Q3 2026 OSI Systems Inc Earnings Call

May 4, 2026

Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the OSI Systems Inc. Q3 2026 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the conference over to Alan Edrick, Chief Financial Officer. You may begin.

Speaker #1: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the OSI SYSTEMS INC third quarter 2026 conference call.

Speaker #1: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

Speaker #1: If you would like to withdraw your question, press star 1 again. Thank you. I will now turn the conference over to Alan Edrick, Chief Financial Officer.

Speaker #1: You may begin.

Speaker #2: Thank you. Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI SYSTEMS. And I'm here today with Ajay Mehra, OSI's President and CEO.

Alan Edrick: Thank you. Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I'm here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 Q3 Conference Call. We are pleased that you could join us as we review our financial and our operational 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. 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 statement based upon subsequent events, new information, or otherwise. We will also reference both GAAP and non-GAAP financial measures.

Speaker #2: Welcome to the OSI SYSTEMS fiscal 26 third quarter conference call. We are pleased that you can join us as we review our financial and our operational results.

Alan Edrick: 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.

Speaker #2: 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.

Speaker #2: All forward-looking statements made in this call are based on currently available information. And the company undertakes no obligation to update any forward-looking statement based upon subsequent events, new information, or otherwise.

Alan Edrick: 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 statement based upon subsequent events, new information, or otherwise. We will also reference both GAAP and non-GAAP financial measures.

Speaker #2: We will also reference both gap and non-gap financial measures applicable reconciliations are available in today's earnings release. We delivered solid third quarter financial results.

Alan Edrick: Applicable reconciliations are available in today's earnings release. We delivered solid Q3 financial results, setting fiscal Q3 records across multiple metrics despite facing the most challenging year-over-year comparison of fiscal 2026, primarily driven by our Mexico contracts. The company's revenues reached a fiscal Q3 record of $453 million, and non-GAAP earnings per diluted share set a fiscal Q3 record of $2.60. Importantly, excluding revenues generated by the large Mexico security contracts in both periods, security revenues grew 25% year over year. Our optoelectronics and manufacturing division also performed well, posting 10% growth and a Q3 record for that division. Bookings were strong, with a 1.3 book-to-bill ratio driven by both security and opto, resulting in a record backlog, highlighted by the previously announced Homeland Defense award, about which A.J. will provide more information shortly.

Speaker #2: Setting fiscal Q3 records across multiple metrics despite facing the most challenging year-over-year comparison of fiscal 26, primarily driven by our Mexico contracts. The company's revenues reached a fiscal Q3 record of $453 million, and non-gap earnings per diluted share set a fiscal Q3 record of $2.60.

Alan Edrick: Importantly, excluding revenues generated by the large Mexico security contracts in both periods, security revenues grew 25% year over year. Our optoelectronics and manufacturing division also performed well, posting 10% growth and a Q3 record for that division. Bookings were strong, with a 1.3 book-to-bill ratio driven by both security and opto, resulting in a record backlog, highlighted by the previously announced Homeland Defense award, about which A.J. will provide more information shortly.

Speaker #2: Importantly, excluding revenues generated by the large Mexico security contracts in both periods, security revenues grew 25% year-over-year. Our optoelectronics and manufacturing division also performed well, posting 10% growth in a Q3 record for that division.

Speaker #2: Bookings were strong with a $1.3 book-to-bill ratio driven by both security and opto resulting in a record backlog. Highlighted by the previously announced Homeland Defense Award about which Ajay will provide more information shortly.

Speaker #2: On the cash side, we generated $14 million in fiscal Q3 operating cash flow despite limited collections in the quarter on the receivables in Mexico.

Alan Edrick: On the cash side, we generated $14 million in fiscal Q3 operating cash flow despite limited collections in the quarter on the receivables in Mexico. Shortly after quarter end, we collected approximately $74 million of the largest Mexico receivable, a strong start to Q4 cash flow. Before diving more deeply into our financial results and discussing our outlook for fiscal 2026, I will turn the call over to A.J. for our business and operational discussion.

Speaker #2: Shortly after quarter end, we collected approximately $74 million of the largest Mexico receivable, a strong start to Q4 cash flow. Before diving more deeply into our financial results, and discussing our outlook for fiscal '26, I will turn the call over to Ajay for our business and operational discussion.

Speaker #3: Thanks, Alan. And thank you, everyone, for joining us today. I'm pleased to be here to discuss our third quarter results for fiscal 2026. We delivered another quarter of solid execution and ended the quarter with a backlog of approximately $1.9 billion, the highest in the company's history.

Ajay Mehra: Thanks, Alan. Thank you, everyone, for joining us today. I'm pleased to be here to discuss our Q3 results for fiscal 2026. We delivered another quarter of solid execution and ended the quarter with a backlog of approximately 1.9 billion, the highest in the company's history. We remain focused on execution, leveraging our strengths in key markets, and utilizing our global operating model as we finish Q4 and head into fiscal 2027. Let's turn to our businesses to discuss Q3 performance in more detail, starting with security. As expected, Q3 performance was up against difficult year-over-year comparisons, primarily due to our Mexico programs transitioning from significant product sales to long-term related service and support revenues. Despite that, security performed well with solid bookings, top-line growth, and operating margin expansion.

Speaker #3: We remain focused on execution, leveraging our strengths in key markets, and utilizing our global operating model as we finish Q4 and head into fiscal 2027.

Speaker #3: Let's turn our businesses to discuss Q3 performance. In more detail, starting with Security. As expected, Q3 performance was up against difficult year-over-year comparisons, primarily due to our Mexico programs transitioning from significant product sales to long-term related service and support revenues.

Ajay Mehra: Let's turn to our businesses to discuss Q3 performance in more detail, starting with security. As expected, Q3 performance was up against difficult year-over-year comparisons, primarily due to our Mexico programs transitioning from significant product sales to long-term related service and support revenues. Despite that, security performed well with solid bookings, top-line growth, and operating margin expansion.

Speaker #3: Despite that, security performed well with solid bookings, top-line expansion. Furthermore, we continue to be very active with customers across aviation, ports and borders, and defense-related applications.

Ajay Mehra: We continue to be very active with customers across aviation, ports and borders, and defense-related applications. Bookings were highlighted by a sizable award from Homeland Defense of an Undefinitized Contract Action, or UCA, with a not-to-exceed value of approximately $235 million for the production and integration of Homeland Defense Over-the-Horizon Radar Transmit Subsystem. We continue to build strong traction with our RF-engineered solutions and are hopeful that there may be additional opportunities in this area for future business. These capabilities position us well to further support Golden Dome, the US initiative to create an integrated missile defense system. As you know, we are a participant in the $151 billion SHIELD IDIQ, which we announced last quarter. We look forward to the opportunities that may arise from this initiative.

Speaker #3: Bookings were highlighted by a sizable award from Homeland Defense off an undefinitized contract action, or UCA, with a not-to-exceed value of approximately $235 million.

Speaker #3: For the production and integration of Homeland Defense over the horizon radar transmit subsystem. We continue to build strong traction with our additional opportunities in this area for future business.

