OSI Systems Inc

NASDAQ:OSIS

Earnings Call Transcript 2021-Q1

[Operator]

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 speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Alan Edrick, Chief Financial Officer. Sir, you may begin.

[Alan Edrick, Chief Financial Officer]

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 2021 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 2021.

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 2021 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 2021. We are working hard to mitigate the impact of the continuing COVID-19 pandemic. Our priorities 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 jump into some highlights. First, we achieved record non-GAAP Q1 earnings per share of $1.6 up 16% from Q1 of fiscal 2020 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% in Q1 fiscal 2021 compared to 9.1% 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% increase in backlog since the start of the fiscal year. 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.

[Deepak Chopra, President and Chief Executive Officer]

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 enter 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 2022. 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 if a $59 million contract to provide multiple RTT 110 CT check 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, the 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 stationery, wrapper scan and baggage and parcel screening machines and trace detection system. We will also provide installation, maintenance, training and follow-on support under this contract.

Based on this customer’s current project timeline, we believe that some cushion that we could record revenues beginning in Q4 of fiscal 2021 and continuing into fiscal 2022 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-end ending September 30, 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 Santos Tomasch Castilla, but contract for the Mexico program expired in June 2020 and reaching a part forward for us has not materialized although we remain 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 Optoelectronic 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.

Finally, discussing the strong progress in the Healthcare division space labs, where Q1 sales were up 28% and operating income increased over 3-fold in comparison with the first quarter of fiscal 2020. 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 am 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. Opto 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 physical 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.

[Alan Edrick, Chief Financial Officer]

Thank you, Deepak. Now I will review the financial results for our 2021 fiscal first quarter in greater detail. Our revenues in Q1 of fiscal 2021 were $255 million as compared to $291 million in the prior year Q1. We saw strong sales growth in the Healthcare and Opto divisions, but a sizable reduction in first quarter revenues in security. Healthcare division revenues as Deepak mentioned, increased 28% year-over-year with strength across our patient monitoring portfolio in all major geographic channels and increased sales of supplies and accessories.

Opto sales rebounded significantly from pandemic-related challenges last quarter with Q1 third-party sales up 11% year-over-year, driven by strong organic growth in our contract manufacturing group as well as incremental revenues from a small acquisition completed in the second half of fiscal 2020. As expected, we saw a reduction in revenue in the Security division with sales down 29% year-over-year, largely due to the impact of the pandemic, uncertain aviation and cargo customers. Security bookings in Q1 were extremely strong, however, with a book to bill of 1.9 and significant growth in backlog.

Our Q1 gross margin of 37.6% was up 350 basis points from the Q1 fiscal 2020 gross margin of 34.1% driven by margin expansion in each of our Healthcare and Security Divisions. The increase in the Healthcare gross margin was due to economies of scale associated with the revenue increase featuring strong U.S. sales, which generally carry stronger margins than international sales. In addition, our Healthcare division’s gross margin is inherently greater than our other 2 divisions, so a higher proportion of our consolidated sales in healthcare results in an overall increase in OSI is gross margin. The gross margin improvement in Security was notable given the change in sales and was driven by a favorable revenue mix and excellent operational execution. As mentioned on previous calls, our gross margin will fluctuate from period to period based on revenue, mix and volume among other factors.

Moving to operating expenses, the company adjusted its cost structure towards the end of fiscal 2020 and early in fiscal 2021 in response to the pandemic. The results of these initiatives were reflected in Q1 SG&A expenses decreasing 6% year-over-year and 3% sequentially. We work diligently across each of our divisions to improve efficiencies and prudently manage our cost structure with heightened focus during these uncertain times. R&D expenses in Q1 were $12.1 million representing a year-over-year decrease of 15% and a 6% sequential decrease. We continue to dedicate considerable resources to R&D particularly in Security and Healthcare as we remain focused on innovative product development, which we view as vital to the long-term success of our business. In Q1 of fiscal 2021, we recorded an $8.4 million impairment restructuring and other charge. This charge was primarily associated with the exit of the MSET contract and other reductions in workforce to streamline our cost structure.

