AstroNova Inc (ALOT) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Astro-Med Inc.

fourth-quarter and annual fiscal 2011 earnings release conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Wednesday, March 16, 2011.

I would now like to turn the call over to Mr.

Stanley Berger.

Go ahead, sir.

Thank you, Jo.

On behalf of the Management of Astro-Med, we are extremely pleased that you have taken the time to participate in our conference call.

Thank you for joining us to discuss the Company's fiscal 2011 fourth quarter and fiscal year financial results and business outlook.

Before I introduce Management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state Management's intentions, hopes, beliefs, expectations, or predictions for the future are forward-looking statements.

During this conference call, we may make forward-looking statements within the meanings of the Securities Exchange Act of 1934.

These statements are based on the Company's present expectations and beliefs concerning future events, and are necessarily based on certain assumptions, which are subject to risks and uncertainties.

Actual results may differ materially from those discussed here.

More information on these risks is included in the Company's filings with the Securities and Exchange Commission.

By now, you should have received a copy of the news release, which was issued yesterday.

If you have not received a copy, please go to our website at www.astro-medinc.com, where a copy of the press release can be downloaded from the investing section of our home page.

Hosting the call today are Albert Ondis, Chairman and Chief Executive Officer; Everett Pizzuti, President and Chief Operating Officer; and Joe O'Connell, Senior Vice President, Treasurer, and Chief Financial Officer.

At this time, I will turn the call over to Mr.

Ondis.

Thank you, Stan, and good morning everyone, and thank you for joining our quarterly earnings conference call.

I am very pleased with our fourth quarter operating results and with our performance for the year as a whole.

Moreover, as a result of our accomplishments in the year which just ended, the new year, fiscal 2012, will be an outstanding year for Astro-Med.

More about that later.

Among the accomplishments of the quarter and the year was the successful completion and commercial introduction of the Vivo!

Touch, our high-performance short run color label printer.

We call it our intelligent printer, because it can be used as an integral part of a packaging line.

This revolutionary new printer has elevated the concept of in-house short run label printing to the highest level.

It is intended for end-user manufacturers of an extremely broad range of products, from food and beverages to chemicals and industrial products; people who desire to print very high quality labels instantly and at low cost in order to package and fulfill the small orders they receive at a profit and to undertake unique marketing opportunities made possible by this high-performance short run label printer.

We made a significant number of Vivo!

Touch deliveries to waiting customers in December and January and deliveries continue, even as we add new performance features.

The Vivo!

Touch is one of the reasons we are forecasting a very strong fiscal year 2012.

Additional accomplishments of the year include a succession of orders for our ruggedized cockpit and cabin printers.

Included are orders for printers to be installed in airplanes which will not be flying for several years.

Therefore, positive natural result from most of the new orders we received in fiscal year 2011 will be in the future.

Meanwhile, ruggedized printer orders received several years ago are now contributing to a steady stream of growing revenue.

So you can see that there is an initial delay when we receive an order from an airplane manufacturer for a brand-new airplane, there's a delay between that time and the time when the plane is designed, certified, and begins to fly.

We are now reaping the rewards of orders received several years ago.

We made a significant decision in mid-2010 to increase our investment in our test and measurement products.

Accordingly, in the third quarter of this year, beginning around September, we will introduce a major new product, giving us two new major products, the TMX, which we will continue to enhance with powerful new features and the new product, which is still unnamed.

Fiscal year 2012 will be a good year for Astro-Med's test and measurement products.

Our Grass brand is doing very well.

The new TREA and other new products which we introduced, both hardware and software, are being rapidly accepted and we are forecasting another very good growth in this year.

Export sales are showing particular strength as new dealers are being appointed and trained.

All in all, I want to remind you that we continue to drive our strategic business plan forward.

It calls for maximum growth from internal development combined with selected acquisitions.

It has been a successful business model.

At this point in the conference, I'm going to turn the microphone over to Joseph O'Connell, Senior Vice President and Chief Financial Officer.

After his comments, I will provide guidance for the new year, and then we'll take your questions.

Joe, here is the microphone.

Thank you very much, Albert, and good morning, everyone.

I'm very pleased to present Astro-Med's financial results for the fourth quarter and for the Company's annual results for the fiscal year ended January 31, 2011.