Ajay Mehra: We continue to build strong traction with our RF-engineered solutions and are hopeful that there may be additional opportunities in this area for future business. These capabilities position us well to further support Golden Dome, the US initiative to create an integrated missile defense system. As you know, we are a participant in the $151 billion SHIELD IDIQ, which we announced last quarter. We look forward to the opportunities that may arise from this initiative.

Speaker #3: In addition, these capabilities position us well to further support golden dome, the US initiative to create an integrated missile defense system. As you know, we are a participant in the $151 billion Shield IDIQ, which we announced last quarter.

Speaker #3: And we look forward to the opportunities that may arise from this initiative. During Q3, we also received several international awards for cargo and vehicle inspection systems and airport screening solutions.

Ajay Mehra: During Q3, we also received several international awards for cargo and vehicle inspection systems and airport screening solutions. In addition, we were an integral part of the security at the Milano Cortina 2026, providing our products to screen participants, officials, fans, as well as their baggage and cargo. Towards the latter half of Q3, we began to see initial impacts from conflict in the Middle East. Certain programs' activities have been delayed by factors such as logistic constraints, travel restrictions, and heightened security protocols. Certain customers in the region are facing pressure from disruptions tied to the conflict. If the situation persists, we could see further impact on the timing of order intake and project completion timelines. That said, once the region stabilizes, we could potentially see even stronger demand for our security solutions.

Speaker #3: In addition, we were an integral part of the security at the Milan Winter Olympic Games, providing our products to screen participants, officials, fans, as well as their baggage and cargo.

Speaker #3: Towards the latter half of Q3, we began to see initial impacts from conflict in the Middle East. Certain programs activities have been delayed by factors such as logistic constraints, travel restrictions, and heightened security protocols.

Ajay Mehra: Certain programs' activities have been delayed by factors such as logistic constraints, travel restrictions, and heightened security protocols. Certain customers in the region are facing pressure from disruptions tied to the conflict. If the situation persists, we could see further impact on the timing of order intake and project completion timelines. That said, once the region stabilizes, we could potentially see even stronger demand for our security solutions.

Speaker #3: Certain customers in the region are facing pressure from disruptions tied to the conflict. If the situation persists, we could see further impact on the timing of order intake and project completion timelines.

Speaker #3: That said, once the region stabilizes, we could potentially see even stronger demand for security solutions. In the US, the order activity for security products was impacted during the quarter by the shutdown at DHS.

Ajay Mehra: In the U.S., the order activity for security products was impacted during the quarter by the shutdown at DHS, which delayed the procurement of our products and services to support U.S. border initiatives. Now that the shutdown has ended, we are hopeful for order patterns to normalize over the coming weeks and months. I want to emphasize here that these are timing-related dynamics rather than changes in the underlying demand. In the U.S., we're also excited about the potential of our security solutions for high-profile upcoming events such as the FIFA World Cup 26 soccer tournament and the 2028 Olympics. Furthermore, in the U.S., the roughly $1 billion outlined in the One Big Beautiful Bill for NII equipment remains a significant growth opportunity. Of course, during the shutdown, the spending resulting from this bill was delayed in Q3.

Speaker #3: Which delayed the procurement of our products and services to support US border initiatives. Now that the shutdown has ended, we are hopeful for order patents to normalize over the coming weeks and months.

Speaker #3: And I want to emphasize here that these are timing-related dynamics rather than changes in the underlying demand. In the US, we're also excited about the potential of our security solutions for high-profile upcoming events such as the FIFA World Cup 26 soccer tournament and the 2028 Olympics.

Ajay Mehra: I want to emphasize here that these are timing-related dynamics rather than changes in the underlying demand. In the U.S., we're also excited about the potential of our security solutions for high-profile upcoming events such as the FIFA World Cup 26 soccer tournament and the 2028 Olympics. Furthermore, in the U.S., the roughly $1 billion outlined in the One Big Beautiful Bill for NII equipment remains a significant growth opportunity. Of course, during the shutdown, the spending resulting from this bill was delayed in Q3.

Speaker #3: Furthermore, in the US, the roughly $1 billion outline in the One Big Beautiful bill for NII equipment remains a significant growth opportunity. And of course, during the shutdown, the spending resulting from this bill was delayed in Q3.

Speaker #3: Turning to optoelectronics and manufacturing, Q3 performance was again strong as revenues increased 10% year over year, with the book-to-bill ratio well exceeding one. In March, Opto received a $40 million award for the electronic subassemblies from a medical OEM.

Ajay Mehra: Turning to Optoelectronics and Manufacturing, Q3 performance was again strong as revenues increased 10% year over year, with the book-to-bill ratio well exceeding 1. In March, Opto received a $40 million award for the electronic subassemblies from a medical OEM, a significant award in a division where most orders are under $5 million. Customers continue to value a vertically integrated model and global manufacturing footprint as they diversify supply chains and launch new products. Our global manufacturing footprint across Malaysia, Indonesia, India, Canada, Mexico, the UK, and the US allows us to offer customers attractive combinations of value and scalability. Opto's backlog remains at record levels, providing great long-term visibility across aerospace, defense, medical, industrial, and other end markets. Finally, our Healthcare division, which continues its path of improving operations and focusing on new product development.

Speaker #3: A significant award in a division where most orders are under $5 million. Customers continue to value a vertically integrated model and global manufacturing footprint.

Ajay Mehra: Customers continue to value a vertically integrated model and global manufacturing footprint as they diversify supply chains and launch new products. Our global manufacturing footprint across Malaysia, Indonesia, India, Canada, Mexico, the UK, and the US allows us to offer customers attractive combinations of value and scalability. Opto's backlog remains at record levels, providing great long-term visibility across aerospace, defense, medical, industrial, and other end markets. Finally, our Healthcare division, which continues its path of improving operations and focusing on new product development.

Speaker #3: As we diversify supply chains and launch new products, a global manufacturing footprint across Malaysia, Indonesia, India, Canada, Mexico, the UK, and the US allows us to offer customers attractive combinations of value and scalability.

Speaker #3: Opto's backlog remains at record levels, providing great long-term visibility across aerospace, defense, medical, industrial, and other end markets. And finally, our healthcare division continues its path of improving operations and focusing on new product development.

Speaker #3: In Q3, healthcare was adversely impacted by order timing, most notably in the US, resulting in lower sales and profitability. On the flip side, we did see growth in the MEER region during the quarter.

Ajay Mehra: In Q3, healthcare was adversely impacted by order timing, most notably in the US, resulting in lower sales and profitability. On the flip side, we did see growth in the EMEA region during the quarter. As you may know, healthcare's products generally carry the highest contribution margins at OSI, so even modest revenue growth has an outsized impact on profitability. Looking at OSI Systems overall, our financial position remains strong. The robust and growing backlog, year-to-date cash flow generation, and a healthy balance sheet give us continued confidence in the company's prospects. In addition to large program opportunities highlighted earlier, we remain focused on increasing our mix of recurring revenues through expanded service and support agreements. As always, I would like to thank our employees, customers, and stockholders for their continued support and dedication.

Speaker #3: As you may know, healthcare's products generally carry the highest contribution margins at OSI. So even modest revenue growth has an outsized impact on profitability.

Speaker #3: Looking at OSI Systems overall, our financial position remains strong. The robust and growing backlog, year-to-date cash flow generation, and a healthy balance sheet give us continued confidence in the company's prospects.