Moving to interest and taxes, net interest and other expense in Q1 of fiscal 2021 decreased to $4.2 million from $4.7 million in the same prior year period because of reduced borrowings, given the strong cash flow and a declining interest-rate environment since last year. On the tax side, excluding the impact of discrete tax items, our effective tax rate in Q1 fiscal 2021 was 27.5% compared to 27.9% in Q1 of fiscal 2020. We recognized discrete tax benefits of $0.3 million in Q1 of fiscal 2021 compared to $6.2 million in the comparable prior year period. As a result, we reported a tax provision under GAAP of 25.3% in Q1 of fiscal 2021 compared to a tax benefit rate of negative 2.9% recorded in Q1 of fiscal 2020.

Let’s now turn to a discussion of our non-GAAP adjusted operating margin, as defined in our press release. Overall, our adjusted operating margin increased from 9.1% in Q1 of fiscal 2020 to 11.3% in Q1 of fiscal 2021. We were pleased with the significant margin expansion especially in the face of overall top line headwinds. The adjusted operating margin in our Security division improved to 14.8% in the latest quarter compared to 12.2% in the prior year first quarter, driven by a favorable mix of revenues, sound operational execution, and cost control actions.

Our Healthcare division reported significant operating margin expansion, more than doubling from 7% in Q1 last year to 17.8% in Q1 of fiscal 2021, driven in part by leveraging the fixed cost structure with improved sales, strong cost controls, and sound operational execution. These improvements in security and healthcare were partially offset by a reduction in the adjusted operating margin in our Opto division from 13% in Q1 of the last fiscal year to 12.1% in Q1 of fiscal 2021, primarily driven by a less favorable mix of customer revenues.

Moving over to cash flow, as mentioned before, this was a very strong quarter of cash flow generation. In Q1, we produced $54 million in operating cash flow, compared with about $25 million in the same prior-year period. This was achieved despite increasing inventory as we prepare for sales growth and higher DSO due to timing of collections as certain customers stretch out payments. CapEx in the first fiscal quarter was $3.8 million, while depreciation and amortization in Q1 was $10 million. Our cash flow conversion was again exceptionally strong. We were active with our stock buyback program as part of our overall capital allocation strategy. During Q1 of fiscal 2021, we repurchased 320,000 shares under our current buyback program, leaving approximately 2.7 million shares available to repurchase under the program. Our balance sheet is strong with modest net leverage and no significant debt maturities until fiscal 2023.

Finally, let’s turn to guidance. Our initial fiscal 2021 guidance range as announced in August included a modest amount of fiscal 2021 revenues in earnings associated with the potential turnkey contract in Mexico, replacing the recently expired Mexico contract. Though that contract did not materialize, we are pleased to nonetheless raise both our sales and our earnings guidance for fiscal 2021, given our first quarter results and the strength of our business and outlook for the remainder of the year. As a result, we are increasing revenue guidance to the range of $1.1 billion to $1.142 billion from $1.09 billion to $1.14 billion.

Similarly, we are increasing our non-GAAP earnings per diluted share guidance to the range of $4.65 to $5.10 per share, from $4.50 to $5.05 per share. We expect to see revenue headwinds continue in the second quarter of fiscal 2021 in our Security division, stemming from the pandemic, but then believe we will build positive momentum as the year proceeds supported by the strong backlog. The non-GAAP diluted EPS range excludes potential impairment restructuring and other charges, amortization of acquired intangible assets and non-cash interest expense and their associated tax effects as well as discrete tax items.

We currently believe this revenue and non-GAAP earnings guidance reflects reasonable estimates and we have included the anticipated impact of the COVID-19 pandemic in our guidance given uncertainties as to the duration and scope of the pandemic as well as other variables. However, the extent to which COVID-19 may impact the company’s financial results is difficult to predict and could vary materially from the anticipated impact currently reflected in our estimates and guidance. Actual revenues and non-GAAP earnings per diluted share could also vary from the anticipated ranges due to other risks and uncertainties discussed in our SEC filings. In the face of these challenging times, we continue to remain steadfastly focused on the growth of our business through investment in product development and strategic acquisitions, while also acutely managing our cost structure.

We believe these efforts will enable OSI, to continue our leadership in providing innovative products and solutions. Finally and importantly, we would like to take this opportunity to thank the global OSI Systems team for its dedication and supporting our customers and contributing to the creation of value for our stakeholders, while maintaining a commitment to safety in the face of uncertainty.

At this time, we would be happy to open the call to questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Martin with ROTH Capital. Your line is open.

[Jeff Martin, ROTH Capital]

Thanks. Good morning, Deepak and Alan. How are you?

