has done well to anticipate potential supply chain constraints and planned work around as needed to maintain deliveries to Oems in aerospace defense.

Healthcare automotive and telecommunications industries, among others during the quarter, we announced an order for approximately $6 million.

Manufacturers' sub assemblies for a wireless critic telecommunication provider.

To support growth in Asia.

Especially for our medical products, we are expanding up those India's operation as we transition to a larger facility shortly which will come online in the second half of 2022 looking ahead.

With a record Q2, ending backlog, we anticipate auto continuing to perform well in the second half of the fiscal year.

Want to make an extra comment that our customers OEM customers in the auto business.

Super Super Cooperative and has helped us in the supply chain and in some cases, we've been able to pass on the price increases over to them.

Moving onto the healthcare Division, we reported revenues of $52 million a bit lower than the same period year ago, which was expected last year's Q2 revenues still had a tailwind from hospitals.

Spending their ICU capacity for the pandemic during.

During the quarter, we announced a couple of key wins totaling $9 million.

From U S hospitals in the northwest and south regions.

These hospitals ordered a wide array of patient monitoring solutions, including our exhibit central stations Q transport patient monitors and related accessories.

During the quarter, we continued to significantly invest in developing new products for the patient monitoring and cardiology product lines to further strengthen our offering for the future.

For cardiology, we have also invested in building out our U S sales channel that together with new products launched helped drive strong cardiology topline growth in Q2 and the first half.

While we have a significant portion of our revenues in the U S for patient monitoring.

Just getting started for establishing our U S presence for cardiology.

Overall, we are pleased with the company's fiscal 2022 flushed half performance considering the conditions that we clear rose due to the omnicom variant.

We're hopeful that the overall impact from omicron will dissipate as quickly as it started there are signs already of that peaking at however, due to the ongoing challenges now exasperated by the latest variant.

Revising our topline guidance to a slightly lower range, while simultaneously feeling confident of increasing our earnings guidance with expected improvement in operating margins and product mix in the second half, but more security revenue, which Allen will go into more detail.

Since the beginning of the pandemic the company has proven its ability to maintain its focus on helping customers worldwide with their critical roles in providing public health safety and security.

I would like to thank our employees.

Tumors and shareholders for their confidence in us and I look forward to the second half of our fiscal year.

I will now turn the call back over to Alan to further discuss our financial performance before we open the call for questions. Thank you.

Thank you Deepak.

Now I will review the financial results for our fiscal second quarter in greater detail.

As mentioned earlier fiscal Q2 revenues were roughly the same as that of the prior year Q2 secure.

The security Division revenues were up slightly with increased service sales, but reduced product sales.

As Deepak mentioned, the pandemic has impacted the timing of completion of certain projects and acceptance testing, which adversely affected security revenues this quarter.

Auto sales, including intercompany sales increased 5% year over year, continuing the momentum seen throughout fiscal 'twenty one.

Third party off to a sales in the second quarter were up 3% year over year, while intercompany sales in the quarter were up 13% year over year to support the anticipated increase in security sales in the second half of fiscal 'twenty two.

The growth in auto and security sales was partially offset by a 4% reduction in year over year revenues in the health care Division.

This was anticipated given the elevated demand for the patient monitoring products in the earlier stages of the pandemic, creating difficult comps for the division in fiscal 'twenty two.

Cardiology related sales increased significantly year over year in each of Q1 and Q2.

The Q2 gross margin was 36, 1% compared to 37% reported in Q2 of fiscal 'twenty one.

Similar to last quarter stronger revenue growth in our Opto division, which carries a lower gross margin than our other two divisions.

The reduced healthcare division revenues was curious a higher gross margin than our other two divisions.

There is downward pressure on the consolidated gross margin.

The mix of product and service sales within the security Division were also less favorable than the prior year's comparable quarter.

Like many companies, we experienced increases in certain component and freight costs in each division, which impacted the gross margin as well.

Our gross margin will fluctuate from period to period based on revenue mix and volume among other factors.

Moving to operating expenses.

We continue to work diligently across each of our divisions to improve efficiencies and prudently manage our SG&A cost structure.

This quarter's results again demonstrate the success of these efforts Q2, SG&A expenses were 55 billion or 19, 8% of sales compared to $56 million or 23% of sales in the prior year Q2.

Research and development expenses in Q2 of $15 million, representing a year over year increase of 9%.

