Alan Edrick - Executive Vice President and Chief Financial Officer Deepak Chopra - Chairman, President and Chief Executive Officer.

Brian Ruttenbur - Drexel Hamilton Lawrence Solow - CJS Securities Greg Konrad - Jefferies Austin Drake - B. Riley & Co. Jeff Martin - ROTH Capital Partners, LLC.

Good day, ladies and gentlemen, and welcome to the OSI Systems second quarter 2018 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Alan Edrick, Chief Financial Officer. You may begin..

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 Deepak Chopra, our President and CEO. Welcome to the OSI Systems second quarter fiscal 2018 conference call.

Earlier today, we issued a press release announcing our second quarter fiscal year 2018 financial results and an 8-K. Before we discuss our results, I would like to remind everyone that today's discussion contains forward-looking statements.

In connection with this conference call, the company wishes to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking under the securities laws.

These forward-looking statements are based on management's current expectations and are subject to uncertainties, risks, assumptions and contingencies, many of which are outside the company's control.

Such statements include, without limitation, information regarding the expected financial and operational performance of the company and its operating divisions; expected revenues, earnings and growth; and expectations regarding the effects of new tax legislation.

Please be advised that actual results could differ materially from our forward-looking statements due to numerous factors, including factors described in the company's periodic reports filed with the SEC from time to time.

All forward-looking statements made on this call are based on currently available information and speak only as of the date of this call and the company undertakes no obligation to update any forward-looking statement that becomes untrue because of subsequent events or new information or otherwise.

During today's conference call, we may refer to both GAAP and non-GAAP financial measures of the company's operating and financial results.

For information regarding non-GAAP measures and comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today's press release regarding our second quarter 2018 results, which has been furnished to the SEC as an exhibit to a current report on Form 8-K.

Before turning over the call to Deepak to discuss the general business and operations, I will provide a high-level financial overview of the second fiscal quarter. All my references will be to fiscal Q2 2018 compared to fiscal Q2 2017 unless otherwise specified.

First, we reported Q2 net revenues of $278 million, a new second quarter record for OSI and a 14% year-over-year increase. This increase was driven primarily by our security division, which reported record Q2 revenues of $172 million, up 23%.

We saw strong organic growth in our cargo and checkpoint products and related services, which was aided by revenues from our explosive trace detection business, which we acquired in the first quarter of fiscal 2018. Our Healthcare division revenues were up by 3%.

Excluding the impact of the prior-year Q3 divestiture of a non-core business, Healthcare revenues were up 13%. And our Opto division reported solid 5% growth. Second, we reported Q2 GAAP diluted loss per share of $2.47 compared to diluted earnings per share of $0.25 in the prior-year.

The loss was largely due to the impact of tax reform legislation, which I will discuss in a bit more detail later during the call. On a non-GAAP basis, Q2 EPS was $0.97 per diluted share, up 43%.

Non-GAAP EPS excluded the impact of impairment restructuring and other charges, amortization of acquired intangible assets and non-cash interest expense, all net of related tax effects. It also excludes net discrete tax expense of approximately $56 million primarily related to the tax reform.

Excluding the impact of the discrete tax expense, our effective tax rate was 28%. Third, operating cash flow for the quarter was $50 million and capital expenditures were $8 million. For the first half of fiscal 2018, operating cash flow was $85 million. Fourth, our non-turnkey Q2 book-to-bill ratio was 1.1.

Our total backlog as of December 31, 2017 was approximately $830 million, an increase of 12% from the start of the fiscal year. Before diving more deeply into the numbers and discussing fiscal 2018 guidance, let me turn the call over to Deepak..

Thank you, Alan. And thank you to everyone joining us on today's call. As Alan has mentioned, we had an excellent quarter and first half of fiscal 2018, having achieved strong sales, adjusted earnings growth and cash flow. Each of our three divisions – Security, Healthcare and Optoelectronics – contributed to this quarter's performance.

Before continuing and discussing the divisions in detail, I would like to address a matter that we disclosed earlier today. In December, a short seller launched an attack on our stock. Their reports are misleading and are based on several false assumptions.

Following the publication of their initial report, we were notified by the SEC and the DOJ that they are looking into matters contained in the short seller's report. Separately, the SEC and DOJ are looking into trading in OSI stock by executives, directors and employees.