[Alan Edrick, Chief Financial Officer]

Good, Jeff. Thank you.

[Jeff Martin, ROTH Capital]

Great. First of all, I wanted to commend you on a strong performance and particularly in the billings in the quarter and the fact that you raised guidance despite backing Mexico out of your assumptions within guidance is nice to see. I am wondering to start out if you could go through the security segment, discuss to what degree things continue to be pushed out the right – to the right and what factors are really driving that, if that’s the same as what we saw in Q4 or there are new and changing factors?

[Deepak Chopra, President and Chief Executive Officer]

Jeff, this is Deepak here. Thanks for the compliment. Basically, what we said in the last quarter also last conference call, the challenge that we have is not the bookings, the challenge is to actually be able to travel to that international place to sign off, one, the equipment, to assemble the equipment, to get the civil works done, and then ultimately, the customer has to provide their people to sign off on the installation, whether it’s a port, whether it’s a border crossing, whether it’s a large infrastructure project at the airport. And that’s been the big challenge of the uncertainty and that’s what happen also as we had projected in Q1 and we think that’s going to continue the uncertainty. So, the pipeline of being able to take the revenue uncertainty becomes a little bit longer, because we don’t know when they are going to sign up. On the other hand, the positive is that during this time, some of the customers, especially international, they are using this time to build up their infrastructure, because the traffic is down, so they want to place orders, they want to get the new technology up and running so that they are – the tender activity is quite strong, the activity of demonstrations and people are getting more used to doing it on a video or self-inspection, self-check and all that stuff is changing the way the ground rules are. And the other one that has been very positive for us, as you know, everybody has increased their shipments to their house – to their office. That means that all the cargo air carriers and stuff, they continue to increase and expand their facilities, which require security equipment.

[Jeff Martin, ROTH Capital]

Okay, great. That’s very helpful. And then you mentioned Opto which should continue to be strong this year. Security is going to improve in the back half. Q2 will see some sustained challenges, but could you address the healthcare segment, how that should progress throughout the year?

[Deepak Chopra, President and Chief Executive Officer]

I am going to take a shot at it. We’ve seen strength and the strength is not in U.S., it’s global. Yes, looks like its pandemic based, more and more people want to stay home, they’re doing tele, as they do tele, they need more checkup done and we are building up new platforms for that. How long this pandemic is going to continue for the growth, I don’t know, except ultimately, this has changed the whole way of doing business so we continue to think that this thing is not going to slow down. So ultimately it also depends upon when some people are talking about second way of coming, some people talking about elective surgeries are coming back. All we are seeing is very cautiously we are monitoring week by week month by month. We continue to look at what the opportunities are. And there are some larger opportunities that some hospitals have taken the next shot again using this time to upgrade their equipment and to put new platforms that can do this more remote monitoring, Alan, you want to add something.

[Alan Edrick, Chief Financial Officer]

I think that that covers it nicely.

[Jeff Martin, ROTH Capital]

Okay. And then with the strong cash flow and cash flow conversion that you’re having, how should we think about capital allocation here? You still have, almost 2.7 million shares remaining on your repurchase authorization. How should we think of that versus acquisitions versus repayment of debt?

[Alan Edrick, Chief Financial Officer]

Hey, Jeff, this is Alan. You’re right, our free cash flow has been extremely strong and when we look at capital allocation, we kind of look at it on a multifold basis none of which is mutually exclusive. So we do look at stock buyback, we look at reducing our debt, we look at acquisitions are a big part of our strategy, and then we also looked at with the new turnkeys which require some upfront CapEx. The good part giving our given our low net leverage and cash flow generation. It means we could actually do all four of these things simultaneously, of course, depending upon the size of an acquisition. So we expect to continue to be looking at and all four areas.

[Jeff Martin, ROTH Capital]

Great. That’s helpful. Thanks for taking my questions.

[Operator]

Thank you. Our next question comes from the line of Larry Solow with CJS. Your line is open.

[Larry Solow, CJS]

Good. Good afternoon and thanks for taking my questions and congrats on good quarter and the bookings. Can you just clarify I know you don’t break out specific contracts, but just from a high level? Mexico was partially in the this year’s guidance in the back half or any help there and obviously it sounds like you have a lot of other things to fill in that gap, but could you maybe just give us a little bit of an I kind of high level and what that was contributing on a long-term basis, because I know it’s sort of was the bellwether of your used to be for several years in terms of turnkey. So just trying to get a little more color for the folks out there?