We continue to dedicate considerable resources to R&D, particularly in security and healthcare.

We remain focused on innovative product development, which we view as vital to the long term success of our businesses.

In Q2 of fiscal 'twenty, two we recorded zero point $8 million.

Restructuring and other charges.

As compared to a benefit of <unk> 2 million in Q2 of the prior fiscal year.

Moving to interest and taxes.

Net interest and other expense in Q2 of fiscal 'twenty two decreased to $2 2 million from $4 2 million in the same prior year period, primarily due to the adoption of the new accounting standard ASU 2020, <unk>, six which eliminated the noncash interest expense associated with our convertible debt.

We note that adoption of this standard also resulted in increased debt on the balance sheet by eliminating the unamortized discount of approximately $10 million.

On the tax side.

Excluding the impact of discrete tax items, our effective tax rate in Q2 of fiscal 'twenty. Two was 25, 8% compared to 27, 5% in Q2 of fiscal 'twenty one.

We recognized discrete tax benefits of <unk> 3 million in Q2 of each of fiscal 'twenty, one 'twenty two and as a result, the reported effective tax rate was 26, 3% in Q2 of fiscal 'twenty two compared to 28, 8% in Q2 of fiscal 'twenty one under GAAP.

I'll now turn to a discussion of our non-GAAP adjusted operating margin.

We were pleased with the increase in the adjusted operating margin in our Opto Division.

Which expanded to a record 15, 4% in Q2 this year driven primarily by gross margin improvement as compared to 12, 8% in the prior year second quarter.

This Q2 record margin in opto was offset by reductions in the other two divisions.

The adjusted operating margin in our health care Division was 13, 8% in Q2 of fiscal 'twenty, two compared to 17, 4% in Q2 last year.

The decrease was driven by higher component and freight costs in this challenging supply chain environment.

Increased investments in infrastructure to support future growth and economies of scale associated with a higher level of sales during the onset of the pandemic.

Similarly, our security division's adjusted operating margin decreased to 14, 2% in.

In Q2 this year from 15, 7% in Q2 of the last fiscal year, primarily due to a less favorable mix of customer revenues and rising costs in the supply chain.

Moving to cash flow.

In Q2 cash provided by operations was $14 5 million cash.

Cash flow was again impacted by our decision to increase inventory levels to mitigate certain supply chain challenges and the timing of payments to vendors and collection from customers as some parties have been delaying payments in the current business environment.

Capex in the second fiscal quarter was $3 7 million, while depreciation and amortization in Q2 was $9 5 million.

We were again active in our stock buyback program.

During Q2, we spent approximately $29 million to repurchase 312790 shares, leaving approximately $2 1 million shares available to repurchase under the current program.

Our balance sheet is solid with net leverage under one 5% with significant capacity for acquisitions and additional stock buybacks.

We have multiple options to satisfy our obligations under the convertible notes, which mature in September .

Finally, turning to guidance.

As Deepak described challenges associated with the pandemic, including the impact on the aviation business and travel, which can impact the timing of product installation and acceptance testing in a more difficult supply chain environment have led us to revisit the guidance in.

In addition, and after a customer shifted business to a consignment model. While this last change leads to increase gross margins a decrease as revenues.

As a result, we are reducing our fiscal 'twenty two sales guidance to $1 6 billion to $1 195 billion from $1 9 billion to $1 225 billion.

However.

We anticipate stronger operating margins.

As such despite expectations of reduced revenues, we are increasing the fiscal 'twenty two non-GAAP EPS guidance to a range of $5 75 to 602 from $5 72 to $6.

Based upon our projected backlog delivery schedule, we anticipate increasing sequential revenues and non-GAAP EPS in each of Q3 and Q4.

Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings.

In the face of these challenging times, we continue to remain focused on the growth of our businesses and continued management of our cost structure.

We believe our efforts in these areas will enable OSI to continue our leadership in providing innovative products and solutions.

Finally, we'd like to take this opportunity to thank the global OSI systems team.

There is continued dedication in supporting our customers and contributing to the creation of value for our stakeholders, while maintaining a firm commitment to safety.

At this time, we'd like to open the call to questions.

Thank you and as a reminder to ask a question simply press star one on your telephone to withdraw your question press the pound key.

Question is from Brian <unk> with Imperial capital Your line is open.