Sales revenues in the fourth quarter this year were $17.9 million, representing approximately a 10% increase over the prior year's fourth quarter sales.

The fourth quarter sales growth was evident in all of the Company's business segments.

Specifically, the QuickLabel Systems, our product group of digital color printing and label systems reported sales of $9.4 million, that's a 5.3% improvement over the previous year.

Our Grass Technologies Product Group with neurophysiological recording systems serving both the clinical and the research markets achieved sales in the quarter of $4.6 million, that's a 6% increase over the prior year.

And Astro-Med's Test and Measurement Product Group of digital data acquisition systems and ruggedized products had sales of $3.9 million, that represented 28% increase over the previous year.

Our hardware sales in the quarter were approximately $8 million and were strong; ahead of last year by 11% while our consumable sales at approximately $9 million were up over the previous year by 11% as well.

Gross profit dollars in the fourth quarter were $7.4 million, that's an 8.4% improvement over the prior year and generating a gross margin percent of 41.3%.

That's down slightly from the previous year's fourth quarter margin of 41.8%.

Operating expenses increased 6% over the last year to $6.6 million in the fourth quarter, and consumed approximately $0.37 of the fourth quarter sales dollar.

The Company's operating income in the quarter was $779,000, representing a 35% improvement over the prior year's operating income of $576,000, excluding the one-time gain of $1.4 million related to a successful litigation recorded in the fourth quarter of the prior year.

Operating margins in this quarter were 4.4% against the 3.5% last year on a comparable basis.

The Company's federal, state, and foreign tax provisions in the quarter was $260,000, reflecting an effective tax rate of 33%.

The Company earned, on a GAAP basis, $517,000 in net income in the quarter or $0.07 earnings per diluted share.

In the previous year, estimates earned on a GAAP basis $0.23 per diluted share.

However, $0.18 of that earnings per share related to one-time benefits related to litigation and acquisition and tax matters in the prior year.

Looking at the Company's results on a yearly basis, our sales revenues grew 11% over the prior year and reached $71 million for the fiscal year 2011.

All product groups achieved growth in the fiscal year 2011 with QuickLabel Systems Product Group sales up 18.6%, and the Test and Measurement and Grass Technology product groups posting single-digit growth rates, respectively.

Geographically, sales in our domestic channels dominated the increase year-over-year at $50.6 million, accounting for 71% of our total revenues and increasing 14.2%.

International shipments were $20.4 million and that grew 3.4% over the prior year.

Gross profit dollars for the year reached $28.6 million and generated a gross profit margin of 40.4% on sales.

This year's margin being down from the prior year's margin of 41.6% and being a result of an outgrowth of product mix and higher manufacturing costs this year incurred.

The Company's operating expenses during fiscal 2011 were $26 million, representing a 5.5% increase over the previous year, with the increase combined primarily to selling and marketing and research and development initiatives.

Our operating income for fiscal 2011 was $2.656 million.

That results in a 35% improvement over the prior year's pre-litigation operating income.

This year's operating margin was 3.7%, up from a comparable margin of 3.1% in the last year.

The Company's federal, state, and foreign tax provisions for fiscal 2011 were $722,000, representing an effective tax rate of 26%; slightly higher than last year's effective tax rate at 25%.

On a GAAP basis, Astro-Med earned $2.062 million in net income for the current fiscal year, and achieved an earnings per share of $0.28 per diluted share.

Also on a GAAP basis, the Company earned $0.38 per diluted share in the prior year.

However, on a non-GAAP basis, that is eliminating the one-time benefits from both years, the current year's earnings per share is $0.23 per diluted share, representing a 21% improvement over the prior year's non-GAAP earnings per share of $0.19 per diluted share.

Just quickly, looking at the balance sheet, relative to the Company's balance sheet and cash flow at year-end, our cash and marketable securities balance stands at $20.6 million.

Our working capital investments of accounts receivable and inventories were up $10.9 million and $14 million, respectively, with the accounts receivable balance representing some 52 days sales outstanding and the inventory dollars translating to 118 days on hand.

