OSI Systems, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the OSI Systems, Inc. Second Quarter 2021 Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question at that time, please press star then 1 on your telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to the host, Mr. Alan Edrick, Chief Financial Officer. So 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. Welcome to the OSI Systems Fiscal 21 Second 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 Q2 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 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 second quarter of fiscal 21 and then turn the call over to Deepak for an overview of the business. I'll then finish with more detail regarding our financial performance and a discussion of our updated outlook for fiscal 21. As the COVID-19 pandemic continues to impact the global economy, our priority at OSI remains the delivery on commitments to our customers and to our partners while ensuring the continued safety of our employees. Now we will jump into some highlights. First, we achieved record non-gap fiscal Q2 earnings per share of $1.35, up 6% from Q2 of fiscal 2020, despite the adverse impact on security division revenues of the ongoing pandemic. Second, we reported a record Q2 adjusted operating margin of 13.0%, a 140 basis point increase from 11.6% in the same period last year. Third, Bookings were solid in the second quarter, continuing our momentum from the previous quarter. Our book-to-bill ratio was 1.1 in fiscal Q2 and 1.3 for the first half of fiscal 21, leading to a 20% increase in backlog since the start of the fiscal year. And finally, cash flow conversion was again strong. Q2 operating cash flow was $36 million, and operating cash flow in the first half of the fiscal year was a record, Before diving more deeply into our financials, let me turn the call over to Deepak.

Thank you, Alan, and thanks to everyone joining us on today's call. During the second quarter of fiscal 21, as Alan has mentioned, we achieved record-adjusted earnings and had strong cash flow. and we ended the quarter with a backlog in excess of $1 billion. With a healthy backlog and a solid overall first half performance, we enter the second half of fiscal 21 with confidence. Let's take a look at each division's performance in the quarter, starting with the security division. Security bookings in the quarter were $164 million representing an approximate 1.1 book-to-bill ratio. As we have mentioned on the earlier call, we expected Q2 revenues in the security division to continue to be impacted by the pandemic, and this was indeed the case. Although the bookings have been strong in each of quarter one and quarter two, there has been difficulty in converting revenues some of the backlog to revenue given the travel restrictions which impede installations and certain factory and site acceptance tests. Our security team has remained focused on customer service, capturing new opportunities, and strong operational execution. We believe revenues will accelerate in the second half of the fiscal year. We booked several opportunities in cargo screening and aviation detection in the second quarter. For ports and borders during the quarter, we announced a $39 million order from an international customer to help protect its critical infrastructure along with ongoing maintenance. We also announced a $12 million international order to provide multiple units of the ZPortal, a high throughput drive-through inspection system, and the widely used ZBB mobile inspection systems, which can be rapidly deployed to provide flexibility in relocating security checkpoints. This order also includes follow-on maintenance service and product support. We secured another order for $10 million for ZBVs and related maintenance service and support. We continue to see a strong international pipeline for ports and borders, especially in the Middle East and Asia. We believe that the US spending for border security, especially on the southern border, will also be reinvigorated with the election cycle behind us and continued bipartisan support for security and technology. Global air passenger traffic is rebounding a little bit slowly. While some airports have pushed out deliveries, airports in certain regions continue to push for infrastructure upgrades to meet the latest security screening requirements. For aviation detection products, We announced a couple of our wins during the quarter. We received a $13 million order to provide airport screening products, including our 920 checkpoint CT baggage scanner, ODEON baggage scanners, and METOR 900M walkthrough metal detectors for a Scandinavian airport. We also were awarded a $6 million order to upgrade aviation checkpoint inspection systems for another customer. Earlier in quarter two, we announced contracts that were received at the end of quarter one from an international government customer for approximately $93 million to provide various x-ray cargo and vehicle inspection systems, baggage and partial inspection systems, trace detection systems, and follow-on maintenance and support. In security, Our approach to offer a broad portfolio of solutions to our customers has really helped us differentiate in the marketplace. In the first half, global logistics providers were very actively seeking our BPI and RTT solutions for air cargo as they continue to expand and upgrade security infrastructure to handle increasing e-commerce demand, thereby increasing our opportunity pipeline. For turnkey services, our Albania and Puerto Rico operations continue to do well, and the newest project in Guatemala at the Port of Santo Tomas commenced operations a few months ago, with scanning volume currently ramping up. Our security division also continues to work on development of new security solutions, especially in the areas of checkpoint security, cargo and vehicle scanning, enhanced detection software, and AI-based automated threat detection solutions. Overall, we believe the performance of the security division in the second half of fiscal 21 will be stronger than the first half performance, as we see a growing pipeline of opportunities and have a significant backlog. Moving to our optoelectronics division that continues to deliver strong results, Q2 revenues of $88 million represented a new record and a 20% increase over the same period in the prior year. During the first half of fiscal 2021, The team managed through the pandemic-induced operational disruptions at various regional sites to meet customer needs and help grow the top and the bottom line. Opto continues to grow business with both new and existing customers, particularly in Asia and the US. As an example of a notable win with a new customer, Opto received an order for approximately $6 million to manufacture LED lighting electronic components for a leading OEM. Opto's bookings were solid and we ended Q2 with a record backlog in the division that was 16% higher than the Opto backlog at the end of fiscal 20 and up sequentially over the 2021 first quarter. The team will continue to focus on opportunities to leverage our existing channels and manufacturing infrastructure in the US, Europe and the UK and Southeast Asia. We anticipate that this division will continue our strong momentum through the second half of the fiscal year. Moving on to the healthcare division, which reported revenue of $55 million or a 31% higher than the same period a year ago. We have been working over the past year to improve operations and bring in new sales and marketing talent in the healthcare division, and both initiatives were crucial in driving the division's Q2 performance as the team ramped up sales efforts, order fulfillment, and service to handle increased volume. During the fiscal 2021 first half, demand for patient monitoring was boosted by the tailwinds from the pandemic. But we simultaneously also encountered some headwinds in our cardiology business as customers focused more on COVID-related treatments and procedures. As more of the population receives COVID vaccinations, We believe that the diagnostic cardiology product line could benefit based on pent-up demand. Furthermore, we have plans for several new cardiology product introductions in the near term and we continue to develop the next generation of patient monitoring platform. We are proud of the accomplishments of the entire healthcare team and its continued support of the hospital customer base facing the unprecedented pandemic challenges. Overall, we are pleased with our company's fiscal 2021 first half performance. While the security division faced revenue headwinds as we anticipated, the team has done an outstanding job booking new business, driving new product innovation, and positioning itself for a stronger second half. The Opto division continues to deliver strong performance as it benefits from a blue-chip customer base of leading OEMs in diversified industries such as aerospace, defense, automotive, industrial, and healthcare. And the healthcare division's focus on customer and operational execution is paying off with the ability to profitably handle significant increases in demand. Looking ahead, We intend to maintain our focus on meeting our customers' needs while protecting the safety and health of our employees. I am truly proud of our OSI team, and I look forward to the second half of a 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.