Great. Thank you very much first question is probably towards Allen.

In terms of cash flows operating cash flows can you talk a little bit about where you think operating cash flows are going to be.

This year as a whole and then.

The inventory build and everything else going on.

How that and.

In your opinion is onetime in nature and.

And how should recover maybe in the future in fiscal 'twenty three.

Hi, Brian It's Alan Yeah. Good question.

So as you know we've been a strong generator of operating cash flow.

Each of the past many years here in fiscal 'twenty. Two we've made some strategic decisions to that will affect our working capital metrics, we are increasing inventory significantly as you've seen on the balance sheet to mitigate some of that supply chain risk also to prepare for the strong sales that were anticipating in the second half and then <unk>.

<unk> into fiscal 'twenty, three simultaneous with that although we are increasing the inventory.

Hanger vendors, a little bit faster as well, which is impacting cash flow given some some challenges. There finally on the on the receivables side, our DSO is a little bit elevated so your question's on point and that this year is a bit of an unusual year, we generated $14 5 million of operating cash flow in the second.

<unk> and while we don't provide guidance on cash flow, we are anticipating that our cash flow will be better in the second half of the fiscal year and then as we move into fiscal 'twenty, three and beyond kind of bounce back to more historical levels and grow from there. So we're expecting to be a strong cash flow generator as we entered our new <unk>.

Fiscal year here at about five months.

Okay.

As a follow up on that historically, the ballpark on operating cash flow basis.

On the norm has been roughly $80 million to $100 million is that the right ballpark historically.

Yes, we might even comment that thats, a little on the low side. If we looked at a fiscal 19 through 21 or our operating cash flow was was north of 100 million each year.

Okay great.

Good so.

The next Brian .

Question is on the competitive front.

So maybe you could talk about book to Bill.

It was a little bit soft in the fourth quarter is that a seasonality issue.

Or is that just everybody is slowing down and tapping the brakes because of omicron and I'm sure that Deepak will address this.

Arguing pass it off to Alan Deepak.

Brian Yes.

Good question.

It's a very broad question, because you mentioned, the word competitive and which product lines. So I presume that youre, referring to security.

Yes going back to the security thing.

As you all know because the government fiscal year of September ending that's always a very strong quarter and we did announce that big thing of a 200 plus $1 million from the CBP, which by the way. We've said it was the largest order and all the various competitors, we got the largest share and there is a lot more.

We are underweight still in that.

Bob.

This.

Quarter.

Security revenue.

Definitely was down a little bit disappointing.

But the reason was mostly with detection.

Where some of the orders got pushed out in the aviation side, but.

But we still had a very strong booking overall.

And our backlog is very strong we haven't lost anything.

The good news is that the requirements have not changed.

There still are looking very aggressively.

And we are very well positioned.

And the other thing that we're very excited about it is that as we launch more and more aggressively not just in U S but globally.

Our search scan agnostic to equipment software.

That opens up more opportunities.

Going on to the other two product lines, we have had very good strong bookings.

Even in <unk> and healthcare it was expected some of the down.

But still very strong, especially in U S and we continue to see that for the next six months both in the auto and health care. It will continued to be strong.

Great. Thank you very much.

Thank you. Our next question comes from Josh Nichols with B Riley Your line is open.

Well, thanks for taking my question and really good to see that.

<unk> ongoing profitability here strong operating margins. Despite some of those headwinds that you've kind of already touched on I guess, the one thing I wanted to ask about is.

Raising the EPS guidance, taking the revenue guidance down a little bit, but considering the backlog still at these record levels.

Two plus billion dollars.

Are these more like push outs.

Would you expect some of that revenue that you're attributing this year to maybe fall into next year. So that maybe not make changes to the out year estimate given that your backlog really hasnt decreased at all.

Yes, Josh this is Alan so it's a good question and you're right our backlog remains quite strong.

Particularly.

Particularly in security and in Opto electronics, where we have a very very strong backlog. So the amount of bookings remaining to fill the gap is is a narrow amount.

On the earnings side, we've been experiencing increased operating margins.

So in that respect on lower revenues, we still anticipate that our profitability will actually improve.

And generate higher operating margins as a company overall, which really positions us well as we move forward.

To leverage the growth in sales in future years.

Thanks, and then I think I might have missed it I know you mentioned.

Maybe part of the reason for the reduction was shipped with one the auto customers.