Capital expenditures during the year reached $2.1 million with a good portion of the dollars related to the purchase of two new rotary presses, one for our Canadian branch and one for our German branch, as well as the expansion of our manufacturing facilities here in Rhode Island.

And lastly, the Company paid $2 million in cash dividends during fiscal 2011 at $0.28 per share, representing a 19% increase in the cash dividends paid to our shareholders.

Albert, that concludes the review of the financials.

Well, thank you, Joe.

As you have heard from Joe's report, we enjoyed good profitability and cash flow, but I must say we did not quite meet our top line growth expectations.

We're working on that issue in the new fiscal year.

And now, for our guidance.

For the new year, we anticipate revenue growth will be at least 10% greater than fiscal year 2011, and that net income will grow by 20% over fiscal year 2011.

Revenue, therefore, should range between $78 million and $79.5 million, and net income should range between $2.5 million to $2.8 million, producing EPS of between $0.33 and $0.37 per diluted share.

Joe and Everett and I are now ready for your questions.

Jo?

Thank you, sir.

(Operator Instructions) Our first question comes from the line of Mark Lanier with Pegasus Capital.

Go ahead, please.

Gentlemen, congratulations on fiscal year 2011.

Thank you, Mark.

Thank you.

And I wanted to ask, just if you would describe in greater detail where you stand with the Vivo!

Touch efforts, and if you could just provide some more color as to how you're seeing the uptake of that new product.

Well chosen words, good color.

Well, the product is now being delivered.

We are installing every machine that we deliver, although the machine was designed by our engineering department to be easily installed by the buyers.

But we are taking the trouble of sending our tech support people along and installing and training people in its use.

The machine is working extremely well.

It is a replacement for an earlier model, but it has features in it which we always dreamed we might want to incorporate in a machine, but could not do it because we just did not have the technology at the time.

We spent a little over two years developing this Vivo!

Touch machine and we launched it -- we introduced it to the world at a major tradeshow at the end of October and we began taking orders immediately.

And we began shipping it in late December, and we continued into January, and we are continuing to deliver now.

The machine is extremely user-friendly.

It is very, very easy to operate.

And it allows customers who buy this machine to have it standing in an ever-ready mode.

So that it, in effect, can be an instant printer.

It prints very, very high quality labels.

It prints them at a very low cost.

And it delivers them in a roll format, so that they can easily be attached to whatever object is being labeled.

And the buyers for a machine like this are a wide range of industrial and consumer products, from wine to automobile tires to safety devices to electronic products to candy to all sorts of beverages.

It's hard to imagine an industry where there is not a potential buyer for the Vivo!

Touch.

Beyond that, Everett or Joe, do you want to add any further comments?

I think you've covered it very well.

I have an additional question with regards to the expansion in the operating margins.

And it's clear that's something that you are looking forward to in fiscal year 2012.

Do have an operating model target for what you believe operating margins can rise to, over the course of the next two years?

It's a good question.

I think that we put our strategic plan together with the expectation that we should be able to get up to 10% on an operating margin basis.

It's all really -- it's kind of an interesting model we have for our Company.

It's really predicated on that top line growth.

I think we have an infrastructure that has capabilities to support a much higher sales volume.

And if we are to -- as Albert pointed out, hit these sales numbers that we anticipate for fiscal 2012 and 2013, I think we'll certainly come within striking distance of doing the 10% operating margin.

And my final question has to do with international efforts.

If you could describe those in greater detail, what your expectations are and how you're progressing?

Okay.

On the international side, we could look at two aspects.

One is the business that's directly related to our branch offices, which are in Canada, France, Germany, and the United Kingdom.

And there, as you may have heard in the capital expenditure front, we expanded our printing capability in Frankfurt, Germany, so that we can print more and prepare more of the labels that these new Vivo!

Touches will be demanding.

So, that consumer business in Europe will be served out of our Frankfurt branch.

Additionally, we, for the first time, we added label production in our Montreal branch office.

Again, for this very same reason, so that we can deliver the new quantities of consumable labels that these new printers will be generating.

In general, our branch offices are doing quite well.

We are adding a couple of more sales people this year.

And we're looking for some very good growth in the branches from all three product groups.

From Test and Measurement, because of the new products we've introduced, from Grass, we've enhanced our dealer network in Europe, and we've added direct support staff in Germany to support our Grass products in Europe, and of course, our color printers.