In relation to the subject of investigation, the company has taken action with respect to a senior employee. As you can appreciate, these are pending legal matters and we cannot comment any further.

The company takes compliance and our policies on anticorruption and securities trading very seriously and we take a great deal of pride in our compliance efforts in those areas. Reviewing the Q2 performance and highlights for each division, beginning with Security.

Q2 revenues in the Security division were $172 million, a 23% increase from the prior-year. This includes $20 million in revenues from our recently acquired explosive trace detection business, which has come out of the gates very strong since the acquisition in July 2017.

We have made substantial strides in integrating the trace product line into our overall Security sales and operation infrastructure. Our core Security business is performing well, with strong sales bookings and improved margins.

The growth was nicely distributed across our various product platforms for baggage and cargo inspection and related services. Security bookings in Q2 were $158 million, which reflects a non-turnkey book to bill ratio of approximately 1.1 and our first half bookings were a robust $391 million, representing a 1.3 non-turnkey book to bill ratio.

In the aviation HBS market, our RTT hold baggage screening system continues to represent a sizable global opportunity and platform for growth. During the quarter, we were pleased to receive our first RTT order in Latin America, a strategic area of growth for us.

The $16 million order from an airport customer in Panama, which included multiple security inspection systems, including multiple RTT hold baggage screening equipment, 600 series checkpoint screening systems for carry-on baggage and Metor metal gates. This is a testament to the breadth of our product portfolio.

This agreement also includes follow-on service and support. Shortly after the quarter-end, we announced a follow-on order for approximately $21 million to provide multiple additional units of RTT explosive detection systems to be installed at Charles de Gaulle International Airport in France.

Airports in the European Union continue to gear up to meet the ECAC deadlines. On the US certification activity front, we continue to support efforts for TSS certification for RTT and the Itemiser trace detection 4DX system.

Also, we recently were notified that RTT 110 and the Itemiser 4DX were named platinum winners, the highest award category at the 2017 GSN Homeland Security Awards for best explosive detection solution and the best chemical detection solution respectively. Moving on to the integrated services portion.

Shortly after the quarter end, we announced a new two-year agreement in Mexico to continue providing security, inspection services in a wide-ranging program utilizing cargo and vehicle screening systems.

The expected revenues of the new contract are consistent with what we expected and what was reflected in our sales guidance for fiscal 2018 during our last conference call. Our Albania program has been running very smoothly and effectively and has become an international showcase for prospective customers.

The Puerto Rico scanning program was back online almost immediately after the Hurricane Maria, a fact that reflects on the dedication, expertise and professionalism of our people there.

Overall, we continue to see a cargo scanning customer base that is reviewing potential integrated service alternatives when making major expenditure decisions for inspection systems. We are very proud of all three projects and are gaining additional attraction globally as potential customers see firsthand the performance and the benefits.

These integrated services programs have proven highly successful for each customer.

Under the program, we typically operate our cargo scanning equipment for the customer, manage, design and build inspection sites either ourselves or with a local partner, and analyze the resulting images and store the images matched with identifying data such as cargo manifests, custom declaration and our vehicle license numbers.

We have also provided high-bandwidth, high reliability data networks that manage the high volumes of data generated by our services using our proprietary CertScan software and interface with the customer's network.

By paying for a service rather than buying the technology, the customers gain financial flexibility as well as guaranteed uptime and, most importantly, technology refresh. These programs normally are multi-year programs with quite a lot of investment upfront by us and a long-term commitment by our customer.

The programs have proven to be a very effective law enforcement tool against the smuggling of drugs, weapons, currency and other frequently smuggled items, such as cars, liquor and cigarettes.

Not only do the programs improve the safety and security for the public, they increase transparency at customs checkpoints, thereby benefiting the shippers, while increasing the accuracy of customs, thereby benefiting the government in the collection of lawfully required duties.

The cargo business has performed extremely well as we leverage the wider profile that we achieve by adding AS&E's product and service offerings.

During the quarter, we announced multiple cargo international orders, which included wins to provide the Rapiscan M60 mobile cargo solution to a Pacific Rim-based customer, AS&E' ZBV bands to another international customer for monitoring critical security checkpoints and a G60 high-energy fixed portal to yet another customer.