Exactly is going on there and could you quantify how much of the.

Revenue.

Revenue estimate update was was related to that versus what's going on in the security Division.

Sure Josh. Thanks. This is Alan again, so we had a customer in the opto, who shifted to what's called the consignment model so rather than us.

Building.

A product from scratch, securing all the components and selling it with the with that markup in this case some of the more difficult to find the items.

That had been resulting in large purchase price variances and the customer has taken over that responsibility to find the items and then provided to us.

But.

But what we do see is lower revenue as a result, but really not much of a change in the operating profit. So it's just a better operating margin prop.

Probably $10 million to $15 million of the change in the revenue guidance was associated with that that shift and because of that shift doesn't really have a.

And impact on the bottom line.

As another reason why we were able to increase the earnings guidance, despite reducing the revenue guidance.

Thanks for the color.

This is deepak here just to add on to what Alan said. The other thing is we have said at the second half the mix is going to change where it's going to be more stronger in the security side compared to the <unk>, which carries a lower margin. So that we think with the mix changing also that should be a big help and just to add on to what Adam is saying is very important.

That our customers in the auto area, where it would be one to this consignment model. They are large companies they have a better way of getting product they can get.

Raw material better than us they take over that <unk> goes away.

That's because they desperately need that box they can buy at any price they want and we just do the value add to us it's a very good model.

Thanks, and then.

Last question for me then.

Now, let's take a chance they can simply but.

Clearly so the notes are coming due no issues you have between liquidity very easy.

Assuming that you would probably use of available liquidity to pay that off.

Just the fact that you upsize the facility also im just kind of curious.

Our expectations are as far as potential M&A.

Is there a lot of opportunities that youre seeing today farther down the pipe with one or two potential acquisitions, where we might see something like this.

Fiscal year or are you just really expanding that capacity fully ready to act if something does come along but nothing.

That's really exceptional close to being completed at this time.

Wow.

It's a good observation, but you already know our answer is going to be very weak.

Sure.

We are looking at we look at every opportunity we can.

And definitely.

This strengthens us.

We are well positioned and we're going to capitalize on it.

Whether it's an.

<unk>, whether it's in stock buyback, whether it's in inventory or whatever we can we are well positioned Adam.

No I would agree we thought it was an opportune time to.

Amend the credit facility to extend the tenure to increase the liquidity that gives us lots of options.

For all those items that Deepak just described and more.

We are always looking at M&A to your question.

Yes.

Makes lot of sense, obviously at LIBOR plus 100.

<unk>.

Thats It from me Thanks, guys I appreciate it.

Thank you.

Thank you. Our next question is from Larry Solow with CJS Securities. Your line is open great.

Great. Thanks, and good afternoon, I should say good morning, Deepak and Alan.

Just a few follow ups for you guys just on Brian's question about the bookings.

And I can fully appreciate the backlog is at near record highs just a little bit in terms of looking at security.

And obviously the orders the CVP were great and hopefully there are more of those but again, if we just take that large order out your book to Bill actually was down.

Decent amount I think in Q1 below one and also down this quarter are below one I should say so is there any concern there just trying to look at.

I know it seems like the funnel or the queue of potential.

Orders is very.

Because it's great as it's ever been so I'm, just trying to get a little bit.

Got it.

And I realize orders or are choppy, but sort of the last couple of quarters. They've been again, if you take out that one large order had been under some pressure so any color to that would be great.

Larry This is Alan I'll take a shot at it.

So by nature of our security business, we always have one off type orders some larger.

Some smaller so it's always difficult for us to ever exclude certain orders. Our overall bookings level has been strong for the first half, but what we have seen.

As a slowdown in bookings on the aviation side that Deepak was describing earlier in his prepared comments as we've seen an intensification of Covid first with Delta and then with <unk>.

With omicron, so a little bit lighter bookings that we've experienced are principally on the aviation side, but to put it all together.

We still have a book to bill in security in the first six months of about $1, four which which we feel pretty good about.

Right Okay.

Yes, absolutely.

Allen said.

We always said that that the mid year ends in September so thats, our business right in year this year for the Big order.

You also have some other orders from Dod and state Department and other things.

We think that is challenging and youre very good observing that the bookings of the aviation side and some of the international bookings.

Pushed to the right and I said it in my comments. The reason for that is not that they haven't gone away.

We've lost them.