And then in the rest of the world, we use independent dealers and distributors for all three of our product groups.

And we have added -- we're adding some more select dealers in some locations where the performance hasn't been too good.

So, we're looking for some new growth in some countries where we hadn't done well in the past.

We're doing very well in Asia.

We have excellent distribution in Japan.

Unfortunately, there's problems there right now.

But we have excellent distribution in Japan, South Korea, Taiwan, and of course, Australia.

So, that business is looking good.

And we did very well last year, this past year, internationally through our dealer network because of the strengthening of our distribution there.

We continue to have meetings with all of our dealers.

Two weeks ago, we had a big dealer meeting in Europe to train and motivate all of our Grass dealers for Europe.

At the end of this month, we'll be having another Grass meeting for our dealers in the rest of the world, which would be primarily Asia and South America, and they'll all be coming here for a big meeting.

So, we're continuing to do all that we can to motivate and promote our products through direct as well as indirect distribution.

Joe, what did we do last year in export sales?

In total, for all businesses, $20 million.

$20 million?

Yes.

And how much of it came from the branches?

The dealer population [to] approximately $5 million of that.

Most of it came from our branches.

Most of it came from our branches?

Yes.

Okay, good.

And if I may ask one last question, it has to do with the new product introduction in September in Test and Measurement.

Do you anticipate that will expand the addressable market for you in that area?

Or is it a product which is a follow-on to existing products for the same addressable market?

Well, it is a follow-on product of our well-established Test and Measurement line.

But it has some features that we have never been able to build into the previous models, due to the high cost.

But we have found a way to reduce the manufacturing costs, and we anticipate bringing this very exciting new product to market at about 20% lower in price than anything comparable to that, in the past.

So, it's a major commitment that we've made, and we think that it's going to be a significant product.

We expect to begin shipment by September, October at the very latest.

Thanks again, and again, congratulations.

Thank you very much.

Thank you very much.

And your next question comes from the line of Steve Busch with Southpaw Investments.

Go ahead, please.

Good morning, gentlemen.

Hi, Steve.

Good morning, Steve.

A couple of questions -- the first one is your cash and investments were down a little bit, not really a whole lot, but where do you see that ending up for fiscal year 2012?

Well, I tell you Steve, if we actually hit the numbers that we have set for the year, we should be up probably closer to [$22 million] in terms of our cash position.

Okay and that's net of dividends, obviously?

Exactly right.

Right.

I like that dividend, by the way.

In terms of the cockpit recorders, we have a large backlog there, but I did read recently in -- the FAA is accepting some onboard computers to basically get rid of paper maps entirely.

But am I right -- am I correct in the assumption that the maps they're talking about are carry-on maps, not the type of things they would get from your printers?

For the most part, that's true.

They will continue to require the printers that we are now making and delivering.

But they have capability online now -- I think you're referring to the iPad --

The iPad.

-- the iPad that was approved to use on certain flights.

And of course, they have right now visual displays of all types, color displays of maps and landing strips and so forth, but they still require the hard copy because they make annotations and figure certain things out with the hard copy.

So, that'll continue to go forward.

Additionally, they make hard copies of certain of the instructions that they get from the towers, so -- for safety reasons.

So, we don't see any interference with our business with the advent of that iPad.

Okay.

The printer will continue and we continue to get requests for a color printer version of our machine, and we're working on it.

So, there's no question that the business we're doing will continue and it will continue to grow.

Right.

Okay.

And that's kind of what I thought.

Yes.

First of all, it would be hard to fly a plane sometimes with an iPad in your hand.

One of the things that we were trying to make clear is that as we book these orders, they usually are for printers that will go inside of airplanes that have not yet been developed.

So, people sometimes wonder with that huge backlog, why aren't you shipping more?

Well, the reason is because we have to wait until those airplanes get designed and built and certified and flying, and we are now beginning to receive the benefits.

Okay, so --

Of orders received two years ago.

Right.

Now, are these printers -- like, for example, the iPad, are you going to be able to have the computers hooked directly into the printers via a USB port or some other kind of connection, so that they can print out on your printers?

Well, we can connect to an iPad, or we can use an iPad to talk to our printers right now.