Ajay Mehra: The robust and growing backlog, year-to-date cash flow generation, and a healthy balance sheet give us continued confidence in the company's prospects. In addition to large program opportunities highlighted earlier, we remain focused on increasing our mix of recurring revenues through expanded service and support agreements. As always, I would like to thank our employees, customers, and stockholders for their continued support and dedication.

Speaker #3: In addition to large program opportunities highlighted earlier, we remain focused on increasing our mix of recurring revenues through expanded service and support agreements. As always, I would like to thank our employees, customers, and stockholders for their continued support and dedication.

Speaker #3: With that, I will turn the call over to Alan to discuss our financial results in more detail before we open the call for questions.

Ajay Mehra: With that, I will turn the call over to Alan to discuss our financial results in more detail before we open the call for questions. Thank you.

Speaker #3: Thank you.

Speaker #2: Well, thank you, AJ. Now let's review in greater detail the financial results for Q3. Let's begin with a look into our revenues by division.

Alan Edrick: Well, thank you, Ajay. Now let's review in greater detail the financial results for Q3. Let's begin with a look into our revenues by division. Security division revenues in Q3 came in at $319 million, driven by higher service revenues, an increased contribution from the RF business, which has been effectively integrated into our overall operations, and increased aviation product revenues. As expected, revenues from our large Mexico security contracts decreased to $11 million in Q3 fiscal 2026 from $69 million in Q3 of the prior year. Excluding the Mexico contracts, securities revenues surged 25% year over year, reflecting healthy growth across the broader security portfolio. Fiscal Q4 is expected to experience a reduced revenue impact from Mexico in comparison to Q3, with the magnitude of this headwind expected to largely roll off as the company enters fiscal 2027.

Speaker #2: Security division revenues in Q3 came in at $319 million driven by higher service revenues and increased contribution from the RF business, which has been effectively integrated into our overall operations.

Speaker #2: And increased aviation product revenues. As expected, revenues from our large Mexico security contracts decreased to $11 million in Q3 fiscal '26 from $69 million in Q3 of the prior year.

Alan Edrick: As expected, revenues from our large Mexico security contracts decreased to $11 million in Q3 fiscal 2026 from $69 million in Q3 of the prior year. Excluding the Mexico contracts, securities revenues surged 25% year over year, reflecting healthy growth across the broader security portfolio. Fiscal Q4 is expected to experience a reduced revenue impact from Mexico in comparison to Q3, with the magnitude of this headwind expected to largely roll off as the company enters fiscal 2027.

Speaker #2: Excluding the Mexico contracts, securities revenues surged 25% year over year reflecting healthy growth across the broader security portfolio. Fiscal Q4 is expected to experience a reduced revenue impact from Mexico in comparison to Q3.

Speaker #2: With the magnitude of this headwind expected to largely roll off as the company enters fiscal '27. Our Optoelectronics and Manufacturing division had another excellent quarter.

Alan Edrick: Our Optoelectronics and Manufacturing division had another excellent quarter. Opto sales, including intercompany, increased 10% year over year to $111 million, a new Q3 record for this division. As described earlier, Healthcare division sales were soft. Our Q3 fiscal 2026 gross margin was 33%, slightly down from the same quarter in the prior year, as a less favorable revenue mix on product sales outweighed an increase in gross margin from higher service revenues. Our margins can fluctuate based on product and service mix and volume, supply chain cost, FX, tariffs, among other factors. Moving on to operating expenses.

Speaker #2: Opto sales, including intercompany, increased 10% year over year to $111 million—a new Q3 record for this division. This was driven by sales growth across our diversified product and customer portfolios.

Speaker #2: And as described earlier, healthcare division sales were soft. Our Q3 fiscal '26 gross margin was 33%, slightly down from the same quarter in the prior year.

Alan Edrick: Our Q3 fiscal 2026 gross margin was 33%, slightly down from the same quarter in the prior year, as a less favorable revenue mix on product sales outweighed an increase in gross margin from higher service revenues. Our margins can fluctuate based on product and service mix and volume, supply chain cost, FX, tariffs, among other factors. Moving on to operating expenses.

Speaker #2: As a less favorable revenue mix on product sales, outweighed an increase in gross margin from higher service revenues. Our margins can fluctuate, based on products and service mix and volume, supply chain cost, FX tariffs, among other factors.

Speaker #2: Moving on to operating expenses. SG&A expenses in the 2026 third fiscal quarter were $71.5 million down 2% from the prior year fiscal Q3 and representing 15.8% of sales compared to 16.5% of sales in Q3 last fiscal year.

Alan Edrick: SG&A expenses in Q3 2026 were $71.5 million, down 2% from the prior year Q3, and representing 15.8% of sales compared to 16.5% of sales in Q3 last year. We continue to work diligently across all divisions to manage our SG&A cost structure efficiently. R&D expenses in Q3 were $19.5 million, or 4.3% of revenues, up from $18.6 million, or 4.2% of revenues in the same quarter last year. This increase stems from our commitment to investing in innovation, resulting in market-leading offerings in security and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives.

Speaker #2: We continue to work diligently across all divisions to manage our SG&A cost structure efficiently. R&D expenses in Q3 were $19.5 million, or 4.3% of revenues, up from $18.6 million, or 4.2% of revenues, in the same quarter last year.

Speaker #2: This increase stems from our commitment to investing in innovation resulting in market-leading offerings in security. And positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives.

Alan Edrick: This increase stems from our commitment to investing in innovation, resulting in market-leading offerings in security and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives.

Speaker #2: Even with these R&D investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past eight years underscoring our ability to drive operating efficiencies while still funding growth initiatives.

Alan Edrick: Even with these R&D investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past 8 years, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now, moving below the operating line. Interest and other expenses net in fiscal Q3 was $4 million, down from $8.2 million in the same quarter the prior year, primarily due to reduced borrowing costs. Our effective tax rate under GAAP was 18.3% in this Q3 versus 14.3% in Q3 last year. Excluding discrete tax items, our normalized effective tax rate, which is the rate used in calculating non-GAAP EPS, was 23.6% in Q3 this year compared to 23.7% in the same prior year quarter.

Speaker #2: Now moving below the operating line. Interest in other expenses net in fiscal Q3 was $4 million down from $8.2 million in the same quarter of the prior year primarily due to reduced borrowing costs.

Alan Edrick: Interest and other expenses net in fiscal Q3 was $4 million, down from $8.2 million in the same quarter the prior year, primarily due to reduced borrowing costs. Our effective tax rate under GAAP was 18.3% in this Q3 versus 14.3% in Q3 last year. Excluding discrete tax items, our normalized effective tax rate, which is the rate used in calculating non-GAAP EPS, was 23.6% in Q3 this year compared to 23.7% in the same prior year quarter.

Speaker #2: Our effective tax rate in our gap was 18.3% in this Q3 versus 14.3% in Q3 last year. Excluding discrete tax items, our normalized effective tax rate which is the rate used in calculating non-gap EPS was 23.6% in Q3 this year compared to 23.7% in the same prior year quarter.

Speaker #2: On a non-gap basis, our Q3 26 adjusted operating margin of 14% was comparable on a sequential basis from Q2 and slightly below the prior year third fiscal quarter.

