OSI Systems, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the OSI Systems Inc. First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Alan Edrick, Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems, and I'm here today with Deepak Chopra, our President and CEO. Headquartered in Los Angeles and home of the world champion Dodgers and Lakers, we welcome you to the OSI Systems Fiscal 21 First Quarter Conference Call. We are pleased that you can join us as we review our financial and operational results and discuss our updated outlook for fiscal 21. Before we discuss our Q1 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 in this call are based on currently available information and the company undertakes no obligation to update any forward-looking statement based on subsequent events or new information or otherwise. During today's call, we 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 summary of our financial performance for the first quarter of fiscal 21 and then turn the call over to Deepak for an overview of the business. I will then finish with more detail regarding our financial results and a discussion of our updated outlook for fiscal 21. We are working hard to mitigate the impact of the continuing COVID-19 pandemic. Our priorities at OSI Systems remain to deliver on 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 jump into some highlights. First, we achieved record non-GAAP Q1 earnings per share of $1.06, up 16% from Q1 of fiscal 20, despite the negative impact on revenues of the pandemic, most notably in our security division. Second, We reported a significant year-over-year increase in the adjusted operating margin to 11.3 percent in Q1 fiscal 21 compared to 9.1 percent in the same period last year. Third, bookings were very strong in the first quarter. The Q1 book-to-bill ratio was 1.6, leading to a 17 percent increase in backlog since the start of the fiscal year. And finally, we had another quarter of strong cash flow conversion resulting in record first quarter operating cash flow of $54 million. Before diving more deeply into our financial results, let me turn the call over to Deepak.

Thank you, Alan, and good morning. Overall, we are pleased with our fiscal 2021 first quarter performance, featuring strong earnings and cash flow, as Alan has mentioned, and robust bookings across all divisions despite the continued impact of COVID-19. Our book-to-bill ratio of 1.6 for the whole company led to significant growth in the backlog. We entered Q2 with a solid pipeline of near-term opportunities. Talking about each division's performance in the quarter, starting with the security division, Q1's bookings were 254 million for a 1.9 book-to-bill ratio. These bookings position security for a strong fiscal 2021, second half continuing into fiscal 22. We are seeing demand improvement in many end markets, although, as we have mentioned before, the order cycle, not surprisingly, in the context of the pandemic, have been somewhat stretched from historical patterns. We have had several notable Q1 booking wins. In aviation, we were very pleased to announce a $59 million contract to provide multiple RTT-110CT jet baggage machines and explosive trace detection systems for the Hamad International Airport in Qatar. This was a very important win involving an airport that had not previously been a rapid scan customer. Air cargo customers continue to improve their screening infrastructure and capacity. And during the quarter, we announced an order for DHL, for RTT-110s, and our new machine, Orion 927 dual energy machine. Though the aviation market faces significant challenges due to the COVID-19 impact on passenger air travel, we are seeing signs of improvement as certain international airports are taking this opportunity to upgrade their infrastructure with newer screening technologies. As mentioned earlier in the previous calls, the air cargo market and logistics market globally continues to show growth. For ports and borders, we continue to expand our reach. We had several important wins in Q1 in this area. During the quarter, we announced a contract win for $31 million to provide our Eagle M60 mobile high-energy cargo and vehicle inspection systems. In addition, Earlier this week, we announced a significant $93 million award from an international customer in the Middle East to provide multiple platforms, including our Eagle cargo, vehicle inspection portals, both mobile and stationary, rapid scan baggage and parcel screening machines, and trace detection systems. We will also provide installation maintenance, training, and follow-on support under this contract. Based on this customer's current project timeline, we believe with some caution that we could record revenues beginning in Q4 of fiscal 21 and continuing into fiscal 22 and beyond. We continue to work with prospective customers in the U.S. and internationally on critical projects that are at various stages of vendor selection. In addition to significant international demand evidenced by bookings in the last quarter, we have several line of sight opportunities in the U.S. Typically, as you know, we see significant purchases by the U.S. government in their government year ending September 30th. But because of the circumstances, Some of these have been delayed, but we remain very strong, positive with these opportunities and are well placed. On turnkey services, our contracts in Albania and Puerto Rico continue to do well. We also commenced operations in Guatemala at the port of Santo Tomas, Castilla. The contract for the Mexico program expired in June 2020, and reaching a path forward for us has not materialized, although we remained optimistic in our last conference call. So we have wound down this operation and looking forward to executing on other new turnkey programs globally. We are raising our guidance due to the overall strength in our business, including very strong security bookings, and a robust pipeline of sales opportunities in the U.S. and international in spite of the shutdown in Mexico. Alan will talk a little bit more about it. Moving to the Opto Electronic and Manufacturing Division, Opto again delivered strong results with record Q1 revenues, generating 9% growth over the prior year and solid adjusted operating income. The diversity of Opto's geographic reach and customer base has helped us achieve positive results during these uncertain times. Furthermore, the division enters Q2 with a record backlog. We expect Opto to continue to move forward with a strong fiscal 2021 fiscal year. And finally, discussing the strong progress in the healthcare division space labs, where Q1 sales were up 28% and operating income increased over threefold in comparison with the first quarter of fiscal 20. Higher demand for patient monitoring products on a global basis drove the growth as we continue to benefit in part by the pandemic. This division, which typically books and ships much of its business in the same quarter, achieved a Q1 book-to-bill ratio of over 1. The healthcare team has done a great job with operations and supply chain management to capitalize on increasing demand. We continue to invest significant resources in R&D to enhance remote monitoring and patient management technologies and have several new products slated for launch this year and next across our product families. We are very pleased with the momentum in our healthcare business and the strong execution by management. Overall, I'm happy with our Q1 performance. Security Division is laying the groundwork for the future with strong bookings as we work through the industry's current challenges. Apto continues to execute for OEM customers in various industries, and healthcare is performing at a high level. We look forward to the remainder of the fiscal 2021. With that, I will hand the call back over to Alan to talk in more detail about our financial performance before opening the call for questions. Thank you.