AstroNova Inc (ALOT) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Astro-Med Inc. fiscal 2006 second quarter results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, August 16, 2005. I would now like to turn the call over to Albert Ondis, Chief Executive Officer. Please go ahead sir.

Good afternoon everyone and thank you for participating in today's teleconference. With me today as usual are Everett Pizzuti, President and Chief Operating Officer and Joseph O'Connell, Vice President and Chief Financial Officer. Each of us will make a presentation and then we will take your questions.

As you know from today's report which crossed the wires about an hour ago, we set a sales record for the second-quarter with sales of $14,648,000 on which we earned $622,000 net after taxes equal to $0.11 per diluted share. We're very pleased with this of course, but we're even more pleased to report that new orders received during the quarter totaled $15,326,000, and this does not include the Honeywell contract for the Boeing Dreamliner cockpit printers which we announced yesterday. More about that from Everett Pizzuti when he gives his report in a few minutes. And by the way, these new orders were up across the board in all three product groups, especially of course at QuickLabel Systems where orders were up 20%.

During the quarter, we introduced some very promising new products and there are more new products in development. In fact, our research and development pipeline is full of products in development which we will be rolling out in the future. Financially, Astro-Med is very strong with substantial cash on hand, no debt and with tightly controlled inventories and accounts receivable. As promised in earlier conferences, we have increased our selling and marketing activities not only to increase the flow of new orders short-term, but to promote brand recognition around the world. There is strong recognition of the Astro-Med brand, the QuickLabels Systems brand and especially the Grass-Telefactor brand, which goes back to 1935 when Albert Graf invented the first commercial EEG machine and launched the revolution in the study of neurology which we're continuing. Strong brand recognition of course is the key to continue sales growth. At this point, I'm going to ask Everett Pizzuti for his report. Everett?

Thank you, Albert, and hello everyone. The second quarter was strong on several fronts with record sales, record bookings and in general good developments in each of our product groups. Here is a brief summary of the important highlights.

First, Test and Measurement. During the quarter, we worked hard on proposals and negotiations for organized printers for airborne applications. As we announced yesterday, we were the successful bidder to furnish cockpit printers for the new Boeing 787 Dreamliner. Our contract with Honeywell covers requirements for the next 10 years with an option to renew for an additional 10 years. It is estimated that there will be 2600 of these aircraft. These printers will be used in the cockpit. We expect there will be similar printers for the cabin of the 787. This has yet to be finalized.

As you know, we receive separate contracts for the printers for the cockpit and cabin of the Airbus A380. We are the exclusive supplier for all of these aircraft. We feel this contract is very significant and that it clearly establishes Astro-Med as the leader in this market for both commercial and military aircraft.

In addition to the commercial contracts for Boeing and Airbus aircraft, we currently have contracts with Boeing for the C-17 and the C-130 military models and are now in negotiation to furnish printers for the Airbus A400M in military planes. In addition, in the second quarter we made inroads into the business jet market and received our first order for printers for the Gulfstream. Also, we are in continuing discussions regarding cockpit printers for upgrading existing commercial aircraft.

In July, we met with Airbus here at our facility for the successful final review of a new data acquisition printer for use in development of new planes. This printer is a derivative of our Everest series recorder and especially sized and ruggedized for use in the plane as well as for testing on the ground. Our relationship with Airbus for these types of products dates back to the mid-1980s.

On the new product front, our T&M group is about to launch two new data acquisition recorders. One is called the Dash-8 MHz featuring very high sample rates that will expand our penetration into the market for testing and troubleshooting. The second is a Dash-8 for power monitoring featuring a dedicated software package specifically aimed at power quality monitoring, not only with power generating plants but also with major industrial companies.

Next, Grass-Telefactor. We had another strong quarter for our Grass-Telefactor Group with both new orders and shipments exceeding last year's second quarter. Sales of sleep systems were especially strong as our very popular Conniff (ph) Series PSG products continue to gain market share. During the quarter, we exhibited our products at the major sleep conference of the year, APSS, which took place in Denver. At this meeting, we introduced our first wireless product, the Aura PSG, featuring BlueTooth technology. This product is a very compact patient warn amplifier that frees the patient from being tethered to be bed. The Aura PSG also has an internal flash memory so that it can be used in an ambulatory fashion for eventual recordings in the home. The Aura PSG is currently in the final stages of design validation and will be released to production in October.

The Grass-Telefactor consumables continued strong with growth in the quarter with electrodes leading the way. These popular electrodes which have been the gold standard of the industry for many years are sold not only to our customers and hospitals and clinics, but also to dealers and our competitors around the world.

Next, the QuickLabel Systems. QuickLabel, the largest segment of Astro-Med, grew about 6% during the quarter as we continue to place more and more color printers domestically as well as internationally. Some of our important market niches this past quarter include automotive, pharmaceutical, apparel and industrial products. For example, we sell our duplex color printers which print two sides of a label simultaneously to several major manufacturers of heat-shrink tubing. In this application, our printers print directly on the tubing with specially developed thermal transfer ribbons. There is no separate label.