Alan Edrick: On a non-GAAP basis, our Q3 2026 adjusted operating margin of 14% was comparable on a sequential basis from Q2 and slightly below the prior year Q3 fiscal year. The Security division's adjusted operating margin expanded from 18.1% in Q3 last year to 18.3% in Q3 of fiscal 2026, driven by growth in higher margin security service revenues combined with reduced operating expenses. This, though, was offset by the other two divisions. The Opto adjusted operating margin decreased to 13.5% in Q3 this fiscal year from 14.0% in last year's fiscal Q3 on a less favorable mix of revenues. The adjusted operating margin of our Healthcare division was negligible due to the sales level. As AJ mentioned, we expect margin recovery as healthcare performance improves. Moving to cash flow and the balance sheet.

Speaker #2: The security division's adjusted operating margin expanded from 18.1% in Q3 last year to 18.3% in Q3 of fiscal 26 driven by growth in higher margin security service revenues combined with reduced operating expenses.

Speaker #2: This though was offset by the other two divisions. The opto adjusted operating margin decreased to 13.5% in Q3 this fiscal year from 14.0% last year's fiscal Q3 on a less favorable mix of revenues.

Alan Edrick: This, though, was offset by the other two divisions. The Opto adjusted operating margin decreased to 13.5% in Q3 this fiscal year from 14.0% in last year's fiscal Q3 on a less favorable mix of revenues. The adjusted operating margin of our Healthcare division was negligible due to the sales level. As AJ mentioned, we expect margin recovery as healthcare performance improves. Moving to cash flow and the balance sheet.

Speaker #2: The adjusted operating margin of our healthcare division was negligible due to the sales level. As AJ mentioned, we expect margin recovery as healthcare performance improves.

Speaker #2: Moving to cash flow in the balance sheet. We generated $14 million in Q3 operating cash flow despite limited collections in the quarter on our largest receivable in Mexico; however, as mentioned earlier, not long after quarter end, we received a payment of approximately $74 million from our largest Mexico customer providing a strong start to our Q4 cash flow.

Alan Edrick: We generated $14 million in Q3 operating cash flow despite limited collections in the quarter on our largest receivable in Mexico. As mentioned earlier, not long after quarter end, we received a payment of approximately $74 million from our largest Mexico customer, providing a strong start to our Q4 cash flow. Operating cash flow for the first nine months of fiscal 2026 was just shy of the amount for all of fiscal 2025. DSO increased 7% from fiscal Q2. Current expectations are that DSO will decrease by fiscal year-end. We expect substantial cash inflows in Q4 and into fiscal 2027 as we continue to collect on the Mexico receivables, which should lead to sizable operating cash flow and strong free cash flow conversion. CapEx in Q3 was $8 million, while depreciation and amortization expense was $9.5 million. Our balance sheet remains solid.

Speaker #2: Operating cash flow for the first nine months of fiscal 26 was just shy of the amount for all of fiscal 25. DSO increased 7% from fiscal Q2.

Speaker #2: Current expectations are that DSO will decrease by fiscal year end. We expect substantial cash inflows in Q4 and into fiscal 27 as we continue to collect on the Mexico receivables which should lead to sizable operating cash flow and strong free cash flow conversion.

Alan Edrick: Current expectations are that DSO will decrease by fiscal year-end. We expect substantial cash inflows in Q4 and into fiscal 2027 as we continue to collect on the Mexico receivables, which should lead to sizable operating cash flow and strong free cash flow conversion. CapEx in Q3 was $8 million, while depreciation and amortization expense was $9.5 million. Our balance sheet remains solid.

Speaker #2: CapEx in Q3 was $8 million, while depreciation and amortization expense was $9.5 million. Our balance sheet remains solid. We ended the quarter with $345 million in cash.

Alan Edrick: We ended the quarter with $345 million in cash. Our net leverage at the end of Q3 fiscal 2026 was approximately 2.2, as calculated under our credit agreement. Now turning to our guidance. We are maintaining our fiscal 2026 guidance for revenues and non-GAAP earnings per share. The recent shutdown of the Department of Homeland Security and the conflicts in the Middle East have impacted short-term bookings and could impact near-term Q4 revenues. Though looking out further, resolution of each of these matters, one of which has just been done, could potentially represent future opportunities for the company. We note that our fiscal 2026 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other costs, amortization of acquired intangible assets and their associated tax effects, and discrete tax and other non-recurring items. We currently believe this guidance reflects reasonable estimates.

Speaker #2: Our net leverage at the end of Q3 fiscal 26 was approximately 2.2 as calculated under our credit agreement. Now turning to our guidance. We are maintaining our fiscal 26 guidance for revenues and non-gap earnings per share.

Speaker #2: The recent shutdown of the Department of Homeland Security and the conflicts in the Middle East have impacted short-term bookings, and could impact near-term Q4 revenues. Though looking out further, resolution of each of these matters—one of which has just been done—could potentially represent future opportunities for the company.

Alan Edrick: Though looking out further, resolution of each of these matters, one of which has just been done, could potentially represent future opportunities for the company. We note that our fiscal 2026 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other costs, amortization of acquired intangible assets and their associated tax effects, and discrete tax and other non-recurring items. We currently believe this guidance reflects reasonable estimates.

Speaker #2: We note that our fiscal 2026 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring, and other costs; amortization of acquired intangible assets and their associated tax effects; and discrete tax and other non-recurring items.

Speaker #2: We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlogged revenues, new bookings, timing of cash collections, tariffs, the recent DHS shutdown, the conflicts in the Middle East, and supply chain disruptions, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance.

Alan Edrick: The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, new bookings, timing of cash collections, tariffs, the recent DHS shutdown, the conflicts in the Middle East, and supply chain direct disruptions, among other factors, is difficult to predict and could vary significantly from the anticipated impacts currently reflected in our guidance. Actual revenues and non-GAAP EPS per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. In summary, we delivered a record fiscal Q3 driven by our two largest divisions, a record backlog providing multi-period visibility, and we also made a meaningful cash collection in the beginning of Q4 that further enhances our balance sheet. We remain committed to operational excellence as we grow our businesses and deliver innovative products and solutions to our customers.

Speaker #2: Actual revenues and non-gap EPS per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings.

Alan Edrick: Actual revenues and non-GAAP EPS per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. In summary, we delivered a record fiscal Q3 driven by our two largest divisions, a record backlog providing multi-period visibility, and we also made a meaningful cash collection in the beginning of Q4 that further enhances our balance sheet. We remain committed to operational excellence as we grow our businesses and deliver innovative products and solutions to our customers.

Speaker #2: In summary, we delivered a record fiscal Q3 driven by our two largest divisions, a record backlog providing multi-period visibility, and we also made a meaningful cash collection in the beginning of Q4 that further enhances our balance sheet.

Speaker #2: We remain committed to operational excellence as we grow our businesses and deliver innovative products and solutions to our customers. We aim to invest in key strategic areas with the goal of driving long-term value for our shareholders.

Alan Edrick: We aim to invest in key strategic areas with the goal of driving long-term value for our shareholders. Once again, we thank the entire global OSI team for their dedication to supporting our customers and partners. Their efforts are what make our results possible. At this time, we'd like to open the call to questions.