And that's done wirelessly.

Whether they are going to be able to have wireless on the plane is another story, because of security reasons.

But on the ground, we have no problems communicating with printers.

We can communicate not only with the cockpit printers, but also with our Test and Measurement printers using an iPad.

And sometimes that's handy for portable applications.

So, we're going to begin promoting the use of that with our recording Test and Measurement data acquisition recorders in the future.

Okay, perfect.

I know JetBlue -- just kind of stay on the cockpit here, JetBlue, their pilots bring their laptops on and do all kinds of work -- I'm not exactly sure what they do.

But do they print out to your cockpit recorders, at all that you know of?

Yes, most of the pilots bring on what's called an EFB, an electronic flight bag.

You see them carrying that in on a couple of wheels.

And in that bag they have a computer, and other devices that they use to augment what's already in the cockpit.

But they will and they do print out to our printer from those devices that they are carrying in, in their EFB.

Okay.

Perfect, that's good to know.

Now, just my last question on this, the Boeing -- was it the Dreamliner?

Yes.

The 787?

Right.

Finally took off once, I believe?

Oh, yes.

Yes.

Well, the test flights have resumed now and they have several planes up there in the test mode.

So, to circle back to your comments about the backlog for these kind of printers, what is the timeframe when we might start actually realizing substantial quantities of the backlog as opposed to just dribs and drabs?

I know you don't have much control over that, but do you have any kind of view of the future of next year?

Well, it's beginning to pick up steam now.

If you were to -- we can tell you that you can't see the numbers I guess, because we don't break it out, but the ruggedized products grew substantially in the year that just ended.

And that's as a result of some of the earlier contracts that we got four or five years ago that have begun to kick in into production.

So, we have so many contracts that have been layered year after year, that every year more of them kick in and this begins to go up.

So, it went up very nicely last -- the year just ended, and we expect it to go up even more this year because of new contracts kicking in, as well as the existing contracts increasing.

Okay.

Again, congratulations on a good quarter and I look forward to the next year.

Okay, thank you.

By the way, Joe just reminded me that the numbers of entries in Ruggedized products alone in the year just ended was 13%.

So, they went up 13%.

So, that's a reflection of the fact that these contracts are indeed kicking in now.

And our next question comes from the line of George Melas with MKH Management.

Go ahead, please.

Hello, George.

Hi, guys.

How are you?

Good morning, George.

Good, good.

Good.

Can we try to dig a little bit more into QuickLabel?

And I'll tell you that what I see, and maybe you can add some color to that.

So, I see revenue growth over the year of roughly $6 million.

I imagine a big chunk of that is coming from Label Line, but I'd love a little bit more color on that.

I know that on your first quarter Q you had mentioned that Label Line added $1.4 million in consumable in Q1, but I'm not sure if that has continued at the same pace since then.

And then, if I look at QuickLabel for over a longer period of time, the margins have come down pretty drastically.

The segment margins from double-digit to roughly half of that or 5% or 6% right now.

So, I know there's lots of moving parts, you have the QuickLabel acquisition, you have sort of a mix shift it seems from thermal transfer to laser, but can you add a little bit of color to first to Label Line acquisition, and then to the overall picture?

Well, the Label Line acquisition has in part been misunderstood.

We did not buy it principally to take advantage of the very low profit business that company was dealing with.

We purchased it because it represented a good manufacturing facility in a strategic location.

And we intended to convert most of the manufacturing done in that factory to labels for printers like the Vivo!

and the Vivo!

Touch.

And to fulfill orders received from customers in the South and the Southeast and even in the Southwest, because of the transportation advantages that we have when shipping out of that facility.

The transition has gone very well.

That factory, which is now of course part of QuickLabel Systems, is almost exclusively devoted to printing labels for our proprietary printers, like the Vivo!

and the Vivo!

Touch and some of the other printers that we manufacture and have manufactured for years.

Let's see, what was the rest of the question, Joe?

I think Joe, he was trying to get a flavor for the consumables, for the growth.

There's a little bit of a challenge there, George.

We've got them integrated actually between ourselves here in Rhode Island and the work down in Asheboro.