Those kind of bookings youll need a customer interaction youll need to travel youll need to face them or they need to come and visit your site in England U S that travel restriction has made it difficult to make a closure so that regularly.

Thats happened, but at the same time, the knee doesn't garner way the opportunity Hasnt gone away and some of that stuff will come back as.

More travel and more customer interaction can happen.

Okay, Thats fair enough and again by no means joined mean to discount the the large orders for vehicle screening.

Customs and border patrol and on that subject.

You mentioned that there is over $800 million total qsymia to IDI cues.

Are you guys in talks with other agencies do you expect.

Others to pick up this product maybe within the U S and maybe also internationally.

Well definitely there is a lot of.

The interest out there frankly, even in aviation.

<unk> is the way the government does.

Gives you the right to get an order, but at the same time Youll performed well you get more.

There are other departments Dod State Department Doa.

There's all kinds of them defense. So the answer is yes, but also they don't OLED IQ, but there are also the same kind of concept and internationally.

Can get a phase one order and then you follow it up with a phase two order once you have a phase one youre going to get phase II phase III for these kind of things are pretty natural that happened in especially in the security area.

Okay.

A question just on the margins so it sounds like.

Mix and <unk>.

<unk> churn issues certainly hurt you guys in security I'm, just trying to if I look sequentially.

Or even year over year revenues were about the same.

Yes.

So I guess the margin impacts clearly is not so much on the operating or absorption level, but it really is the mix, but again, if I look deeper into service revenues are actually up I thought service revenues generally carry the higher margin.

Product revenues, maybe thats a generalization but.

So I would think that your margins, maybe it would've gotten a lift from better service better service revenue. It looks like grew 5% year over year. So I assume product revenue probably declined about that same number.

Trying to get a fuel does this sort of stayed at these levels for a couple of quarters or do you expect it to rebound.

Sure Larry so.

I mean, I think you really have pointed out some of the reasons why the operating margins dropped for security in the second quarter, but as we move.

Forward into Q3, and Q4 on the stronger revenues the economies of scale associated with that we are expecting operating margin expansion and security through the balance of the fiscal year.

Also I just.

I would like to add on top of it keep in mind that the security so does the supply chain.

Supply chain has has an impact.

But it has an impact so that as those two items have been hooked everybody's talking about it especially freight.

So that as those things changed the margin would improve.

I am correct right.

Maybe it's a generalization service revenues.

Historically, I thought carrying a higher margin is that not true or.

That is true.

Service revenues do carry higher margin compared to product revenues.

Okay. Okay, and then just switching gears real fast on the auto side obviously.

Gross margin improvement year over year, and your margins have consistently been sort of low double digits.

Does this mix do you feel like this mix issue took you up to 300 bps or is there some piece of that.

A portion of that might be sustainable.

Well it was certainly a great quarter for <unk> on the operating margin. It's been over the last 10 12 quarters have been quite solid for auto.

I would say it was.

A very favorable environment on the margin side for opto in Q2, we would anticipate good strong margins in Q3, and Q4, but not maybe necessarily to the to the same level as we saw in Q2, but should should represent year over year improvement in each of Q3 and Q4.

Okay, and then just lastly, just on health care.

Could you just give us an idea of the scope of the.

The increase on the sales force is it basically essentially.

Most of this business was I guess on the cardiology side was a European or specifically UK based in.

Essentially now.

Bring it sort of maybe I'm, sorry, those visits from the ground but.

Given this business out pretty close to the ground and how many sort of sales reps.

Targeting to add how many have you added or maybe you can just give us a.

What inning are you in or some kind of percentage in the salesforce has larger even bigger than it is in the UK.

Larry This is Alan so good question, so our cardiology business historically had been extremely strong in the UK and in Germany.

Then we've sold in other parts of the world as well in the U S, which is which is a good strong market had been our primary focus we use a different sales force selling cardiology than we do for patient monitoring although they do share leads because it's a different type of sale.

We began really building out that salesforce in earnest.

Over a year ago, New sales leader, who has got a tremendous track record.

As well as the team.

Not a sales force that's going to be the size of a patient.

Patient monitoring.

We're in the near term because it's a different target that we're going that but we do believe that we're basically fully ramped.

On our U S sales force today and that has led us to see good strong double digit growth.

And each of the first quarter the second quarter.