In another interesting application, we have developed a special product which prints directly on the glass, again without a label. One key market for this printer is for use on the glass slides that carry a sample of blood for medical analyzers.

Finally, in September, QuickLabel will be introducing an exciting new color printer at a major trade show in Las Vegas. During this second quarter, we previewed this revolutionary new product which we call Vivo (ph) at two select trade shows in New York. The response to Vivo was outstanding. Vivo features high-resolution photographic print quality that will expand our markets beyond the reach of our present color label printers. Based upon this preliminary marketing, we have set the official launch of Vivo for our PAC (ph) Expo in September, and that is my report. Albert?

Thank you very much. Joe O'Connell, would you please give us the financial report?

Thank you very much, Albert, good afternoon everybody. As you have heard, we had a very strong second quarter. I'll just do a quick recap of the quarter as well as where we are at the halfway mark for the current fiscal year and a review of the balance sheet.

Estimated net sales in the second quarter as you heard reached 14,648,000. That is a 5% increase over the prior year's sales for the corresponding period. Also, it was 3% better than our first quarter sales this year of 14,193,000. The Company's sales volume through our domestic channels was 10,158,000; that's a 4% increase over last year, whereas our international shipments representing some 31% of our quarterly sales were 4.492 million; they increased 7% year-over-year. The impact of foreign exchange in the quarter was negligible.

Profiling the second quarter's sales by business segment, we have QuickLabel Systems as you heard with sales of $7.7 million. That is a 5.5% increment over the prior year's sales and a 9% increase over the first quarter QLS sales of 7.1 million. The growth in the domestic talents (ph) was up 4% while international sales was up almost 10%. Growth in the printer line was dominated by shipments of the 4100 XE. The increase in the consumables was shared by all the media products.

Grass-Telefactor sales in the section quarter were 4.4, reflecting a growth rate of 9% from the prior year sales in the corresponding period. Our growth was evident in both our clinical systems as you heard from Everett, especially in terms of our sleep and our EEG systems as well as our consumable products. In terms of sleep and EEG during the quarter grew at double-digit rates whereas our electrode business also grew at a double-digit rate during the quarter against last year.

Test and Measurement sales were 2.5 in the quarter. That is down 3.5% from the previous year. Notwithstanding the overall decrease, we did experience strong demand for the new (indiscernible) products, including the cockpit printer as well as demand for the Dash-18 portable recorders. Our gross profit dollars in the second quarter were 6.3 million, reflecting a 7% increase over the prior year's gross profit in that second quarter. This quarter's gross profit margin was 43.2%, an improvement over the prior year’s gross profit margin of 42.3% as well as an improvement over our first quarter's margin of 40.1%. The improvement is traceable to a favorable product mix that we experienced in the second quarter.

Operating expenses in the quarter were 5.4 million. That is an 8% increase over last year and represents some $0.37 on the sales dollar in the quarter. The major drivers to the increase are personnel-related, selling, marketing and trade show expenses. Operating income in the second quarter was 906,000. That is 1% behind last year's operating margin of 918,000 and reflects an operating profit margin of 6.2, slightly down from last year's operating profit margin of 6.5%.

Other income in the quarter was 91,000; that's a sharp improvement over the prior year other income of 23,000. This increment is due to additional dividends and interest income, lower foreign currency losses and other miscellaneous income. Income taxes in the quarter were 375,000, reflecting an effective tax rate of 37% and slightly higher than last year’s effective tax rate of 36%.

Our net income in the second quarter reached as you heard 622,000 and representing a 3% improvement over the net income reported in the second quarter of the previous year. This quarter's net income reflects a return on sales of 4.2% which is comparable to the prior year's return on sales of 4.3%. On an earnings-per-share basis, the quarter's net income reflects some $0.11 per diluted share which is a 10% improvement over last year's second quarter earnings per share of $0.10 per diluted share.

Finally, reviewing the balance sheet, a recap of the Company's operating sales for the six months is as follows. Sales for the year are at 28.841 million; that represents a 2% increase from last year and adjusting for the foreign exchange, sales are up 1% year-over-year. This year's sales growth is shared between Quick Label Systems and Grass-Telefactor. QuickLabel Systems' sales are $14.7 million. That increased 4% from last year whereas Grass-Telefactor sales at $8.9 million are up 6% year-over-year. Our Test and Measurement sales are at 5.2, lower by 7% from the prior year sales of 5.6 million. Our gross profit for the first six months are $12 million, representing a 3% increase over the gross profit realized in the first six months of the previous year. This year's gross profit margin is 41.7, a slight improvement over last year's gross profit margin of 41.5%.