So, we actually -- what we are doing now in terms of taking advantage of the investment, making decisions based on the geography as to where the product should be sold.

So, it's a little bit deceptive to just quote a number for Asheboro right now, because in some cases we find it more economically attractive and the customers find it more attractive to have it manufactured in Asheboro as opposed to being manufactured here in Rhode Island.

So, the value that we are talking about here is a little difficult to reference as exclusively Asheboro per se, because some of that business is what Astro-Med had, but we found it more attractive to be able to manufacture it in North Carolina.

Right.

And that also applies to some of the label business that we were manufacturing in Rhode Island and shipping to Canada and in some cases, shipping to Europe.

We're now making those locations independent of our West Warwick operation, and of course, it's taking them a little while to get up to speed.

Tooling is required and training, but we have that pretty much in hand, and we anticipate a lot of very good growth in the consumables business in all of the four locations where we will be manufacturing these consumables -- that would be West Warwick, Asheboro, North Carolina, Montreal, and Frankfurt, Germany.

So, we see the new year as a year of significant growth in the consumables part of the QuickLabel business.

Okay.

So, actually, that's a good place to ask the follow-up question.

Because if you look at consumable sales --

Yes.

They go up nicely, I think roughly 20% in 2000 -- in the fiscal year that just ended.

Yes.

But if you look at it by quarter, the growth decelerated significantly.

So, it may be that in the first quarter or the first and the second quarter, you still had sales at Label Line that then you discontinued, so maybe the comparison is not a fair one.

Is that a way to look at it?

And if not, why would it decelerate so much?

Well, one of the issues that we haven't covered very thoroughly is the fact that when we transitioned from manufacturing the Vivo!

to the Vivo!

Touch, we misjudged by about six months the rate at which we would run out of the old Vivo!

and be able to replace it with the Vivo!

Touch.

So, the sale of consumables pretty well tracked our sales of Vivo!

Touches.

And of course, I think it's fair to say, and proper to say, that a number of customers were quite unhappy that there was such a gap between the discontinuation of the Vivo!

and its replacement by the Vivo!

Touch.

But that period did result in a decline in not only in printer sales and hardware sales, but in consumable sales as well.

And we will see that reverse quite quickly.

We believe it will be quite noticeable toward the end of the first quarter and certainly, as the year rolls on, you will see significant improvement.

Just to understand that slightly better, Albert.

The gap between the Vivo!

and the replacement by the Vivo!

Touch, I can see how it leads to a decline in hardware sales.

Why did it lead to a decline in consumables sales?

Is it that the customer looked for an alternative supplier?

No, it was simply because the machines that we did not place in the field did not produce -- just simply did not produce consumable sales.

Okay.

Okay, very good.

And so, maybe looking broader at QuickLabel, and if we look at the operating margins of the business, they have clearly come down over the last three or four years.

Do you see those climbing back to high single digit, or maybe even double-digit?

Or is the business so different now that it should operate at different margins?

I think, George, we should see a recovery on that.

As you say, we've made some investments over the last couple of years in the manufacturing process itself.

And we've also tried -- with some of the newer products, obviously lowered the cost of those new products, recognizing obviously you're getting pressures in the pricing of all products.

So, the expectation is that, based on the model we're looking at, we should start to see an improvement in -- starting in fiscal 2012 starting to return to those more attractive and higher margins for each of the businesses in 2012, and we should be able to leverage on that for 2013.

So, there is a lot of optimism in terms of expectations that we see over the next couple of years.

Okay, great, thank you very much, guys.

You're welcome.

And our next question comes from the line of [Bill Nye], private investor.

Go ahead, sir.

Hi, thanks for taking my call.

Okay, Bill.

Nice to talk to you.

Great, a lot of good color here in the questions and a lot of my questions have been asked, but I still have a few.

Are you guys still disclosing your book-to-bills in the quarter?

Bookings versus billings as you were disclosing two years ago, one year ago?

Yes, I think we are.

Sure.

It's about one to -- as I say, our bookings, I think we mentioned this in our press release, our bookings were over almost $73 million this year.

So -- and one of the reasons we mention also our backlog jumped 25% year-over-year, so we have seen a nice improvement.

In fact, I think we even referenced this, this is the level we were at before the recession hit.

