OSI Systems, Inc.

Good day, and thank you for standing by. Welcome to the OSI Systems, Inc. Second Quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask the question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to OSI Chief Financial Officer, Alan Edrick. Please go ahead.

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 2022 Second Quarter Conference Call. We are pleased that you can join us as we review our financial and operational results. Earlier today, we issued a press release announcing our second quarter fiscal year 22 financial results. Before we discuss these results, I would like to remind everyone that today's discussion will include forward-looking statements and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. 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 will refer to both GAAP and non-GAAP financial measures when describing the company's results. For information regarding non-GAAP measures and GAAP measures of the company's results and a quantitative reconciliation of those figures, please refer to today's earnings release. I will begin with a discussion of our financial performance for the second quarter of fiscal 22, and then turn the call over to Deepak for an overview of our business performance. I will then finish with more detail regarding our financial results and a discussion of our outlook for the 2022 full fiscal year. We are pleased with our results this quarter, despite global marketplace challenges. including heightened impacts from COVID with the emergence of the Omicron variant and increasing supply chain delays and logistics costs. As we continue to work through this environment, a top priority at OSI Systems remains 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 go through a high-level summary of our financial results. Q2 revenues of $277 million were comparable with that of the prior year Q2. Increased sales in the opto division, along with a slight increase in sales in the security division, were mostly offset by a 4% reduction in year-over-year healthcare division sales as expected. Q2 non-GAAP earnings per share were $1.28, down 5% from Q2 of fiscal 21, due primarily to increased R&D, higher supply chain costs, and a change in product mix. For the first half of fiscal 22, we reported record non-gap diluted EPS of 244 per share, up 5% year-over-year. Bookings were a bit softer in the second quarter of fiscal 22. Following a Q1 book-to-bill of 1.6, the Q2 book-to-bill ratio was 0.9, resulting in the fiscal 22 first half book-to-bill exceeding 1.2. We ended the quarter with a backlog of over $1.2 billion. a 12% increase since the beginning of the fiscal year. Lastly, in December, we amended our credit facility, increasing the capacity from $535 million to $750 million, extending the term to a fresh five years and maintaining the very favorable pricing, which as a quarter end was LIBOR plus 100. This adds increased optionality as our convertible notes come due in September 2022. Before diving more deeply into our financial results, I'll now turn the call over to Deepak.