[Alan Edrick, Chief Financial Officer]

Sure, Larry, this is Alan. Good question. So our Mexico revenues in fiscal 2020 were $60 million. Embedded in our guidance for fiscal 2021was we thought we would have a little bit more than three quarter of the year worth of revenues associated with Mexico but at a reduced rate. We expected there to be some price concession in that. So given that we are no longer including that we are able to raise guidance based upon the strength of the overall business in all three divisions we think is particularly noteworthy.

[Larry Solow, CJS]

Right, okay. So from a revenue basis you’re essentially you’re raising your revenue by about exact contract it looks $65 million to $70 million or something, I guess. If we take out that 45 but was that an outsize contributor on the margin, I know you don’t want to give specifics, but we’ve got a normal turnkey type margin. How should we look at that revenue that’s coming out?

[Alan Edrick, Chief Financial Officer]

So the revenue that is coming out achieved operating margins that were above our corporate average. The nice part is the business is doing so well that we’re delivering strong earnings and strong margins even taking that out. Just for a little bit more clarity, we had embedded in the neighborhood of about $30 million of revenue into our fiscal ‘21 guidance initially for Mexico. So that’s the portion that came out.

[Larry Solow, CJS]

Okay, fair enough. And anything just qualitatively, it sounds like you’ve taken enough for this year, is that something that you know that it has that had the parties moved on, do they have other alternatives, is there any way you can is it something that this could come back to the table at some point?

[Deepak Chopra, President and Chief Executive Officer]

Good question, Larry, this is Deepak here. Yes, in the last conference call, we were still optimistic, you said it very well. They still have a very large equipment base of rapper scan, which only rapper can handle and service and maintain. So we still think that it might happen, but we could not wait any longer. So we basically decided to move on. We got other opportunities but discussions still continue. But then as you can see it’s a tough environment economy wise in Mexico with the pandemic, with the economy and stuff, they got maybe bigger priorities more towards the pandemic than to look at it, but the traffic at the border crossings is not reducing. They still have to do business with the North United States. So our equipment is lying unused, we have done very good job of shutting it down to make sure that it remains intact. But ultimately, the Mexican Government has to decide equipment belongs to them, they have to decide what they want to do with it and we are there for them whenever they want anything.

[Larry Solow, CJS]

Right, okay. To move on because obviously had a lot of good things to talk about. So just on the, on obviously very strong bookings and can you just discuss sort of the nature of the bookings in terms of timeline is this, it sounds like a lot of these things are short-term midterm. Like you, I know you called out the deal post the quarter that may run into ‘23 but, this big number you put up to 250 something, 254, I think is that over the next couple of years where you expect delivery?

[Alan Edrick, Chief Financial Officer]

Larry, this is Alan. So I’ll take a shot at that. So you’re right. The big contract that we mentioned for the aggregated $93 million, we expect we’ll start to see some revenues for that in as early as our fourth fiscal quarter and then continuing into ‘22 and beyond. The $59 million contract that Deepak mentioned as well, we’ve already started to be begin to recognize revenues. Sort of the remainder of the bookings will go through sort of a normal cadence. Cargo generally cargo and vehicle inspection products generally have a little bit longer lead time and some of our basic baggage and inspection products can go a little bit shorter. So a good portion of that will be delivered besides those two items I mentioned in fiscal ‘21 with some of their continuing into fiscal ‘22 and beyond for some service contracts.

[Deepak Chopra, President and Chief Executive Officer]

And this is Deepak here. Just to add on to what Alan said, and I said it in my script. Normally, at this time of the year, end of U.S. government, there is a lot of activity because of the election and because of the pandemic and stuff that travel restriction and stuff that has been pushed to the right, we are still very confident feel good about it and as that happens that will start resulting into revenue in the latter part of the year and go beyond into fiscal ‘22, there is a lot of demand.

[Larry Solow, CJS]

Right, right. Great and just on the cost side, you spoke to touch on a consolidated basis, your SG&A being down and I think some of that, a good amount of that was probably focused on the security piece where you’re, I think you lost some $50 million in absolute basis in revenue but only $2 million to $3 million in operating profit. So I suppose with this cuts in all as revenue starts to come back, without guiding specifically, but I would assume you’re segment margins and security sound hopefully the longer-term exceed sort of their previous highs is that fair to say?