We were actually booking orders for roughly $72 million, $73 million, and then, of course, the recession hit and we dropped back significantly to $64 million.

But yes, it's really -- we're tracking -- we're pleased to say we're back on a track where we are -- our bookings are actually exceeding the billings by at least $1 million, maybe $1.5 million.

Good, and have you guys disclosed the Label Line acquisition cost?

We really haven't done that, Bill.

We have actually, we have, I think historically, the purchase price I think we have identified that, but we have not, aside from that, as Albert said, we've kind of looked at this as really a kind of a strategic initiative in the Southeast to be able to have a manufacturing facility down there.

It wasn't so much the company, so much as it was the manufacturing facility.

Right.

Okay.

And I'd like to drill down a little bit on that longer-term goal of the 10% operating margin.

That's really good news, because 3% to 4% just doesn't do it.

Right.

So, I guess the gross margin you're seeing rising on coverage of the fixed costs primarily?

I think so.

As you say, the improvement has to be, as you say, on the gross profit margins themselves, which we believe, as I said, we have an infrastructure in the secondary cost to pretty much cover a much higher volume of sales than we currently have.

So, does that suggest maybe those selling costs will start to level out now?

That's -- the expectation is that, exactly.

We think we have a full complement of folks as you say, and you start to see that drop as a percentage, as you say, of the revenue itself.

Right, and I guess the R&D you'd see continuing to grow at about the same pace as sales?

I'm not sure.

Albert can comment on that.

I think we've used the 7% guideline, but I think we've also been able to identify some more cost effective ways to get the R&D initiatives with -- well, you can, Albert, talk about some of that.

Well, a lot of our -- to be perfectly honest with you, our technology is a combination of mechanical, electronic, and software.

And the software component has increased over the years to a point where we quickly realized that although we have a large number of software engineers, we felt that we could not maintain the necessary pace to continue, so we've begun doing some outsourcing of software engineering and that has been quite effective.

To be quite honest, it's been quite effective.

It's managed to help us to hold cost a little lower than it would otherwise be, and the quality of the software is very high.

So, we're using both domestic and Indian software code writers.

Does that outsourcing tend to change the time period it takes to develop a product?

Well, it speeds it up.

Okay.

It helps the speed.

Yes.

Great.

Great.

And would you feel like you've got -- for a product enhancement, a general timeframe it takes, or does it vary substantially?

All of the high-level products that we introduce take anywhere from a year to two years.

I think the average is a year and a half because there is so much qualification and testing and certifying to do.

And to be able to export products, for example, to Europe, you have to go through a series of quite different tests that are needed for domestic consumption.

And the same thing is true when we export to Japan.

They have their rules on things like safety and so on.

And we have to go through all of that.

Most of that is done in-house, but the testing and the certification is done by outside consultants.

Yes.

At considerable expense, I might add.

But all of that factors into the length of time that it takes to go from a concept to a salable product.

I think the really high-level products take no less than two years.

Okay.

It's just one of those things.

Yes.

Well, thanks for the information, gentlemen.

Nice talking to you, Bill.

Yes.

And our next question comes from the line of [Stanley Friedman], private investor.

Go ahead, sir.

Thank you for taking my call.

I noticed in the paper it mentioned some supplies were coming from Japan.

Has this tsunami and whatnot in Japan had any effect on that?

We don't think so, no.

No.

We haven't seen -- most of the suppliers that we do business are in the south.

A lot of their electronic supplies are in the deep south of Japan and we've been in touch with all of our key suppliers.

We have probably three or four key suppliers there and we've been in touch with all of them.

And there are no issues at the present moment with any of them.

Unless that rolling -- the rolling blackout could be a factor, but I don't think it will affect us.

Very good, thank you gentlemen.

(Operator Instructions) And gentlemen, it appears there are no further questions.

I'll turn it back to you for any closing remarks.

Thank you very much, one and all, for participating.

We enjoyed your questions, and I hope you enjoyed our answers.

You can retrieve the full text of this through our website, as Stanley said, and we look forward to talking to again in May.

Thanks again and goodbye.

Ladies and gentlemen, that does conclude your conference call for today.

Thank you for your participation and for using ACT Conferencing.

You may now disconnect.