Thank you, Alan, and thanks to everyone joining us on today's call. We had a good second quarter and first half of fiscal 2022 while working through a challenging macro environment that was significantly impacted by the rapid spread of Omicron variant. This latest COVID wave continues to hamper our supply chain logistics, and business-related travel. Security has been the most impacted, while optoelectronics and healthcare were less affected and performed to our expectations. We ended the quarter with a backlog of over $1.2 billion and entered the second half of fiscal 2022 with confidence in our ability to execute in a tough environment. taking on to each division's performance in the quarter, starting with security. The security division delivered Q2 revenues that were slightly higher than Q2 in the prior year and revenues in the first half that were 5% higher than the first half of fiscal 2021. In Q2, the Omicron variant impacted a pandemic-challenged environment especially for the aviation security market, as certain airports prolonged their equipment upgrade, replacement, and service cycles. Local travel restrictions in certain regions of the globe also affected timing for installation, test, and acceptance phases by the customer of our aviation port and border security products. Discussing some of the highlights during the quarter and the first half, the security team captured several key booking opportunities during the quarter. We announced one of these wins valued at about $29 million from an international customer to provide cargo and vehicle inspection systems, bagging and parcel inspection systems, related training and maintenance services. Earlier in the quarter, previously we announced $200 million in orders that were received near the end of Q1 from U.S. Customs and Border Protection, CBP, under two indefinite delivery, indefinite quantity contracts called IDIQs that collectively have a ceiling value totaling approximately $870 million. As CBP further strengthens its border security to interdict contraband and illegal drugs hidden in cargo and vehicles, we believe that there are opportunities for additional orders under these IDIQs to support the customer's non-intrusive cargo and vehicle inspection programs for which we have one of the broadest solution offerings in the industry. As we had mentioned before, that The shipments on this contract is more towards the Q4 and into 2023. Internationally, we are currently working on several projects to upgrade and maintain existing rapid scan and AS&E cargo and vehicle inspection systems and new installations. Our ZBV mobile backscatter vans Portal 60s, high-energy and multi-energy configurations for drive-through portals, and G60 fixed gantry configurations, among others, are utilized at one or more of these projects to provide customs clearance of goods at ports and border crossings. On some projects, we are also incorporating our proprietary integration software called CertScan, which is cyber secure and helps manage inspection image data, travel, vehicle identification, and integrates with other IT systems at cargo and vehicle inspection checkpoints, thereby streamlining and facilitating the inspection process. SearchScan was designed to work with third-party inspection systems and can be sold as a standalone software. So we continue to gain traction with our cert scan software as a service called SAS model with potential customers that have inspection equipment from multiple vendors to utilize the software platform. As mentioned before in our 200 million contract that we announced before, there is a good portion of the cert scan software also. In turnkey services, Our projects in Albania, Puerto Rico, Guatemala continue to perform well. Our experience and capabilities derived from operating and managing these turnkey programs have been invaluable as they have allowed us to differentiate ourselves and win critical border security projects. that have a scope which involves equipment installation, civil works, system integration, and operating training, and in some cases, the search scan software also. During the quarter, we continue to work with third-party global logistics providers to support their infrastructure expansion efforts that require various solutions for parcel inspection and explosive detection. And again, we have a broad set of solutions here that match well to the requirements of these customers. We are very focused on capturing new opportunities in this growth area, primarily driven by increased e-commerce goods flow. As mentioned before, air cargo has become a very good product portfolio for us, and we feel that we are best placed as our broad product portfolio for that market. In Q2, security did a commendable job delivering to our customers while prudently managing the cost structure, dealing with the ongoing supply disruptions, travel bans, travel quarantines, and test and acceptance delays. Looking ahead, we believe that security with a solid backlog and opportunity pipeline is well positioned for a strong second half of our fiscal year. As Mellon will talk later, definitely some of the revenue in security got pushed from Q2 into Q3 and Q4. Moving on to our optoelectronics division, we had a strong quarter by leveraging our global operational presence to deliver to our various OEM customers. Opto's third-party Q2 revenues of $78 million represented yet another new record for the division. Opto dealt with instances of material shortages, component price increases, and higher phrase costs and still achieved record quarterly profit. In an increasingly difficult macro environment, The OPTO team has done well to anticipate potential supply chain constraints and plan workarounds as needed to maintain deliveries to OEMs in aerospace, defense, healthcare, automotive, and telecommunication industries, among others. During the quarter, we announced an order for approximately $6 million to manufacture sub-assemblies for a wireless critical communication provider. To support growth in Asia, especially for our medical products, we are expanding AAPTO's India's operation as we transition to a larger facility shortly, which will come online in the second half of 2022. Looking ahead, with a record Q2 ending backlog, we anticipate AAPTO continuing to perform well in the second half of the fiscal year. I want to make an extra comment that our customers, OEM customers in the opto business, they have been super, super cooperative and have helped us in the supply chain. And in some cases, we've been able to pass on the price increases over to them. Moving on to the healthcare division, we reported revenues of $52 million, a bit lower than the same period from a year ago, which was expected. Last year's Q2 revenues still had tailwinds from hospitals expanding their ICU capacity for the pandemic. During the quarter, we announced a couple of key wins totaling $9 million from US hospitals in the Northwest and South regions. These hospitals ordered a wide array of patient monitoring solutions, including our exhibit, central stations, cube transport patient monitors, and related accessories. During the quarter, we continue to significantly invest in developing new products for the patient monitoring and cardiology product lines to further strengthen our offering for the future. For cardiology, We have also invested in building out a US sales channel that, together with new products launched, helped drive strong cardiology top line growth in Q2 and the first half. While we have a significant portion of our revenues in the US for patient monitoring, we're just getting started for establishing our US presence for cardiology. Going forward, we plan to maintain our focus on operational execution and stay agile to handle additional demand that may arise from certain hospitals that need to increase capacity currently being strained by the latest COVID variant. Overall, we are pleased with the company's fiscal 2022 first half performance, considering the conditions that quickly arose due to the Omicron variant. We are hopeful that the overall impact from Omicron will dissipate as quickly as it started. There are signs already of them peaking it. However, due to the ongoing challenges now exasperated by the latest variant, we are revising our top line guidance to a slightly lower range while simultaneously feeling confident of increasing our earnings guidance with expected improving operating margins and product mix in the second half with more security revenue, which Alan will go into more detail. Since the beginning of the pandemic, the company has proven its ability to maintain its focus on helping customers worldwide with their critical roles in providing public health, safety, and security. I would like to thank our employees, customers, and shareholders for their confidence in us, and I look forward to the second half of our fiscal year. I will now turn the call back over to Alan to further discuss our financial performance before we open the call for questions. Thank you.