[Alan Edrick, Chief Financial Officer]

Yes, Larry, lots of opportunities for margin expansion, always what contributes to it will be the revenue mix. Both the products and the geographic channels, but you’re exactly right. Some of the changes we made in our cost structure are more permanent, in nature and some of the changes that we made will be more kind of variable, in nature, but you’re right there is always opportunities for strong operating margin expansion, which the team is highly focused on achieving.

[Larry Solow, CJS]

And then just lastly, Alan, on the free cash flow another very strong conversion, what’s driving that increase, is there more room to run is, just remind us where you stand on some of your working capital metrics. And I think that’s driven some of the improvement?

[Alan Edrick, Chief Financial Officer]

Sure, great, operating cash flow, great free cash flow. We are very pleased with it. Interestingly, not being driven by outstanding working capital metrics, I mentioned in the sort of the prepared remarks that our DSO is up. So in these times, some of our customers are just taking a little bit longer to pay. So when we can get DSOs back to a little bit more normalized level. That’s actually an opportunity to drops to increase in free cash flow for us. On the inventory side, similarly, we’ve actually been investing a little bit more in inventory as we are expecting our sales volumes to be picking up here through the balance of the year. So I think what’s really driven it has been a strong profits, some working capital metric positivity and we expect that throughout the balance of the year, we’re going to have a continued strong cash flow.

[Larry Solow, CJS]

Great. Excellent, thanks for the call, I appreciate it.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

[Sheila Kahyaoglu, Jefferies]

Hey, good morning, good afternoon. I wanted to ask about the contract. Deepak, I think you mentioned that in terms of the Middle Eastern customer, in Security and it sounded like some sort of turnkey involvement as well as products. So can you just maybe talk about that program and your scope as you expand your ports and cargo business?

[Deepak Chopra, President and Chief Executive Officer]

Thank you, Sheila. It is not a turnkey project, it’s a lot of equipment both cargo and aviation equipment, it’s installation, it’s service, it’s maintenance and it’s going to continue. It will have a lot of tail. As you know that after a couple of years discontinues for the next 5, 10 years, so that it’s a longer term normal equipment sale maintenance and service. Now, that doesn’t mean with so much equipment on the ground and this particular country already is a good customer of Rapiscan. So our infrastructure, our support continues to expand. And yes, it can lead long-term for more training, more, call it, semi-turnkey integrated product line. But right now, on this particular $93 million order, it’s equipment maintenance, installation and service.

[Sheila Kahyaoglu, Jefferies]

Okay, thank you. And then on the – security decrementals were very good in the quarter despite a pretty big decline in the top line, what was the mix tailwind, Alan, if you could elaborate on that at all? Sorry, mixed tailwind.

[Alan Edrick, Chief Financial Officer]

Sure, I would say it’s really two things. One, some of our other turnkey projects were extremely successful in the quarter and generated strong contribution margin, strong operating margins, some of the product mix that we had throughout the various businesses were very strong, as well. And then, the basic cost control initiatives were quite solid across the Group also. So all of that led to, as you mentioned, very strong operating margins in light of revenue reductions in that segment.

[Sheila Kahyaoglu, Jefferies]

And then just on the top line. You mentioned U.S. is pretty weak, whereas the rest of the world is taking this time to implement a lot of upgrades. Why is the U.S. weak? I would just think actually the elections are probably a reason for them to spend, given the government fiscal year-end. So I kind of quite square that away.

[Deepak Chopra, President and Chief Executive Officer]

This is Deepak, Sheila. I wouldn’t use the word weak, I would say that pushed to the right, the rest of the world, some countries have different political situation. Some people are more dependent upon transport business with each other, some people more aviation-related and ports into it. U.S., on the other hand, definitely is going through some things to do with the election and they do with the pandemic, travel restriction, how to get various things inspected even, so we don’t think so that this will continue. I think that some of the upgrades have to be done. The government, though the year has ended, some of the requirements that they need to upgrade their border crossings and ports, they are going to happen. The upgrade is eminent, though it got pushed to the right, airport upgrade to new equipment is going to happen, it’s just pushed to the right.

[Sheila Kahyaoglu, Jefferies]

Okay. And then last question for me, thanks for answering all these, is Healthcare, you did mentioned, it is quite short cycle, but you’re seeing very good momentum in that business. What is the product driving that where you’ve seen the success?