Operating expenses for the first six months reached 10.6 million. That is an increase in spending of 7% from last year. The incremental funding is primarily related to selling and marketing activities as increases in G&A and R&D were normal. Operating income for the first six months 1.4 million and compares to last year's operating income of 1.9 million. This year's operating profit margin was 4.9% on sales as compared to last year's 6.6% on sales.

Other income for the first six months was 199,000? Again, similar profile and improvement over last year's other income of 120,000 and similar to the second quarter, the increase is traceable to dividend at interest income, lower foreign exchange losses and miscellaneous other income.

Income taxes provided for the current year is 600,000 and again represent an effective tax rate of 37%. The Company earned $1 million in the first six months and the current fiscal year providing a return of 3.5% on the sales. The prior year’s net income was 2.2 million. However, the prior year's net income does include a onetime non-cash benefit of 939,000 which was reported in the first quarter of the fiscal 2005 and is due to the release of the valuation on the deferred tax asset established in fiscal 2003. On an earnings-per-share basis, this year's earnings-per-share are $0.18 per diluted share and compares to last year's reported earnings-per-share of $0.38 per diluted share. If you exclude the benefit, the comparable number to last year would be $0.22.

Just a quick look at the balance sheet. Our cash and marketable securities at the end of the second quarter were 13.7 million. That is slightly down, about 2% down from our year-end balance of just below 14 million. Our accounts receivable balances rose 6% in the second quarter or from the beginning of the year to 9.9 million, representing some 64 days outstanding. That is a two-day improvement from the first quarter's 66 days. Inventory levels rose 2% to 9.6 million and our inventory was basically the same at 3.5 turns comparable to what -- that 3.6 that we had at year end. Our capital expenditures during the first six months were 374,000 and compares to last year's first six months of spending of 623,000. Our current liabilities were flat with year end balance of $7.4 million. The dividends we paid in the first six months were 424,000 representing some $0.08 per share. Our book value improved at the end of the second quarter to $7.33 from $7.22 per share. The employee population at the end of our second quarter stands at some 370 persons. That completes the financial review, Albert.

Thank you, Joe. Before we take our questions, I would like to revisit the issue of guidance as I promised I would at the end of the teleconference reflecting the first quarter results. As Bill O'Connell has just said, at the end of the second quarter, we had revenue for the first six months of 28.84 million and earnings per share of $0.18. We are now saying that for the 12 months of the current year, our revenues will range between 59 million and 60.5 million and our earnings-per-share will range between $0.43 and $0.48. With that, Rob, we're ready to take questions.

(Operator Instructions). Jim Gentrup, Provident Equity Research.

Good afternoon, gentlemen. Congratulations; looked like a strong quarter, especially on the orders I wanted to start with talking about last year's third quarter if you could revisit that for a moment. Last year, I remember you talking about some seasonally weak issues that really I think all three segments were actually down sequentially last year. It appears as though that won't happen this year. Could you maybe speak to that a little bit and help us out there a little bit?

Third quarter?

Yes, I'm talking about what happened in the third quarter of last year. I am looking ahead to this current quarter.

We're seeing a more healthy situation as we began the third quarter and we don't think we're going to repeat last year's third quarter in terms of downs sales for each of the product groups. We think the third quarter will be rather robust.

Just if I could add to Albert's comments. Jim, as you point out correctly, the composition of the sales in that third quarter were very soft. Last year, we only hit about 2.5 in the T&M and just below 7 QuickLabel Systems and below 4 in the Grass-Telefactor. So certainly as you can see, we feel pretty confident that that is a historical reference. But certainly we're much better positioned for this year’s third quarter than we were last time.

Speaking of T&M then, on the shipments of beginning of the cockpit printers, do you expect in this next quarter to have any meaningful shipments there?

Well, Jim, we have been shipping a few cockpit printers even in the second quarter. But yes, there will be a few more meaningful shipments in the third and in the fourth quarters for both the Boeing and the Airbus contracts. But the real production shipments do not begin as we mentioned previously until next year. And next year, we expect the incremental cockpit printer sales to be in the area of 2.5 million and the following year, nearly 5 million.

You're saying 2.5 million in fiscal year '07?

Right fiscal '07, 2.5 million, an additional 5 million fiscal '08. And I have to make a note that that is based upon the orders that we currently have in hand. It does not take into account other orders that are pending.

So while we're still on that same line of reasoning there or questioning, should -- we have talked about or you have talked about in the past about 150 million I think opportunity potential over 10 years. Can you kind of reiterate that or are you still looking at that or?

Yes, it's actually higher than that now. I'm talking about opportunity that we have not booked yet. Right now, that opportunity is probably over 175 million, comprised of probably eight or 10 or 12 separate deals.

You mentioned in the press release about the potential for 2600, I think it was the 787s. Do you have a handle for, or an estimate for the A380 production levels that we talked about before?