Along with multi-year service agreement sold at the time of equipment sale, we are beginning to see a greater frequency of contract renewals, resulting from our larger combined installed base of Rapiscan, AS&E, and recently added ETD products. The long-term prospects for Security continue to be appear very strong.

In addition to our acquisitions that have strengthened our position in the marketplace, we're focusing on new market segments that are well-suited to our capabilities. For example, we have a very strong track record in supplying security technologies to major sporting events.

But we are now beginning a strategic initiative to enter the market for integrated security services for sports events.

During Q2, I'm happy to announce we have entered into an agreement with the PGA Champions Tour, formally called the Senior Tour for golf and are now the title sponsor of the tour event in Biloxi, Mississippi, which will be now called the Rapiscan Systems Classic and will be held in March.

We will be providing the security for the safety of the players and the attendees, utilizing our integrated screening service model. We also plan to showcase, at this event, our total service portfolio.

We are negotiating with the PGA Champions Tour for doing security services at additional venues during 2018 and beyond, building on an experience at global sporting events such as the Olympics, FIFA World Cup, and the Gold Coast Games, this new initiative allows us the opportunity to build a reputation at more frequent, recurring venues.

In summary, the ETD product line acquisition has performed well at the onset. Our RTT presence in the marketplace continues to grow. In cargo, we're seeing numerous market opportunities where we are well aligned with our existing product offering and we are happy to execute the new agreement for the Mexico screening services.

With strong first half bookings and excellent prospects, we expect the Security division to finish this year very strong. Looking into fiscal 2019, our pipeline of opportunities is strong and we've seen and we believe we are well-positioned to capture many of these opportunities.

Moving on to Healthcare division which reported a very solid quarter, revenues were $52.5 million or 13% higher on an organic basis. The US region did particularly well. During the quarter, we announced a large order to provide patient monitoring solutions and related accessories to a major Midwestern US-based medical center.

The Healthcare team has been working hard to capitalize on the stronger operational foundation and refreshed product base and has delivered fourth consecutive quarter of year-over-year organic growth.

Looking ahead, we believe that Healthcare will continue to progress as the expansion of the global economy should aid hospital capital spending and creating more opportunities. Moving over to our Optoelectronic division, its revenues for the quarter 5% higher than the prior-year.

We saw strength in our sensor business as demand increased for certain military sensor applications, which typically improves the mix to higher profitability. We continue to look up to this division to deliver smart, profitable growth, while utilizing our flexible global infrastructure to meet external and internal demand.

As we had mentioned in previous calls, this division also is a critical supplier to both security and healthcare divisions. To sum it up, Q2 was a high performance where each business delivered topline growth that resulted in strong adjusted earnings growth. Our Security team converted on critical sales and operational initiatives.

Our Healthcare team has continued to improve each successive quarter over the last calendar year and we are really pleased with the Opto division's topline growth and ability to deliver consistent profitability. I would like to thank our employees, customers and shareholders for their support.

With that, I'm going to turn the call over to Alan to talk in detail about our financial performance before opening the call for questions. Thank you..

Thank you, Deepak. Now, let's review the financial results for the second fiscal quarter in greater detail. As mentioned previously, our revenues in Q2 of fiscal 2018 increased by 14%.

Q2 revenues in the Security division increased by 23% and were driven by strong performance across much of our product portfolio as well as the explosive trace detection acquisition.

Revenues in the Healthcare division increased 13% in Q2 on an organic basis, led by strong US patient monitoring sales and growth in our international diagnostic cardiology business. Overall, the Opto division sales were up 5% as intercompany sales to support the growth of the Security segment significantly increased.

External revenues in the Opto division grew by 2%. Each of our divisions contributed to a large gross margin expansion to 36.7%. The greatest impact was attributable to the Security and Healthcare divisions as it had favorable product and channel mixes as well as economies of scale resulting from higher revenues and operational efficiencies.

As mentioned on previous calls, our gross margin will fluctuate from period to period based on product mix, amongst other factors. Moving to operating expenses, in Q2 of fiscal 2018, SG&A was up $8.5 million, primarily due to acquisitions in the Security division and in support of the growth of the division.