[Deepak Chopra, President and Chief Executive Officer]

Well, most of this is patient monitoring. It’s our infrastructure monitoring, patient monitoring, which sits right next to the bedside or in a larger installed base where all the data gets consolidated into one central station. And it’s being bought, as they expand, what I call, the patient bed increase, so they need more beds, they need more space, so our monitoring equipment is very well-regarded and we are also seeing some momentum, though not as much in our cardiology business.

[Sheila Kahyaoglu, Jefferies]

Okay, thank you so much.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Josh Nichols with B. Riley. Your line is open.

[Josh Nichols, B. Riley]

[Technical Difficulty] an exceptionally strong quarter especially for Medical, can you provide a little bit of additional color or detail on – you can say the growth rate is expected to continue from where this year and could the company sustain these types of significant margin contributions going forward, given the continued demand?

[Alan Edrick, Chief Financial Officer]

Hey, Josh, this is Alan. Good question. Thank you. We expect to see some nice momentum in the Healthcare business continuing, not necessarily at a 28% year-over-year growth rate. That was a particularly strong quarter. In terms of the margins and the contribution margins and operating margins, this is a business that is so sensitive to the top line. So to the extent that revenues stay similar or grow, then there is a nice opportunities to enhance the margins, overall the business, to the extent revenues in a particular quarter were less, you would have the similar effect. The strong contribution margins make the operating margins extremely sensitive to the top line in this business.

[Josh Nichols, B. Riley]

Thanks, Alan. And then just because this year is a little bit different, I guess I wanted to ask, how do you expect the backlog the kind of flow this year as far as – how much of the current backlog of $1 billion is expected to be recognized this fiscal year and how’s that going to trend given that you’re seeing an increase in order flow, although some of the shipments are a little bit delayed?

[Alan Edrick, Chief Financial Officer]

Good question. From our best estimates and these can change a lot based upon what you’re hearing from Deepak earlier, but roughly half of the backlog we think will convert to revenue through the course of the remaining 9 months of the fiscal year, with the remaining portion of the backlog converting in fiscal 2022 and thereafter. And that tends to be relatively similar at this point of the year to what we’ve seen in past years. It can fluctuate from time to time, but that seems to be a pretty good proxy.

[Josh Nichols, B. Riley]

Thanks. And then just to round things out, it looks like you’re expecting some good operational performance out of Opto as well. Could you just hit on any particular areas as far as end markets or specific products that you’re seeing relative strength or weakness in that area?

[Deepak Chopra, President and Chief Executive Officer]

Again, good question, it’s Deepak here. Fortunately, we have always said that the Opto business has a very broad customer base and we are OEM supplier to a very broad industries, aerospace, defense, healthcare and all those industries, fortunately, are showing a lot of growth, especially healthcare, and it’s also global, if the healthcare is not just for U.S., it’s for Asia, it’s for Europe. Aerospace, there is traction even in Europe and in U.S. and in the defense industry. So that is a very broad-based product line and they are all OEM suppliers, original equipment manufacturer, we supply to other end-users, but the result that they backlog and the predictability is much better, compared to end-product like in healthcare or security. But on the other hand, there’s also, as we saw what happened in the previous quarter, because of the pandemic, if the factories of our customers are impacted of slowdown or people can’t come, so obviously that they would push back to the right, some of that incoming OEM requirements. So we see that happening sometime and in some places, our international factories ourselves are impacted. Can we run them at 100%, can we run them at 50%, can we run them at 25%? So there is a little bit of this challenge that’s going on, but overall, the automotive industry also is showing lot of strength.

[Josh Nichols, B. Riley]

Thanks, guys. That’s all from me. I’m back in the queue.

[Operator]

Thank you. I’m showing no further questions at this time. I would now like to turn it back over to Deepak for closing remarks.

[Deepak Chopra, President and Chief Executive Officer]

Thank you very much for attending this call. I know the market is still open, so you took time to listen to us. I want to thank everyone for joining the call. Especially again as Alan mentioned, I want to thank all the employees. This is a challenging time for us globally, with 7,000 employees globally. We are very sensitive to their well-being. They have done a great job and thanks to our customers for their patients and to our stockholders to continue to have a trust in us. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, you may now disconnect. Everyone have a wonderful day.