Anticipate that to continue and with cardiology, representing our highest contribution margins.

Not only in healthcare, but in all of the OSI systems that can really have.

Nice flow through effect to the overall bottom line.

Great. Thanks, I appreciate all the color there.

Thank you. Our next question is from Jeff Martin with Roth Capital Partners. Please go ahead.

Thanks, Good morning, Deepak and Alan Nice nice job executing through a really challenging environment.

Thank you.

Wanted to get a sense what was your experience with respect to travel.

Specifically around acceptance.

Security installations with the Delta variant.

That ever get back to.

Normal level of travel and pace of.

Acceptance just trying to gain some perspective on.

How we might see.

Travel open back up for specifically for for OSI with respect to being able to combat that.

Good question Jeff.

I would say that that is.

Talking last quarter.

We're looking at things getting better and then the underground comes in.

Travel is restricted.

And we use the word travel and very broad sense.

We look at travel two ways. One is you can see customers or the customers can come to your second.

Second thing is you have to do installations, many of our products they need a sign off by the customer after installation or some of the other support that has to be built civil works other things because of all this activity.

With restriction, which become a problem.

And just to give you an idea if we have to go back to let's say Asian country out of middle East country to install it we a percent a person from England that person has to be quarantined for a couple of days then they go back and they want to get the installation done and then find out that the customer has got COVID-19 for the customer is not there then they come back to the hotel.

Then theyre quarantine again, and when they come back to England. They get quarantine again, so by the time you finish it's a very efficient system.

And that has put some cost structure spin it and some of the revenues have been pushed out and that thing isn't going to change.

I'm guessing you guys wouldn't mind every indication is gone is at peak. It has got to come down that should open up a lot more positive encouraging news just hope that there is not another.

That comes in.

So to us in the security business, especially.

Customer interaction is very very very important, especially.

Especially in the international sector and it's also happened in the U S. Some of the U S. Customers are also having a tough time visiting our sites on us being able to go back and sign off so all of that stuff is really the thing under the name travel.

That has been a big issue.

And hopefully as it gets better Omnicom Beach down we will again end up getting up successes and sign ups with our customers.

That's helpful. Thanks, Steve I.

I wanted to also focus on third scan a bit more could you help us understand what the.

Typical contract looks like in terms of.

Maybe an average revenue size and duration, how many years and then also.

What kind of feedback you are seeing in the sales channel from potential customers.

<unk> be helpful to have that perspective.

Good question.

We ask all of those questions all the time.

Basically firstly, if I can.

Gnostic software think of it which can interface and connect from one.

I meant do another central station to another equipment to another site Dorado central station and to be able to be accessible by all centralizing it to make it more efficient data flow.

And it's agnostic doesn't matter, whether it's our rapiscan system already Scott competitor system or whatever.

The customer is very interested and excited about it.

And the way the revenue comes in is one is the <unk> sale.

Even the person who's been a competitor if their system is going to get integrated into it they got to get the software from search scan to use that customer interacts at and then we do training and then as the customer long term users what we call more seats, we get a license.

Sensing feet. So all that stuff adds up to being a typical I call. It like a Microsoft model or whatever that as we go forward. It will start having a recurring revenue tends.

Tends to be higher margin revenue.

That's the model.

And it's not just in U S.

We are integrating and doing some of the stuff internationally and the most important challenging thing that we think and I think it's logical yes think about it how efficient the wall will become if various trading countries and interact with each other and pass the data back and forth under a secured software platform <unk>.

Frequency of cargo movement would be much better.

Alright, and how long do you target for the average contract or are we talking five to seven year contracts.

One year contract with a couple of del Tin extension, how are those initially targeted <unk>.

Too early to think about this way for the software business once the cluster monies onto Intuit all the add on options accessories and once the platform is established you get multi multiyear contracts and renewable.

Right, Okay, and then thinking a bit more longer term here I know there is an upcoming replacement cycle in the U S, particularly passenger screening.

What other things are on the longer term horizon that youre excited about particularly within the security segment.

Well you said it one is obviously the replacement cycle.

Aging equipment and passenger screening.

Theres been no set date and there is new new certification model, everybody is going to get to baseline level everybody has to get certified.

That's a big opportunity.

My mind cargo side, our integration of all the checkpoints and borders and ports and stuff is our biggest opportunity and we will continue to expand and grow because as you know at one time. Many many many years after 911.