We also saw additional corporate overhead as the company grew. We continue to be focused in all of our divisions on increasing efficiencies and prudently managing our cost structure.

R&D expenses in Q2 were $15.1 million, up from $12.9 million and also primarily due to the Security division acquisitions and increased investment to enhance our product portfolio. We remain focused on innovative product development, which we view as vital to the long-term success of our business.

Impairment, restructuring and other charges were $8.3 million in Q2 compared to $9.4 million in Q2 of fiscal 2017.

Moving to taxes, as a result of the enactment of the Tax Cuts and Jobs Act in December of 2017, we recognized a one-time charge of approximately $56 million in Q2 fiscal 2018, which represented our current estimate of the tax on accumulated overseas profits and the revaluation of deferred tax assets and liabilities.

Given our June 30 fiscal year-end, we will not realize the full benefit of the tax act's lower corporate tax rate of 21% until the next fiscal year. Based on the company's initial analysis of the tax act, we expect it will result in a US statutory federal tax rate of approximately 28% for fiscal 2018.

Excluding the charge and certain discrete tax items, our tax rate was also approximately 28%.

The final impact of the tax act may differ materially from the estimated amounts due to, among other things, changes in interpretation of the tax act, any legislative action that may be taken to address questions arising due to the tax act, and any changes in accounting standards for income taxes or other related interpretations in response to this act.

We anticipate finalizing and recording any resulting adjustments by the end of the 2018 calendar year.

Our provision for income taxes is based upon the mix of income from US and foreign jurisdictions and tax rate differences among countries as well as the impact of permanent taxable differences, tax selections, equity vesting and exercises, and valuation allowances, among other items.

So, let's turn now turn to a discussion of the non-GAAP adjusted operating margin, which excludes the items mentioned earlier in the call.

As would be expected with an increase in sales and profitability, the company's non-GAAP adjusted operating margin improved markedly in Q2 of fiscal 2018, coming in at 10.8% compared to 8.5% in the same prior-year period.

With the solid revenue growth in the Security division, coupled with gross margin expansion, the adjusted operating margin was again strong in Security, improving to 15.8% from 13.5% in Q2 of last year.

The operating margin in the Healthcare division has significantly improved to 10.7% and the prior-year Q2's operating margin of 3.6%, leveraging higher sales and a favorable product and geographic mix. The contribution margin of the Healthcare division is the highest amongst the three divisions and is sensitive to the top line.

Partially offsetting the strong improvements, the operating margin in the Opto division was down slightly on a year-over-year basis, coming in at 9.5% in Q2 of fiscal 2018 as compared to 10.1% reported in the prior fiscal period.

Moving to cash flow, in Q2, cash flow from operations was $49.6 million compared to $20.1 million in the same prior-year period. Capital expenditures were $83 million, while depreciation and amortization was $21.3 million.

Days sales outstanding, or DSO, was 68 days, down from the 72 days at the end of last quarter and basically in line with the 67 days reported in Q2 of fiscal 2017. Days inventory for Q2 came in at 145, down by 16 days compared to the 161 days reported in Q2 of fiscal 2017. Our balance sheet remains strong. Finally, turning to guidance.

We are raising our guidance on both revenues and non-GAAP EPS. We anticipate 10% to 13% growth in fiscal 2018 sales, which would put us in the range of $1.055 billion to $1.090 billion. In addition, we anticipate growth in non-GAAP earnings per diluted share to $3.45 to $3.67.

This excludes impairment restructuring and other charges including certain legal costs and amortization of acquired intangible assets and non-cash interest expense, all net of related tax effects and discrete tax items. We currently believe the sales and earnings guidance reflects reasonable estimates.

Actual sales and earnings, however, could vary from this range because of the risks and uncertainties that affect our business and industries generally, including items beyond our control such as site readiness for product installations, customer acceptance and the timing of orders in each division.

We continued our strong track record of sales and earnings growth, while generating solid cash flows and investing in product development and innovation and making selective strategic acquisitions.

Our investments have enabled us to continue our leadership role in the turnkey screening services market and have allowed us to introduce into the market innovative products and solutions across our various industries. Thank you for participating in this conference call. And at this time, we would like to open the call to questions..