Yes, we've mentioned that before. The number that we heard from Airbus is around 600 planes.

600? So a lot less than --

Well, but the thing to remember there though, there is a little difference because the cockpit of the A380 takes two cockpit printers, whereas the 387 -- whereas the 787 takes one. Additionally, we have the contract already for the cabin printers of the Airbus A380, and there are two minimum there also. So there's a minimum of four cockpit printers per A380, whereas in the case of the 787, there is one cockpit printer and of course the cabin printer has yet to be defined.

And in the A380, the four -- actually originally, you had given a 1 to 3, so your 1 to 3 range in the cabin, the passenger cabin, but now you're saying two minimum?

Right.

Very good. That is good news. The ASP on that is around 12,000, isn't it?

It's really a little more than that. It's closer to 15. It varies because the price changes with quantity in each year. But if you want to use an ASP of about 15, you would be a little closer.

So even in fiscal year '08, at 5 million contribution, that still wouldn't represent -- you still would probably -- we should -- it might escalate from there yet as well then?

Right, based on orders that we have not received yet.

Okay. And then the backlog; could you talk about the backlog a little bit Joe? What is backlog going into --?

Yes, we can. Actually, the backlog took nice jump Jim as you might suspect at the second quarter. The backlog at the end of the second quarter stands at 4,589,000. And that compares -- for example at year-end, you may recall our backlog was about 2,860,000. So a significant increase in the backlog in all products which is the good side from the standpoint of what we're looking at in the 4,589,000.

Very good. And the QLS, the competitive environment in the QLS, has that improved over last two quarters? I assume given the order of the greater the order growth that it has, can you talk about that a little bit?

Yes. The competitive situation is putting much returning to normal.

People have come to their senses then?

Yes. There's no question but that there is a place for the inexpensive inkjet label printer, but it is not really competitive to our system and it's really a different application.

And these people who order the lower-cost inkjet printers, do they often come back to you then and say, okay, we're still going to need this, or --?

Yes.

I think I will let somebody else jump in, guys. Thank you very much.

Okay, Jim.

Evan Greenburg, Middlebrook Capital Management.

Hey, Albert, how are you? I just wanted to know a couple of things. Jim asked a lot of what I was going to ask. Number one, I wanted to get an idea of consumables versus printer shipments and whether the consumables are still growing and meeting the growth there in the (indiscernible)?

Yes. As you know, we aren't prepared to talk about total consumables because each of our product groups contains a consumable component. And our consumables increased, I believe Joe said by 12% in the quarter.

So consumables grew 12% for the quarter. Could they continue to grow in double-digits (indiscernible)?

That's right, Evan, exactly right. At the end of six months, it's comparable -- it's a little less than that, but it's over 10%.

And number two question had to do with the cockpit printers. Do you know what the average gross margins of those are going to be when you ramp-up production? Do you have an idea. Are they going to be greater than the traditional gross margin of the company?

I think it will be pretty consistent. We're in a very strong proprietary position with these products for a variety of reasons and we are able to maintain pretty good margins. We're not yet in full production, so a lot of it is based on very strong estimates. But we will do okay on these products.

Thanks a lot guys.

(inaudible).

Good afternoon Albert and Everett and Jim. You have done very well in this quarter. I guess the new products, the backlog and increased profitability. Most of my questions have been asked and answered, but my recollection is that you've made some kind of statement of the sale of your excess real estate. And I think I recall about needed some kind of zoning that you needed to get. Could you talk about the sale of the excess real estate, what you might receive and when that might happen?

Yes. I will paraphrase the news release that we put out. We entered into an agreement to sell the real estate, and under the terms of the agreement that we've signed, the prospective buyer has until September 17 of this year to make their final judgment, because they intend if they go forward with the plan to construct high-rent apartments on our property. They have until September 17 and during the period, during the three-month period that ends on September 17, they're conducting due diligence which covers a wide range of investigations, including making sure that they have sources of electricity and water and sewage treatment available. The traffic patterns are acceptable to the town and a variety of zoning and other regulatory matters have to be covered.

We are optimistic that all of this will take place without any negative events. And if that occurs as we think it will, because we're getting monthly reports from them, then the closing will take place in about a year and a half from now. Until that time, we will continue of course to own the property, but the buyer will be required to forfeit a substantial amount of money in the remote event that they go beyond September 17 but do not make the ultimate close. So they have until September 17 to make their final commitments. We're optimistic that they will. It is a large, well-established, highly experienced real estate development company who have signed the agreement.

That's a very positive for Astro-Med. Has Astro-Med received any money up-front that they would lose that Astro-Med would gain if they did not do anything on September 17?

If they come to September 17, if we come to September 17 and they are prepared to go forward with it, then they will place $0.5 million in escrow. And that escrow will be forfeited if they do not close, ultimately close. But if they decide on September 17 not to go forward with it, there will be no forfeiture or a very nominal forfeiture, $5000.