Speaker #2: Once again, we thank the entire global OSI team for their dedication to supporting our customers and partners. Their efforts are what make our results possible, and at this time, we'd like to open the call to questions.

Speaker #1: Thank you. As a reminder to ask a question, you will need to press star then the number one on your telephone keypad. And if you would like to withdraw your question, press star one again.

Operator: Thank you. As a reminder, to ask a question, you will need to press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Your first question comes from the line of Larry Solow with CJS Securities. Your line is open.

Speaker #1: Your first question comes from the line of Larry Solow with CJS Securities. Your line is open.

Speaker #3: Great. Kathy, I guess the first question we know Mexico is going to be pretty slow. So the 25% growth, you've seen outside Mexico, where's that coming from?

Larry Solow: Great. Good afternoon. I guess first question, we know Mexico is gonna be pretty slow. The 25% growth you've seen outside Mexico, where's that coming from, I guess geographically and just on the product mix? Is most of that still, you know, ports and borders, vehicle inspection or where? I'm just kind of trying to figure out, you know, if you could parse out, give us a little color on the origin of the growth.

Speaker #3: I guess geographically, and just on the product mix, is most of that still ports and borders, vehicle inspection? I'm just kind of trying to figure out if you could parse out—or give us a little color on—the origin of the growth.

Speaker #4: Larry, this is Alan. Good question. We're seeing a growth in a bunch of different areas. First off, geographically, we're seeing most of the growth internationally.

Alan Edrick: Larry, this is Alan. Good question. We're seeing the growth in a bunch of different areas. First off, geographically, we're seeing most of the growth internationally. You know, as we look forward with the ending of the DHS shutdown, we foresee the US picking up steam significantly as we enter fiscal 2027. To date, most of the growth has been driven internationally. We're seeing it across, you know, a wide variety of our areas. We're seeing our service revenues increase nicely. We're seeing our aviation revenues increase nicely. We're seeing our RF revenues increase nicely. That's predominantly what's driven, you know, most of the growth that we're seeing, you know, outside of Mexico, as you mentioned.

Speaker #4: As we look forward with the ending of the DHS shutdown, we foresee the US picking up steam significantly as we enter fiscal 27. But to date, most of the growth has been driven internationally.

Speaker #4: And we're seeing it across a wide variety of our areas. We're seeing our service revenues increase nicely. We're seeing our aviation revenues increase nicely.

Alan Edrick: We're seeing it across, you know, a wide variety of our areas. We're seeing our service revenues increase nicely. We're seeing our aviation revenues increase nicely. We're seeing our RF revenues increase nicely. That's predominantly what's driven, you know, most of the growth that we're seeing, you know, outside of Mexico, as you mentioned.

Speaker #4: We're seeing our RF revenues increase nicely. And that's predominantly what's driven most of the growth that we're seeing outside of Mexico, as you mentioned.

Larry Solow: The RF contract that you got, the Golden Dome contract that you announced, you announced it at the end of April. Was it actually obtained before the end of the quarter? 'Cause that sounds like that order is clearly in the backlog in the book-to-bill for the quarter, correct?

Speaker #3: And the RF contract that you got, the Golden Dome contract that you announced—you announced at the end of April—but I guess it was in your... was it actually obtained before the end of the quarter?

Speaker #3: Is that sounds like that order is clearly in the backlog and the book to bill for the quarter, correct?

Speaker #4: Yes, it came in. This is AJ. It came in at the end of March.

Ajay Mehra: Yes, it came in. This is AJ. It came in at the end of March.

Speaker #3: Gotcha. And I guess you just delayed because of the government shutdown or any reason why it didn't release wasn't put out?

Larry Solow: Gotcha. I guess you were just delayed because of the government shutdown or any reason why that release wasn't put out?

Alan Edrick: Larry, it just takes a little bit of time to go through the various sequences in order to get a press release out and get the appropriate approvals to do so.

Speaker #4: Larry, it just takes a little bit of time to go through the various sequences in order to get a press release out and get the appropriate approvals to do so.

Alan Edrick: Larry, it just takes a little bit of time to go through the various sequences in order to get a press release out and get the appropriate approvals to do so.

Larry Solow: That's fair.

Alan Edrick: Yep.

Speaker #4: So yep.

Alan Edrick: Yep.

Larry Solow: Gotcha. Just on the government shutdown or delays and whatnot, it sounds like certainly it's impacted your bookings a little bit to date, maybe a little bit more Q4. Has it impacted revenue at all to date? It sounds like maybe no, but there is potential in Q4. Is that kind of what I, what I hear?

Speaker #3: just on the government shutdown or delays and whatnot, it sounds like certainly it's impacted your bookings a little bit to date. Maybe a little bit more Q4.

Speaker #3: And has it impacted revenue at all to date? It sounds like maybe no, but there is a potential in Q4. Is that kind of what I hear?

Speaker #4: So I think that what I pointed out earlier was yes, it's impacted some bookings. But really, it's a timing issue. I mean, that's really what it is.

Ajay Mehra: I, you know, I think that, you know, what I, what I pointed out earlier was, you know, yes, it's impacted some bookings, but really it's a timing issue. I mean, that's really what it is. You know, we think that those bookings and like I said, the $1 billion, you know, Big Beautiful Bill is still sitting there.

Speaker #4: So we think that those bookings, and like I said, the $1 billion big, beautiful bill is still sitting there. So yeah, it did. I think in Q4, we're hoping things start loosening up for the next few weeks to a few months.

Larry Solow: Sure.

Ajay Mehra: Yeah, you know, it did. I think in Q4, we're hoping things, you know, things start loosening up for the next few weeks, to a few months. You know, it may have a slight impact, but we'll wait and see.

Speaker #4: And it may have a slight impact, but we'll wait and see.

Speaker #3: Great. Okay. Thanks, AJ. I appreciate that.

Larry Solow: Great. Okay. Thanks, Ajay Mehra. I appreciate that.

Speaker #1: Your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.

Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.

Christopher Glynn: Hey, thanks. Good afternoon. Just want to ask about the services revenue. I know it, you know, wasn't going to be totally linear, but it was about 5% growth and had been, you know, consistently strong double digits. My understanding was, you know, following significant sustained backlog growth for a few years that this would, you know, probably be double digit grower compound pretty consistently. Is that still an appropriate view, or should we view it as maybe kind of stepping down to the single digit profile going forward for services?

Speaker #4: Hey, thanks. Good afternoon. Just wanted to ask about the services revenue. So I know it wasn’t going to be totally linear, but it was about 5% growth.

Speaker #4: And it had been consistently strong double digits. Am I understanding was following significant sustained backlog growth for a few years that this would probably be double digit growth or compound pretty consistently.

Speaker #4: Is that still an appropriate view? Or should we view it as maybe kind of stepping down to the single digit profile going forward for services?

Speaker #5: This is Alan. Good question. What we saw throughout calendar 25 for fourth straight quarters was very strong double digit growth in service revenues. As our installed base increased significantly, in this particular quarter, we had mid-single digit growth in our service revenue coming off of a little bit more difficult comp.