[Operator Instructions]. Our first question comes from Brian Ruttenbur with Drexel Hamilton. Your line is now open..

Yes, thank you very much. Very good quarter, by the way. So, jump right into understanding cash flow. You had an extremely strong cash flow quarter. Was there anything one-time in nature that happened in this period? Was there pull forwards of revenue? I'm just trying to understand going forward because it was way above average cash flow..

Yeah. Brian, good questions. Thank you. This is Alan. Cash flow was outstanding for us in the quarter and really probably resulted from two primary things. Just the general strong profitability of the company, better working capital management and some customer advances that we received that also aided.

You're also right that there was some revenues that came forward a little bit from Q3, not of a significant amount, but some that also helps contribute to a strong quarter and strong cash flows..

Okay.

So, we should see cash flows drop a little bit just because of that from quarter to quarter and also the seasonality of healthcare in the March period, right?.

That's correct..

Okay. And then, in terms of security revenue, just trying to model this new contract because it kicks in – this quarter is the first quarter it kicks in. We should have a drop in revenue from the December period to the March period, is that right? Because of Mexico..

Yes. Brian, good question. And we, of course, provide guidance on an annual basis, but, generally speaking, that would be correct. We generally see that the Q2 period is a bit stronger than Q3 due to some seasonality. And then, as you mentioned, there's a change from the new Mexico contract that was factored into our guidance. And you're right.

So, generally speaking, our fourth quarter is stronger than our third quarter..

And then, if I could talk – it wasn't mentioned, but if I could bring up RTT and give us an update on your win rate and what's going on, number of airports you're in roughly and what's going on there because it appears that you had a couple of good wins in Europe this period..

Brian, this is Deepak here. Obviously, specifically, we don't talk about it except what we have already announced. Yes, the pipeline is very robust. As we said on many, many calls for the last couple of times, ECAC's requirement of a deadline is coming closer. So, a lot of the airports in Europe continue to look at it.

Our win in Panama is what I call as a very strategic win for us because as Latin America starts revamping their airports to meet new standards, it helps that you already have a presence in one of the large airports.

All in all, I can't comment for competitive reasons of what our percentage take is, but I would be quite confident in saying that we are maybe considered the biggest intake and successfully that has happened in the last couple of quarters..

And you mentioned Latin America with the RTT. So, it's a $2 billion opportunity roughly in Europe. And you seem to be winning above your share or at least your share and then some.

Is something going on with South America and Latin America that is making them respond to the 2020 deadline in Europe?.

Well, two-sided question. Obviously, the total pipeline is there worldwide. And yes, all the airports in Europe are pushing towards it. Some of the smaller ones can ask for exceptions. Latin America doesn't have a requirement as such.

But anybody who is going to upgrade their airports, they want to get the best because the lifetime of these kind of products are 8, 10, 15 years, so they want to get the best product that's out there and we just want to make sure that not only Latin America, Asia, Middle East that we are looking at all those areas as potential growth opportunity with our product..

Okay. And then just last question, addressing the FCPA issue, have you had any – I've followed you guys forever, it seems like, but I don't recall that you've ever had any issue in the past – that's going off of memory. I haven't gone back and searched all the documents.

Has there been anything in your history on that?.

No. And we are very proud of our ethics policy, our FCPA policy, training. And this triggered by the short seller and we are cooperating with them, working with open dialogue..

Okay, thank you very much..

Next question comes from Larry Solow with CJS Securities. Your line is now open..

Great. Thanks. Good afternoon. Deepak, I realize the ethics investigation is a sensitive issue.

Can you maybe just take 30 seconds just to review the factual history real briefly of the Albania contract? If I'm not mistaken, wasn't that already reviewed by a court in Europe, so that was already somewhat looked? Can you comment on that?.

Larry, basically, that's true, what you've said. We went through two government changes and we in an open tender. It was a competitive bid. And we won fair and square. We have a very satisfied customer. When the government changed, basically, the new government coming in had some hesitation. They stopped the contract. We went into an arbitration in Vienna.

And we prevailed. And we negotiated what I call a renewed contract and it's been going well. So, the answer to you is that it has been – what I said before, it has gone through two government, the changes. It's been working very well.