This seems a very positive, positive way to utilize this excess real estate. Now as relative to your guidance, the $0.43 to $0.48, I'm glad that you're comfortable at this point in giving guidance and hopefully you will meet or exceed this and good luck.

Thank you very much.

Joe (technical difficulty).

Good afternoon gentlemen and congratulations on another good quarter. On the new contract, the Boeing or the Honeywell contract for the cockpit printers, if you take a number of a plane's time of $15,000, that is roughly a $40 million opportunity over the next 10 years. That is reasonably correct, I assume?

I would say that is reasonable, yes.

And that is only a quarter of the 175 million potential business out there, so that is great. And the other question --.

That's not included in the 175 potential we spoke of.

That's an additional to that?

Yes. The 175 deals are that we're now in negotiation or quoting and bidding, so those are details that haven't come to orders yet. So that is not included in the number that we gave you for estimated shipments next year and the following year.

Good, well that makes it even better than I thought. That's great. The other question would be, do you still think the total real estate value of the company now is in excess of the stock price, which is about $11 a share now?

Yes, indeed we do.

Yes. I remember before, I thought it was somewhere in the neighborhood of 12 or 13, something in that area. That's good and congratulations again on the other contracts, and also getting the other divisions to get better sales. You're making great progress and I appreciate it.

(Operator Instructions). Gary Silverstein (ph), Elliott Rose (ph) Asset Management.

Hi, guys; congratulations on a solid quarter. A lot of my questions on the new contracts have been answered and you have been quite thorough with your presentation. I congratulate you on that so I don't have much left. But in terms of following up the last question about the real estate, when you guys put the Braintree property up for sale, besides this group, was the other interests and are there people in the wings in case these people walk on September 17?

Yes, there is a great deal of interest in this piece of real estate. And interestingly, we were not even soliciting buyers. We were attempting to find ventures for part of the property that we didn't (indiscernible) and these buyers came to us because they thought that they would prefer to buy it, rather than to rent it. So there is a lot of interest in that real estate. We think that it will go nowhere but up.

So if you these guys do walk, there is the possibility of selling it in the same time frame at the same price, or perhaps taking a haircut and trying to sell it sooner?

This particular contract that we signed, it did involve, we did have other bids and this was the highest admittedly. And not only that, but they appeared to be the most solid of the people we spoke to. But if this thing falls by the wayside, it's possible that we could even get a higher price because some time has passed since the time that we negotiated this. I hope that it does not fail and I hope that these buyers will be able to go through with this thing. But yes, if it fails, we are confident that we can find another buyer.

And the additional Rhode Island real estate, you just gave a figure out to the last questioner. Can you over that again -- how much square feet we have, how many acreage and what you guys think it's worth now?

Well, we have 11 acres here which is very close to highly traveled and very visible industrial and retail area. And on the 11 acres, we have a total of some 95,000 square feet -- 117,000 square feet of very first-class manufacturing and office space. I believe that the value of this real estate, not including the contents, just the buildings and land, has got to be in the area of well in excess of $15 million, possibly as much as $17 million.

Al, in light of that, notwithstanding the possibility, although it might be remote, of a casino coming to your town in West Warwick, which might cause hesitation on doing anything with the real estate in the short-term, but in light of that strong value and in light of the Company's longevity, it seems like again, that that asset, while certainly it's appreciating, it's maybe not doing as much as it could for the shareholders. And perhaps we could look at a sale leaseback and try to utilize some of that cash to give something back to the shareholders. Perhaps a onetime payment or something like that. What is your sense on that, and how much time would you allow to go by with this casino issue up in the air before you guys would look to monetize the real estate separately from doing anything with the company?

The most important thing on our mind with respect to the real estate is the possible impact that any relocation would have an our employees, who are our most important asset here.

But there wouldn't be a relocation on a sales leaseback.

That's correct, but I think that if the casino did come in and if it became uncomfortable for us to operate because of the effects of the casino and the traffic, that would be the time when we would take a look at it. I just don't know whether the sale and leaseback -- it would not make sense at this time, but yes it could make sense at some point in the future. There's a program on public television -- public radio called All Things Considered, and that is our motto here at Astro-Med -- we consider all things.

Following up on that and moving towards these contracts, these airline contracts; Everett, you clarified on the last question that the 175 million plus over the next 10 years or so is 10 to 12 contracts and they don't include the three or four (indiscernible) ready (ph). Is that correct?

Yes. In fact, we have even more than that that we haven't put in that total that are in the pipeline. There aren't a lot of deals and they are going beyond just the cockpit printers. We also have contracts for and are continuing to bid on things like ruggedized ethernet switches. And we are evening getting involved with some other ruggedized products that are used in these commercial aircraft.