Alan Edrick: This is Alan. Good question. You know, what we saw throughout, you know, calendar 2025 for 4 straight quarters was very strong double-digit growth in service revenues as our installed base increased significantly. In this particular quarter, we had mid-single digit growth in our service revenue coming off of a little bit more difficult comp. It also has to do with sort of the, some of the timing of some of the installations that were done in prior quarters versus this quarter. You know, as we look forward, we continue to expect to see, you know, very strong service revenues. I think there'll be certain periods where we'll see, you know, good double-digit growth. There'll be other periods where it's single digit.

Speaker #5: And it also has to do with sort of some of the timing of some of the installations that were done in prior quarters versus this quarter.

Alan Edrick: It also has to do with sort of the, some of the timing of some of the installations that were done in prior quarters versus this quarter. You know, as we look forward, we continue to expect to see, you know, very strong service revenues. I think there'll be certain periods where we'll see, you know, good double-digit growth. There'll be other periods where it's single digit.

Speaker #5: As we look forward, we continue to expect to see very strong service revenues. I think there'll be certain periods where we'll see good double digit growth.

Speaker #5: There'll be other periods where it's single digit. But overall, we expect to see nice growth in our service revenues, which is nice because it inherently carries a higher margin associated with it.

Alan Edrick: Overall, we expect to see nice growth in our service revenues, which is nice because it inherently carries a higher margin associated with it.

Speaker #3: Okay, so Alan, it sounds like you expect, generally over the next year or two, to be outgrowing equipment. Is that right?

Christopher Glynn: Okay. Alan, it sounds like you expect it generally over the next year or two to be outgrowing equipment. Is that right?

Alan Edrick: It can be. It all depends. For instance, as we.

Speaker #5: It can be. It all depends. So for instance, as we begin to.

Alan Edrick: It can be. It all depends. For instance, as we.

Christopher Glynn: Okay. I get it.

Alan Edrick: You know.

Speaker #3: It can get a little nebulous. Yeah.

Christopher Glynn: It's getting a little nebulous. Yeah. Yeah. Not, not trying to pin you down.

Christopher Glynn: It's getting a little nebulous. Yeah.

Speaker #5: Yeah, not trying to expect strong product revenue growth as well.

Alan Edrick: Yeah. Not, not trying to pin you down.

Alan Edrick: We expect strong product revenue growth as well.

Christopher Glynn: We expect strong product revenue growth as well.

Speaker #3: Yeah. Yep.

Christopher Glynn: Yeah. Yep.

Alan Edrick: With the strong product revenues we're expected to have as well.

Speaker #5: With the strong product revenues, we're expected to have as well.

Alan Edrick: With the strong product revenues we're expected to have as well.

Speaker #3: Okay. And then on security margins, you've kind of effectively run down the Mexico revenues, which you've described as really efficient production runs, and so should services be in a pretty consistent margin expansion trajectory from here?

Christopher Glynn: Okay. Then on security margins, you've kind of effectively run down the Mexico revenues, which you've described as, you know, really efficient production runs. Should services be in a pretty consistent margin expansion trajectory from here?

Speaker #5: Is the question is, will the service margin continue to increase from here?

Alan Edrick: Is the question is will the service margin continue to increase from here?

Speaker #3: Yeah. Now that you've had a couple of years where it's been kind of flat down slightly as you've kind of wound down the Mexico revenue, which you've described as very efficient production runs.

Christopher Glynn: Yeah, now that, you know, you've had a couple of years where it's been kind of flat down slightly as you've kind of wound down the Mexico revenue, which you've described as very efficient production runs. Now that that's all kind of taken out of the base period and you continue scaling. Just wondering if there's any reason why we shouldn't expect, you know, kind of consistent margin expansion net security from here.

Speaker #3: So now that that's all kind of taken out of the base period and you continue scaling, just wondering if there's any reason why we shouldn't expect kind of consistent margin expansion in Security from here?

Ajay Mehra: Goal in security is always to couple top-line growth with an operating margin expansion. That's what we look to do over the long term. You know, there'll be certain quarters or periods where based upon the mix of the revenues, particularly the mix of the product revenues, may not necessarily lead to that end result, over a longer-term basis, that's absolutely the goal and the intent of the company.

Speaker #5: The goal in security is always to couple top-line growth with operating margin expansion, and that's what we look to do over the long term. There will be certain quarters or periods where, based upon the mix of the revenues—particularly the mix of the product revenues—it may not necessarily lead to that end result.

Speaker #5: But over a longer-term basis, that's absolutely the goal and the intent of the company.

Speaker #3: Okay. Great. Thank you.

Christopher Glynn: Okay, great. Thank you.

Speaker #1: Your next question comes from the line of Josh Nichols with B. Riley. Your line is open.

Operator: Your next question comes from the line of Josh Nichols with B. Riley. Your line is open.

Speaker #4: Yeah. Thanks for taking my question. Great to see the record backlog and book to bill. Yet again, and despite the DHS shutdown, now that that's back open again, just curious, are there any specific mechanisms by which the CBP procurement resumes post-shutdown?

Josh Nichols: Yeah, thanks for taking my question. Great to see the record backlog and book-to-bill yet again. You know, despite the DHS shutdown, now that that's back open again, just curious, are there any specific mechanisms by which, like, the CBP procurement resumes post-shutdown? Or do you expect there to be a relatively quick uptick in order activity between now and your fiscal year end at the end of June?

Speaker #4: Or do you expect there'd be a relatively quick uptick in order activity between now and your fiscal year-end at the end of June?

Ajay Mehra: This is Ajay Mehra. I think it's gonna be relatively quick over the next few weeks, maybe some months. There's really no restriction that we can see that they can't resume stuff. It's just people coming back in, take some time to, you know, get everybody working and, you know, concentrating on letting out orders instead of where the funding is gonna come from. We feel good about it. You know, I think over the next few weeks, time will tell. We are very encouraged that the shutdown is over.

Speaker #3: This is AJ. I think it's going to be relatively quick over the next few weeks, maybe some months. But there's really no restriction that we can see that they can't resume stuff.

Speaker #3: It's just people coming back in; it takes some time to get everybody working, and concentrating on letting out orders instead of where the funding is going to come from.

Speaker #3: So we feel good about it. But I think over the next few weeks, time will tell. But we are very encouraged that the shutdown is over.

Speaker #4: And then wanted to touch on, I guess, two things from our last two-part question. One, this $235 million homeland defense contract, I think that's much larger than anyone was anticipating.

Josh Nichols: Wanted to touch on, I guess, two things for my last two-part question. One, you know, this $235 million Homeland Defense contract, I think that's much larger than anyone was anticipating. You touched on SHIELD IDIQ. Do you see any other large opportunities within that piece of potential business that you think the company is in good position to secure? Lastly, just Alan Edrick, maybe for you, a question on, like, post the $74 million Mexico account receivable that you guys got. Like, how would you kinda characterize the Mexico-related AR levels today?

Speaker #4: You touched on SHIELD. Do you see any other large opportunities within that piece of potential business that you think the company is a good position to secure and lastly, just Alan, maybe for you a question on post this $74 million Mexico account receivable that you guys got?

Speaker #4: How would you kind of characterize the Mexico-related AR levels today?

Speaker #5: I'll take the first part. We obviously are very happy and proud of this contract. We got it; it basically demonstrates our technical expertise out there, some of the products we have out there.