And not only that, but it's a showcase where a lot of customers internationally have looked at it and it's getting a lot of attention and we are very proud about it. We are very proud to be part with the Albanian government..

And if I may, the short seller – there's sort of two parts. I guess, bribery which sounds like – from what you just described, it sounds like, it's hard to believe there is any of that, but also that there is some issues with the way you're accounting for it.

Can you just give any rebuttal to that?.

Larry, this is Alan. We, of course, don't go into point by point with the short seller report. What we can tell you is we're comfortable with the accounting as is the auditing firm who audits our financials..

Okay. Let's move on. And I appreciate still the insight. I know it's a sensitive situation. Obviously, a great quarter. But just – as Brian said, and it does sound like there's maybe a little bit of pull forward in Security. Doesn't seem like it's a significant amount.

But just on that subject, your margins in Security year-to-date are – operating margin are about 16%, somewhat above – back to where the levels they were, even a little bit above in 2014 and 2015. Are these sustainable? I know one piece of the business that had been hurt was – hurting you guys was the RTT piece.

Has that recovered? Is that back to corporate average or its Security segment average? I know you don't guide for the quarters for the segments, but how should we view sort of margins in this segment as we look out over the next two years?.

Larry, this is Alan. Good questions. You're right. Our operating margins on an adjusted basis for Security have been very strong in the first half of the fiscal year. We don't really provide guidance on operating margins going forward.

That being said, an increasing beneficial mix in our products with the acquisition, for instance, of the trace business, with the ramp up in RTT and improved margins as we've been talking about over the past few years, we've seen the margins improve in that product. All of those things will have favorable impacts.

Of course, reduced revenues associated with the Mexico contract – we've been talking about for a while – plays a role in that too. And all of those things factor into what we believe to be the strong guidance that we provided for fiscal 2018 that we recently increased..

Got it. Just last question on your increased guidance. Was there – I know you did say that the statutory rate was coming down from 35% to 28% at least for the – I guess for the six months of the year, in the back half of the year.

Can you sort of give us what the full effective rate for the year is expected now versus what it was and how much that is benefiting the EPS guidance?.

Sure, Larry. So, our guidance was unchanged relative to taxes. As you know, a good portion of our profits take place overseas. So, our effective tax rate that we're estimating for the year is approximately 28%, which is consistent with where it was even before tax reform.

There's an opportunity for it to benefit further in fiscal 2019 as we get the full benefit of the reduction to 21%. But being that we're a fiscal year and not a calendar year company, half of our year is based on – from the US perspective is based on 35% and half is based on 21%, which coincidentally is also about 28%..

Got it. So, purely higher revenues and maybe a little better operating profit is driving it.

There's nothing below the line?.

That's correct..

Got it. Great. Excellent. Thank you very much. I appreciate it..

Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is now open..

Good evening. It's actually Greg on for Sheila. Just wanted to follow up on free cash flow.

Is there any type of free cash flow guide for the year and how should we think about that, given lower volumes for Mexico?.

Greg, this is Alan. Good question. We're very pleased with our free cash flow so far in the first half of the year. Free cash flow is not a metric that we provide guidance on. We see volatility from a quarter-to-quarter perspective, but with our strong profits comes good free cash flow.

Of course, with growth, there sometimes is a usage for working capital. So, we're happy with where we're at on a year-to-date basis..

Thanks. And then, one of your competitors had mentioned that there was some weakness on the US government side. Some of that just related to the CR.

Have you been seeing any of that?.

No. This is Deepak here. Unless you're asking on specific product line, we don't see any general weakness. We're very optimistic about our US intake..

Thanks. And then just last, you had mentioned some lumpiness in the Healthcare margins, heavily dependent on volume. When we look at the margins you did in the quarter, I think they're the definitely the highest for quite some time.

How should we think about that going forward?.

This is Alan. Good question.

The Q2 margins were very strong in Healthcare, as we saw an increase on the top line, but also, as I think I might have mentioned, it was strong US patient monitoring sales, which generally carries a higher gross margin for us as well as strong international cardiology sales, which also carries a strong contribution margins for us.

So, we'll see that fluctuate from time to time, but we're very pleased with the quarter's operating profits in that business..

Thank you..