So you're saying there are than --

Right, there's a lot in the pipeline in terms of tending possibilities.

So it's more than 10 to 12 contracts; it could be 15 or 20?

That's correct.

And while they might ship like these others over five, 10, 15 years, et cetera, when you expect the window on a decision on these multiple contracts to close? In other words, notwithstanding additional RF fees from here forward, but the ones that you are aware of, this 10 to 20, will decisions be made in the next three months, six months, nine months?

Well, it will vary. For example, we would expect the decision on the cabin printer for the 787 to be made in the next few months. And then the next one we are anticipating probably in the next three or four months also is the A400M, which is the Airbus military aircraft. We are actually -- we have already quoted that to the two contractors who will be providing them to Airbus. We're not quitting directly to Airbus in this space, but both of the people who were bidding to Airbus have used our printer in their proposals to Airbus. So we expect that one to close this fall.

And the others?

The others, you know, there are varying times over the next 12 months.

Okay then any -- if the number were to increase, then it would be subsequent to a year?

That's correct.

But these 10 to 20 should all come to fruition one way or another over the next 12 months?

Well, yes. Many of them will pop out within the next 12 months or so and, right, that's correct.

I don't know if was last conference call or two conference calls ago, we were 3 and 0, or 4 and 0, whatever. We hadn't lost one yet. Is that still the case?

Yes, I think -- right. We have not lost any to our knowledge and we're clearly now at the forefront of the airborne printers for the cockpit and the cabin, having now just one, the big prize here from Boeing and then through Honeywell and the big prize for A380 in France. And as we mentioned in an earlier conference call, the other two companies that make printers of this type -- one is a French company and the other is a company based in Alabama but is owned by a company in Singapore. So to the best of our knowledge, they have not won any contracts since we came to the forefront here.

Al, back to you. We saw in the quarter roughly 14 million -- year-over-year 14 million in sales grow to 14.648 (ph) and operating income went from 918 to 906. Are we starting to -- at some point I guess we're all looking for the leverage in the breakout. Are we on the cusp of that where as we have sales increases -- beyond year-over-year or beyond 6 or 700,000; that things will start falling to the bottom line? Because at this level, it just doesn't seem to get to the operating income line in light of the increasing expenses.

That's a good observation. I'm glad you asked that question. We think we're just about there, we think we're just about there. 15 million might be the point at which it tips over and begins to get very interesting. We have, as you might expect, we have built up our R&D activity significantly to support things like these cockpit printers awards. And I'm a little surprise here today that no one has asked about that new QuickLabel printer that Everett mentioned, the Vivo.

How about that Vivo product?

Yes, it's very, very exciting. It has been in development for three years and we have been carrying a very substantial development expense for it, as well as a number of other products. And as these things began to ship, we will see sales increase obviously and profits increase, and with no significant increase in the R&D expense. As I say, we feel that around 15 million thereabouts is the tipping point where we will see much stronger margins coming to the bottom line.

Super. We've been waiting for that. Joe, in terms of the buyback program, were any shares bought back in the quarter?

They were not, Gary. We have, as I said we still have authorization for 547,489 shares in the buyback (indiscernible). We did not by any in the quarter.

Can we talk to that point Al? In other words, if we take a present value of the real estate, book is probably closer to 10, 11. We seem to be on the cusp of a breakout. We have this major multiyear opportunity, this possible annuity in these output and cabin printers. Doesn't it make sense to get a little more aggressive with the buyback at these levels and/or look to increase the cash dividend? It seems like we had enough cash to do everything we're doing now to run the business, to finance receivables and inventory, to keep the spending on R&D robust. We might have a possible $6 million receivable on that real estate with Group A; if is not Group A, Group B at a similar price perhaps, which would increase our cash over the next 18 months by 50%. It just seems to me we could do something for the shareholders while we are waiting to cross the magic 15 million and see it get to the bottom line in terms of more aggressive buyback, which will reduce the denominator and further increase EPS as we go forward.

That certainly is a subject that is frequently discussed at our Board meetings. And having said that, but without implying that we're going to do something like that, I just want you to know that it is a subject that is very much on our minds and is discussed, was discussed as recently as at yesterday's Board meeting and it will be discussed I am sure at subsequent Board meetings because we are sensitive to -- very sensitive to shareholder value, and that's what we're working for. And we are determined to do whatever it takes to return to the shareholders a handsome profit for their patient's and for their investment.

One last question for Joe. Joe, SOX 401 or 404, whatever it's called, have we seen the maximum in quarterly expenses from that, and will they taper off or continue at this level in G&A?

Gary, we've actually spent very little on the 404 certification process. One of the things we have done is in anticipation of that, we have upgraded our ERP application as well as getting a new box in. And we think a lot of the work, if you will, that would have had to have taken place with the old system we can actually cover by virtue of a new application that we will put in place that will satisfy the documentations at the same time we will be doing a lot of the testing, which is a critical part of the certification process. So we don't think even prospectively Gary it's going to be an appreciable hit to us, primarily because of the decision to make the investment in the, as I say, the new box and upgrade the application.

