Earnings News and Notes

OSI Systems [OSIS]

Net income rose strongly despite a 5% decrease in sales due to improved operating efficiencies, cost cutting, and product mix. The company’s restructuring efforts that have led to lower operating costs continue although at a slower pace. The sales decline was due to a drop at the Rapiscan security division–down 6% to $150.6 million–that company officials blame in part on delays in shipments. Rapiscan was the only division with lower profits as well, down 15% to $4.1 million. Still, the company says it is making progress on margin expansion at Rapiscan that will reach double digits sometime in FY ’11. Despite the soft security results, company officials say the second half of the fiscal year at Rapiscan will see “outstanding growth” supported by a strong backlog that stood at a record $164 million, a 41% increase since the start of the fiscal year. The officials note that a recent contract win to supply screening services to the Puerto Rico Ports Authority (PRPA) is not included in backlog (See related story this issue). While the PRPA win marks the start of a new business model for Rapiscan, a recent $35 million contract with an airport operator in Mexico to supply hold baggage X-Ray systems to screen checked bags represents a new role for the company, that of a prime contractor responsible for managing and coordinating the construction related to the implementation of the hold baggage system, OSI officials say. This award is in backlog and most of the revenues will be recognized in FY ’11. They also say that “quotation activity” for its Secure 1000 whole body imager has increased following the failed Christmas Day airliner bombing and that the company has the production capacity to meet demand. Business remains active for air cargo screening but investors don’t see a lot of news regarding sales on this front because the individual deals are small, the officials add. OSI’s overall backlog at the end of the quarter stood at $240 million and free cash flow was $7.6 million. Sales guidance was reaffirmed at between $620M to $640M and earnings guidance was raised nine cents to between $1.23 and $1.32 EPS.