Ajay Mehra: I'll take the first part. You know, we obviously are very happy and proud of this contract we got. It basically demonstrates, you know, our technical expertise out there. Some of the products we have there, we're well considered by the government and other customers. You know, yeah, there are opportunities out there. You know, I'm not gonna sit here and try to quantify them. It's a very new market. We're all looking at it. You know, I think by the size of the order and what the future holds, you know, we'll wait and see over the next, over the next few quarters. It's a great start, and we feel very good about it. This is Alan.

Speaker #5: We're well considered by the government and other customers. Yeah, there are opportunities out there. I'm not going to sit here and try to quantify them.

Ajay Mehra: You know, I'm not gonna sit here and try to quantify them. It's a very new market. We're all looking at it. You know, I think by the size of the order and what the future holds, you know, we'll wait and see over the next, over the next few quarters. It's a great start, and we feel very good about it. This is Alan.

Speaker #5: It's a very new market. We're all looking at it. But I think by the size of the order and what the future holds, we wait and see over the next few quarters.

Speaker #5: But it's a great start, and we feel very good about it. And this is Alan. So, the second part of your question, Josh, on the Mexico receivable—with the recent receipt of the $74 million, it certainly reduces the Mexico receivable balance.

Alan Edrick: To the second part of your question, Josh, on the Mexico receivable. With the recent receipt of the $74 million, it certainly, you know, reduces the Mexico receivable balance. That being said, there's ample opportunities for significant cash flow as we collect on this receivable over the coming months and quarters. We would expect the, you know, the free cash flow conversion to be, you know, quite outstanding here over the foreseeable future.

Speaker #5: That being said, there's ample opportunities for significant cash flow as we collect on this receivable over the coming months and quarters. So we would expect the free cash flow conversion to be quite outstanding here over the foreseeable future.

Speaker #3: I appreciate the detail. Thanks, guys.

Josh Nichols: Appreciate the detail. Thanks, guys.

Speaker #1: Your next question comes from the line of John Cardine with Citi. Your line is open.

Operator: Your next question comes from the line of John Godin with Citi. Your line is open.

Speaker #6: Hi, this is Bradley Eisner for John Garden. Thanks for taking my question. So I just want to take a step back and look at the bigger picture on the opportunities we're seeing, particularly around the airport security demand side.

Bradley Eyster: Hi, this is Bradley Eyster for John Godin. Thanks for taking my question. I just wanna take a step back and look bigger picture on the opportunities you're seeing, particularly around the airport security demand side. I appreciate that you touched upon the potential supply chain challenge that you're seeing, given the dynamic macro environment. In that same school of thought, with the reduction of flight capacity to various degrees, concerns over jet fuel cost availability, I know it's still early days, but have you guys seen any impact to the demand for these services? Is there any timing impacts creeping up from this?

Speaker #6: And I appreciate that you touched upon the potential supply chain challenges that you're seeing, given the dynamic macro environment. But in that same school of thought, with the reduction of flight capacity to various degrees, concerns over jet fuel cost and availability—and I know it's still early days—but have you guys seen any impact to the demand for these services?

Bradley Eyster: In that same school of thought, with the reduction of flight capacity to various degrees, concerns over jet fuel cost availability, I know it's still early days, but have you guys seen any impact to the demand for these services? Is there any timing impacts creeping up from this?

Speaker #6: Or is there any timing impact creeping up from this?

Speaker #5: I mean, it's a great question. I think overall, after a conflict ends, unfortunately, being in the security business, it's always that things tend to pick up.

Ajay Mehra: I mean, it's a great question. You know, I think overall, like, you know, after, you know, after a conflict ends, you know, unfortunately, being in the security business, it's always that things tend to pick up. You know, are there some temporary disruptions in the Middle East, et cetera, because of aviation? Yes. I think we've got to look at it from a overall standpoint that as and when this gets put behind us, we think we'll see not just aviation or overall, we think we'll see an uptick potential in our business.

Speaker #5: Are there some temporary disruptions in the Middle East, etc., because of aviation? Yes. But I think we've got to look at it from a overall standpoint that as and when this gets put behind us, we think we'll see not just aviation, but overall, we think we'll see an uptick potential in our ur business.

Speaker #3: Got it. I appreciate the color. And I just want to touch upon the opportunities on Golden Dome and SHIELD that you're pursuing. So I'm just kind of curious, more on the medium and longer term here, potentially.

Bradley Eyster: Got it. I appreciate the color. I just wanna touch upon the opportunities on Golden Dome and Shield that you're pursuing. I'm just kinda curious, more in the medium and longer term here, potentially. How would you like kind of measure out the kind of landscape here for the RF contraction size specifically? I'm just curious what kind of update you can provide, any kind of traction or interest gains for customers here would be helpful.

Speaker #3: So how would you kind of measure out the competitive landscape here for the RF protection side specifically? And I'm just curious, what kind of update you can provide?

Speaker #3: Any kind of traction or interest gain for customers here would be helpful.

Speaker #5: Oh, I think that we've been talking about it for several quarters. Like I said, we're this initial contract has been very good for us.

Ajay Mehra: I think that we've been talking about it for several quarters. Like I said, we're this initial contract has been very good for us. We announced smaller contracts last quarter. We think there's a lot of momentum going forward, but honestly, I think there's a limited amount what we can talk about because of what type of contracts these are. I think the future looks good. The timing, we'll just have to wait and see.

Speaker #5: We announced a smaller contract last quarter. We think there's a lot of momentum going forward, but honestly, I think there's a limited amount what we can talk about because of what type of contracts these are.

Speaker #5: But I think the future looks good. The timing, we'll just have to wait and see.

Speaker #3: Great. Appreciate all the color. Thank you.

Bradley Eyster: Great. Appreciate all the color. Thank you.

Speaker #1: Your next question comes from the line of Seth Siffman with JP Morgan. Your line is open.

Operator: Your next question comes from the line of Seth Seifman with J.P. Morgan. Your line is open.

Speaker #3: Hi. Good afternoon. This is Rock Lawn for Seth. Should we think about the Homeland Award and possible similar awards in the future as supporting the longer-term growth in the opto segment?

Ray Kwon: Hi, good afternoon. This is Ray Kwon for Seth Seifman. Should we think about the Homeland award and possible similar awards in the future as supporting the longer term growth in the Opto segment? How should we be thinking about the top line growth in 2027 following the low double-digit pace this year? Could it be one of the faster growers next year?

Ray Kwon: Hi, good afternoon. This is Ray Kwon for Seth. Should we think about the Homeland award and possible similar awards in the future as supporting the longer term growth in the Opto segment? How should we be thinking about the top line growth in 2027 following the low double-digit pace this year? Could it be one of the faster growers next year?

Speaker #3: And how should we be thinking about the top-line growth in 2027 following the low double-digit pace this year? Could it be one of the faster growers next year?

Speaker #5: First of all, this is in the security segment. The Golden Dome that's where it falls. On the opto side, we think that yes, there is room for potential growth as we go forward.

Ajay Mehra: First of all, you know, this is in the security segment. The Golden Dome, that's where it falls. You know, on the Opto side, you know, we think that, yes, there is, you know, room for potential growth as we go forward. You know, we talked about it before. There's definitely a movement away from, away from China. With our capabilities, like I mentioned in my remarks, all over the world, not just in Asia, but in Europe and the US, from a manufacturing basis, we provide a lot of flexibility to our customers. You know, we feel good as we move forward. Obviously, you know, there are always, you know, a little bit of ups and downs there.