Congratulations guys, thank you very much.

Brian Kowalchyk, Westpark Capital.

I just want to reiterate everyone else's congratulations on the Honeywell contract. It's long-awaited and nicely done, gentleman. I was wondering if you could maybe expand on the additional opportunities that you're seeing out there in the cockpit printers? And maybe, Everett, I think you talked about the expected incremental revenue from the current contracts. Is there an opportunity to generate additional revenues from those contracts, or how do you see that rolling out over the next several years?

What we said is, the numbers we've mentioned that would roll out in fiscal '07 and fiscal '08 are based strictly upon the contracts that we have in hand now.

Opportunity to have additional orders under those contracts?

Well, not under those contracts, but under the tendering negotiations that we now are in the midst of.

Can you help me understand a little bit more -- maybe you talked about the 787 cabin printer, and then the A400 military printer over the next couple of months.

Those are not in the numbers that we quoted for next year and the following year.

So there -- is there still a large retrofit opportunity that you see developing over the next year?

Yes. Some of the programs that are in the pipeline that we don't have contracts for include the 787 cabin printers, additional C-130 (indiscernible) programs, A340 program, the A400M program, the 737 retrofit program and so forth. There's a number of Navy programs. So these are some of the deals that we made some proposals on, we're in the midst of negotiations; they're in various stages of negotiation. And these are the programs that could and will be added to those shipments once we get those contracts.

Very good. Look forward to hearing that as you make progress on those additional opportunities. Joe, this gross margin this quarter, very strong. Is this kind of a new paradigm in the gross margin, or is it a function of the mix going quarter to quarter? How do you see things rolling out going forward?

Brian, it's really the latter as you profile it. Really as you say that you look at our composition in the quarter and it can obviously be influenced depending on the mix of products that we had. And we just in this particular quarter have a nice favorable composition in terms of the product groups.

Based upon the mix that you have, but particularly strong in QLS obviously?

That's correct, and also Grass-Telefactor contribution.

That would imply that some of those products are of a higher margin nature?

Yes.

I have asked this in the past, the (indiscernible) drilling down again. Can you may be help us with the absolute dollar amount in the consumables?

Yes. We actually for the total quarter brand, the total consumable products were 6,587,000 for all three product groups.

Very good. Thanks, guys. Nice quarter and look forward to more good news going forward.

Jim Gentrup, Provident Equity Research.

Joe, that's 12% growth in the increase in the consumables; was that from the QLS segment, or is that throughout?

That was actually -- with the numbers I quoted, it was a total, Jim.

As a total group?

Right. I think Albert mentioned earlier, we are not breaking the individual product lines out, product groups out, we're just aggregating the total consumable number.

Okay. And then on the contribution from A.B. Dinesen (ph), did you have much contribution during the quarter in QLS? Was there maybe (indiscernible)?

No, not much. There is some good promise though in the fairly immediate future.

Okay. So Q3, we expect to see some contribution from that then?

Yes.

And on the 8100 XE, you didn't talk about that much. Is that seeing good growth yet, and what kind of promise does that hold?

We've had some very interesting sales during the most recent quarters and some of them carry the promise of very significant additional sales. We will have to see how it unfolds. There is one application in particular that I'm not at liberty to discuss that I could have very large implications, but we are under a nondisclosure agreement with the buyer. And there's a possibility there that if the plan they works out, it could be quite substantial. But I hasten to say, this is not to be interpreted as a promise or a commitment by the buyer, but it is quite interesting.

And then on the Grass-Telefactor side, the long-term monitoring systems, did you have much of that (ph) in the backlog or in the pipeline as far as -- I know you have added staff there as well, just kind of curious about if you can keep these levels up in the G-T side?

Yes, we've had some -- in the quarter, we did have some decent long-term monitoring orders and some of them are indeed in the backlog. As we had mentioned many times, these long-term epilepsy monitoring contracts spike up and spike down; it's the nature of that particular business. In the third quarter, we saw some nice orders for those but no big spikes, but there are some contracts -- in the second quarter, I'm sorry -- but in the forthcoming quarters, we expect some of those might spike up.

So I guess I'm just trying to get an idea of if you can keep this run rate then; it sounds like you can then.

We have a very solid position with Grass-Telefactor. You know, our field force is pretty much in place now and it's well experienced. The products, the hardware products are quite solid. And as I mentioned, the Comet (ph) Series, both the PSG and EEG, well-respected in the field. And we have developed a new software, the twin (ph) software, to a point where it has lots of new features. So it's a very solid situation with Grass-Telefactor.

The consumables are continuing to grow. They're part of that 12% that we mentioned and the Grass consumables are really well-recognized around the world. So in general, the Grass outlook is good.