Our next question comes from Austin Drake with B. Riley FBR. Your line is now open..

Yeah. Good afternoon, guys. Just real quickly.

When did you receive the inquiry for the FCPA investigation?.

I think we have said it subsequent, but more than that we would rather not talk about it..

Okay.

And then, could you characterize the current operating environment across the different business lines? And could you talk about maybe some of the larger opportunities you think the company could capitalize on over the next, like, 6 to 12 months?.

Maybe the first portion, Alan, you want to take it?.

The general operating environment?.

Yeah..

Yeah. The general environment, we're seeing a strong funnel of opportunities in the Security business. Our Opto team has done a real nice job and we've seen – in our Healthcare business, we've seen – over the last four quarters, we've seen 7%, 7%, 10% and 13% organic growth.

So, I think our outlook is bright in the general environments that we operate..

And just to add on to your second part of the question is, our opportunities are very broad. I said in my opening statement. We have a very broad product line with the ETD acquisition that we did in July.

And we are proud to say that we have the broadest product portfolio in security in the scanning, so that we look at opportunities in cargo, in turnkey services, in trace detection, in HBS, RTR, we have a TRS (tray return systems), and what we call an integrated solution in all these.

And now that I've also mentioned that we are embarking upon this new initiative, what we have said in the sporting events, we think that we have a great opportunity to continue to grow this product line.

And with the CertScan proprietary software for our cargo, which is one of the biggest selling point in our turnkey services, we are very, very optimistic about the growth prospects in all our security. And Alan mentioned in your healthcare. And in the Optoelectronics, which has a big component in medical, we think there's good growth opportunity.

And with the military funding being talked about in Washington, has a big prospect for us in growth in the aerospace and defense industry..

Okay, got it. That's great.

And how should we think about D&A and CapEx for the remainder of fiscal year 2018?.

This is Alan. We would expect that D&A will decrease over the remainder of fiscal 2018 as there was a significant portion of our contract with Mexico that became fully depreciated in the month of January. So, I would expect to see D&A decline in both Q3 and Q4 from where it was at the Q2 level. There was a second part of your – oh, CapEx.

From a CapEx perspective, we are not currently today anticipating any significant CapEx over the second half of the fiscal year, unless we win new turnkey programs, which, of course, is very positive for us..

Got it. Okay.

And then, just lastly from me, is there any more detail to give on the SG&A increase in the quarter or is that just simply support for the growth of the company?.

Yeah, it really is support for the growth of the company including the acquisitions that we did..

Thank you..

And our next question comes from Jeff Martin with ROTH Capital Partners. Your line is now open..

Thanks. Good afternoon, guys..

Hi, Jeff..

Hi, Jeff..

I just was curious if you could shed some light, the trace detection business benefited in the first half by the international flight mandate to put additional screening in.

Ha that run its course or you see some medicinal benefit from that in the second half of the year?.

Well, again, very difficult to speculate. An incident or an event can change things. I think in the last conference call, Alan did say that our first half was stronger than the second half with respect to the trace. That's baked into our numbers. But at the same time, we are pursuing a lot more opportunities.

And the whole strategic reason of buying that business was that we have a broader structure, we have a better sales channel, we have a much broader reach, we are in 147 countries and we have integrated the product line into our standard security business and we hope to pull some more sales..

Okay.

And then, in the large patient monitoring contract for Healthcare, was there benefit to that in the second quarter or is that mainly a second half or even first half of 2019 benefit?.

Jeff, this is Alan. Yeah, my understanding is it was partially shipped in the second quarter and will be partially shipped subsequent to that..

Okay. And then, in terms of the tax-related charge, what's the cash related portion of that? I assume it's not all pure cash..

You're correct, Jeff. Very little of it is cash. We also have NOL carryforwards and certain tax credits that would offset it. And as you may know, any resulting cash is also payable over eight years. But the expected cash outlay on that charge is actually quite minimal for us based on our expectations today..

Okay, great. That's all I had. Thanks..

At this time, I'm showing no further questions. I'd like to turn the call back over for closing remarks..

Thank you. Thank you everybody. Ladies and gentlemen, once again, thanks for participating in our conference call. We look forward to the second half and speaking with you at the next earnings call. Good day, everyone. Thank you very much..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day..