Has been a dormant area line, there, which also requires that our security and they need even more integration and staff and that becomes a big big play and we are very well placed we have said it before that thats been one of the biggest growth opportunity for us.

In the air cargo space.

Great. Thanks, Deepak I appreciate the color very helpful.

Thank you. Our next question is from Sheila <unk> with Jefferies. Your line is open.

Hi, Good afternoon, Deepak Alan Thanks for the time, so I wanted to go back to opt out performance is really good in the business.

Yes, Alan you seem to indicate this is a sustainable level.

Maybe for Opco, but as well as the rest of the business, how do we think about inflation raw material costs and pricing overall.

Is this a business that has more leverage to pricing.

Previously thought it I believe.

Hi, Sheila this is Alan yes, so in the opto business, what we tend to see more so than our other businesses when there is inflation or.

Or input cost increases this is the area, where we're dealing with Oems that there is the biggest opportunity to pass it on.

Yes to the customer so we typically have seen that which is one of the reasons why we haven't had a degradation of our operating margins. In fact, we've had an improvement in both our gross and our operating margins.

As customers clearly understand whats going on in the.

The supply chain and nobody wants to pay more money.

They understand when we show them that our costs have gone up that we need to pass that cost on to them.

Okay got it and then on.

Security if we could go back to the business. How do you kind of think about the growth trends given the bookings, but the deceleration we saw in the quarter.

And maybe if you could touch upon the different end markets and what sort of growth you saw in Q2, I think you mentioned cargo was a particular standout.

If you could elaborate on the different end markets you serve.

Gena This depot care.

No. It makes sure that we emphasize to explain.

No business has gone away.

This push to the right.

<unk> had some some business that the last month last week last day could not get onto a ship.

You'll get the freight.

In some cases.

The customer was not there the site was not ready.

To the right. So we believe that is the explanation.

<unk> pushing to the right and B there the backlog is still there. The pipeline is still very strong and that will continue now Alan Dave mentioned and I've mentioned.

<unk>.

On the aviation side, it really took a big.

Southern dive everybody was expecting after Q1 after the Delta variant that passenger travel is going to increase and then omicron comes in that pushed it to the right, but ultimately air travel will increase and go back to normal and people need to invest in airports and upgrades and stuff.

That it will happen.

Same thing with air cargo it will continue to grow up as there is more demand so as long as that as demand as long as travel as long as there is security needed. This business will continue to grow and just got pushed to the right.

Okay understood. Thank you very much.

Thank you and as a reminder to ask a question simply press star one on your telephone to get in the queue.

We have a question from Christopher Glynn with Oppenheimer. Your line is open.

Thank you good afternoon and good morning.

I think most of my questions have been asked I did want to ask about security.

Backlog pricing versus cost to execute cost to execute is.

Certainly in flux.

Backlog pricing comes in when you get bookings so.

How does.

This impact.

Volatility in future margins or are there provisions.

Well, maybe you want to make.

Sure Chris This is Alan so a good good question.

Generally when you take an order you're right you lock in price and it's pretty difficult after that period of time to get a customer to increase that price in the security business.

While we have had some.

Increases in our in our supply chain that we've sometimes had to absorb on orders that we had taken.

Many months or many quarters ago, we certainly factor that in to all of the new bookings that we have in place all that being said when we put it altogether.

Our outlook looks good for what we have in the backlog, which is why believe why we believe we will see.

Increased operating margins in the second half of the year for the security business.

Is that comment sequential or year over year comment or growth as far as the back half security margins.

It's definitely on the sequential side, it would probably be a year over year as well, but I was thinking sequentially.

Thank you.

I'm not showing any further questions in the queue.

At this time.

Well, thank you very much and again I want to thank all the employees.

Also patients of our customers.

And the support of our stockholders.

In a challenging time, we're not going to say it was easy at the same time. We're also saying we are confident about the second half of our backlog is strong.

But there is uncertainty there we are.

Well positioned.

Manufacturing operations in Asia, and Europe , and Latin America, and U S. So we have a lot of flexibility to cater to our customers' needs and to be flexible that has been a big strength for it so I want to thank everybody and.

Talk to you after the third quarter and thank you again for your support.

Goodbye.

And with that ladies and gentlemen, we thank you for participating in today's conference you may now disconnect.

Q2 2022 OSI Systems Inc Earnings Call

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