Albert, you did touch on with a couple of callers ago on Vivo a little bit, but you didn't really talk about, or can you -- how much can you talk about as far as selling price and the target market here. You talked about expanding the market considerably I think in your opening remarks. What kind of details can you give us now?

Well, the Vivo is -- brings the quality of the printed label to a much higher level than we have ever been capable of before. It's a revolutionary system because it's the first we believe in the world which is based on a laser engine. So that unlike our present technology which relies on thermal transfer, this uses laser technology and it has much higher resolution. It will the priced at around $25,000. It's a very high-end machine and we are confident that it will be extremely well received. We have been very cautious as we have moved forward in introducing it to potential users because it's important to us that this machine be totally debugged and solid as a rock before we begin placing it with trusted and valued customers. That is why we had these cautious sneak preview channel trial actually during the month of June. And we believe that we're going to be making our first shipments in late September or early October. And we're going to withhold shipments in the international market until early 2007 so that we will be sure that we are prepared to provide the necessary support and gave the training to our people overseas so that they will be able to respond to customers properly.

Does this mean that it would -- would it replace the 4100, or it would just be complementary since it's a higher price point?

We believe it will be a complementary machine because even though it does print with a much higher resolution, it is really designed more for an office kind of environment than our present thermal transfer machines which are capable of operating in a factory environment. Many of the customers for certain industrial products have to have the printer in the -- right in the factory, and this new machine is really not as a well adapted to the atmosphere of a typical factory where temperature, humidity may vary widely during the period. It's aimed more at a light manufacturing or office environment. So these two typical systems will coexist. There are advantages to each of them.

So it's basically somebody in the light manufacturing situation who wants a higher quality laser?

That's right. Very high-quality; very, very high-quality.

Last question I had just to confirm, what is the amount of acreage you have in Rhode Island there?

The amount of land we have?

Yes.

11 acres.

Okay thank you, gentlemen.

Joe First (ph), First Associates.

Just to clarify two things. You were talking about holding off on the new (indiscernible) to '07. Are you talking about calendar '07, or your fiscal year ending '07?

In this case, they're practically one in the same. It will be January or February -- January being the calendar year and February being the fiscal year. But it will be in the late winter or very early spring before we begin shipping it overseas.

You're talking about of next year, then year 2006.

Yes, '06. Calendar '06, fiscal '07.

Yes that's what (indiscernible), your year end January '07, so you're talking about. In other words, you're not talking about a year and a quarter from now, you're talking about a year (indiscernible).

We're talking a few months away.

Good. And the other question again a clarification -- you were talking about one of the previous questions was about at what level of sales do you start bringing more down to the bottom-line. And you made a reference to 15 million. Were you talking about 15 million in revenue for the total company per quarter, or were you talking about just the label division?

I was talking about the quarterly revenues for the total company.

Okay, that's what I thought but I wanted to clarify that.

I'm sorry, I should have made that.

Once it gets over that then, you start bringing my more down to the bottom-line. And like you said, (indiscernible) obviously you're right about there if you're estimating 59, 60 million for this year, you're just about there. Okay, thank you.

You're welcome, Joe.

Brian Kowalchyk, Westpark Capital.

Thanks, Albert. You sounded like you wanted to talk a little bit more about Vivo, so the previous questions certainly explore them a little bit more. But can you maybe help me understand some of the applications that you feel the Vivo printer is better suited for than the current thermal transfer printers?

Some of the high-end, very high-quality labels, particularly those where the color correction must be perfect where the image is to be printed has a lot of fine detail, those types of labels are hard to do -- those types of labels are a little bit hard to do with thermal transfer, but they are right up the alley of this Vivo printer. Now some of the people who use them are people who are printing images of flowers, printing images of people because we're able to print what is truly photographic quality. So we can print labels which contain people in them and many labels do. That is the typical quality standard for us to reach with our thermal transfer technology.

Okay. So it sounds like an opportunity to explore a new market that you guys previously have not been able to sell into?

That is exactly right.

Very good, good luck with the launch.

At this time, we have no further questions. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Thank you very much. Joe, I would like to let you say the final word if you don't mind.

Thank you Albert. Again, Astro-Med's Safe Harbor statement. During this conference call we may have made forward-looking statements within the meaning of the Securities and Exchange Act of 1934. The statements are based on the Company's present expectations and beliefs concerning the future events and are necessarily based on certain assumptions which are subject to risks and uncertainties. The actual results may differ materially from those discussed here. More information on these risk factors is included in the Company's filings with the Securities and Exchange Commission.

Thank you very much folks. Thank you for participating in this and we will be talking to you again in November. Bye now.

Ladies and gentlemen, that does conclude the Astro-Med Inc. fiscal 2006 second quarter results conference call. Thank you again for your participation on today's conference and you may now disconnect.