Speaker #5: We've talked about it before. There's definitely a movement away from China. And with our capabilities, like I mentioned in my remarks, all over the world—not just in Asia, but in Europe and the US—from a manufacturing basis, we provide a lot of flexibility to our customers.

Ajay Mehra: There's definitely a movement away from, away from China. With our capabilities, like I mentioned in my remarks, all over the world, not just in Asia, but in Europe and the US, from a manufacturing basis, we provide a lot of flexibility to our customers. You know, we feel good as we move forward. Obviously, you know, there are always, you know, a little bit of ups and downs there.

Speaker #5: So we feel good as we move forward. Obviously, there are always a little bit of ups and downs there. But overall, I think opto is in a good position.

Ajay Mehra: Overall, I think Opto is in a good position.

Speaker #3: Great. Thank you.

Ray Kwon: Great. Thank you.

Speaker #1: Once again, everyone, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Jeff Martin with Ross Capital.

Operator: Once again, everyone, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Jeff Martin with ROTH Capital. Your line is open.

Speaker #1: Your line is

Speaker #5: Thanks. Good afternoon, AJ and Alan. I wanted to dive into the RF business a bit more. Are you able, Alan, are you able to give us the revenue number from that business for the quarter?

Jeff Martin: Thanks. Good afternoon, AJ and Alan. Wanted to dive into the RF business a bit more. Are you able, Alan, are you able to give us the revenue number from that business for the quarter? Then I believe you were ramping up additional production facilities there. Curious where you're at today in production capacity relative to the Homeland Defense contract.

Speaker #5: And then I believe you were ramping up additional production facilities there. Curious where you're at today in production capacity relative to the Homeland Defense contract.

Speaker #4: We can go through the actual numbers, but we started ramping up the production capabilities and moved into new facilities over the last several months.

Ajay Mehra: Can go through the actual numbers. You know, we started ramping up the production capabilities and moved into new facilities, you know, over the last last several months. We made that decision a while ago, and frankly, you know, looks like a very good decision. We've ramped up that capacity. We keep on ramping it up. Like I said, you know, we're in a new facility, and we feel good about what we could do and offer the government in terms of being able to turn around product a lot faster than we were able to maybe, you know, a year or two ago. You wanna take the second part, Alan?

Speaker #4: But we made that decision a while ago. And frankly, it looks like a very good decision. And so we've ramped up that capacity. We keep on ramping it up.

Speaker #4: Like I said, we're in a new facility. And we feel good about what we could do and offer the government in terms of being able to turn around product a lot faster than we were able to maybe a year or two ago.

Speaker #4: Do you want to take the second part on?

Speaker #5: Sure. Yeah. We were pleased Jeff with the revenues in the RF business. I believe it was a new record for us. We did about $38 million.

Alan Edrick: Sure. Yeah, we were pleased, Jeff, with the revenues in the RF business. I believe it was a new record for us. We did about $38 million in the quarter. The run rate of that business has significantly increased since the time of acquisition, you know, 18 months or so ago. We're very pleased with the trajectory.

Speaker #5: In the quarter. So the run rate of that business has significantly increased since the time of acquisition. 18 months or so ago. So we're very pleased with the trajectory.

Speaker #3: That's helpful. Thank you. I know you're not in a position to really give any guidance beyond this year, but just curious, qualitatively, how you're thinking about growth and your growth prospects in fiscal 27 and 28.

Jeff Martin: That's helpful. Thank you. I know you're not in a position to really give any guidance beyond this year, just curious qualitatively how you're thinking about growth and your growth prospects in fiscal 2027 and 2028.

Alan Edrick: This is Alan. Good question. You're right, we'll be giving our guidance for fiscal 2027 on our next call in August. You know, that being said, you know, we're optimistic for growth as we move into our new fiscal year just 2 months from now. We're excited to close out Q4 in fiscal 2026. With the strong backlog and robust opportunity pipeline that we have out there, you know, fiscal 2027 could be a very, very exciting year for us.

Speaker #5: This is Alan. So good question. And you're right. We'll be giving our guidance for fiscal 27 on our next call in August. That being said, we're optimistic for growth as we move into our new fiscal year just two months from now.

Speaker #5: So we're excited to close out Q4 and fiscal 26. But with the strong backlog and robust opportunity pipeline that we have out there, fiscal 27 could be a very, very exciting year for us.

Speaker #3: And last one for me is you've been historically a very, value-oriented buyer. On the M&A front, a lot of those have produced very good returns.

Jeff Martin: Last one for me is, you've been historically a very value-oriented buyer on the M&A front. A lot of those have produced very good returns. I think the RF business is case in point. Just curious if you're seeing other opportunities out there that are similarly interesting. Are there areas, you know, from either a market expansion standpoint or a technology expansion standpoint that you're looking at that could, you know, move the needle over the next couple of years here?

Speaker #3: I think the RF business is case in point. Just curious, if you're seeing other opportunities out there that are similarly interesting, and are there areas from either a market expansion standpoint or a technology expansion standpoint that you're looking at that could move the needle over the next couple of years here?

Speaker #4: Well, we're always looking at opportunities. I mean, that's just part of it, as Alan's pointed out before. We have a lot of dry powder available for us.

Ajay Mehra: Well, you know, we're always looking at opportunities. I mean, that's just, you know, part of it. As Alan's pointed out before, we have, you know, we have a lot of dry powder available for us. I think we look at from a technology standpoint. Obviously, we wanna make sure that, you know, 1 plus 1, you know, everybody says 3. I'll always say maybe more. You know, there are opportunities. I really don't wanna get into specifics, but we're always actively looking and but we're not gonna do anything unless we feel it really makes a difference from a strategic, as well as from a, you know, business perspective as we move forward.

Ajay Mehra: Well, you know, we're always looking at opportunities. I mean, that's just, you know, part of it. As Alan's pointed out before, we have, you know, we have a lot of dry powder available for us. I think we look at from a technology standpoint. Obviously, we wanna make sure that, you know, one plus one, you know, everybody says three. I'll always say maybe more. You know, there are opportunities. I really don't wanna get into specifics, but we're always actively looking and but we're not gonna do anything unless we feel it really makes a difference from a strategic, as well as from a, you know, business perspective as we move forward.

Speaker #4: And I think we look at, from a technology standpoint, obviously, we want to make sure that one plus one everybody says three. I'll always say maybe more.

Speaker #4: But there are opportunities. I really don't want to get into specifics, but we're always actively looking. But we're not going to do anything unless we feel it really makes a difference from a strategic as well as from a business perspective, as we move forward.

Speaker #3: Thank you.

Jeff Martin: Thank you.

Speaker #1: There are no further questions at this time. That concludes the Q&A session.

Operator: There are no further questions at this time. That concludes the Q&A session.

Speaker #5: Thanks again. Thank you all for attending our conference call. We look forward to speaking with you during our next earnings call following the completion of our fiscal year.

Ajay Mehra: Once again, thank you all for attending our conference call. We look forward to speaking with you during our next earnings call following the completion of our fiscal year. Thank you.

Speaker #5: Thank you.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.