AstroNova Inc (ALOT) 2016 Q2 法說會逐字稿

Good day and welcome to the Astro-Med second-quarter of fiscal 2016 financial results conference call. Today's conference is being recorded.

At this time I would like to turn the call over to David Calusdian of Sharon Merrill Associates. Please go ahead, sir.

Thank you and good morning, everyone. Hosting this morning's call are Greg Woods, Astro-Med's President and CEO, and Joe O'Connell, Senior Vice President and CFO. Greg will begin today's call by reviewing the Company's operating highlights and business outlook. Joe will take you through the financials. Greg will make some concluding comments and the management will then be happy to take your questions.

By now you should have received a copy of the news release which was issued earlier today. If you have not received a copy, please go to the investor section of the Company's website, www.Astro-Medinc.com.

Please note that statements made during this call are not statements of historical fact are considered forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially. Such forward-looking statements speak only as of the date made. Except as required by law, the Company undertakes no obligation to update these forward-looking statements.

For further information regarding the forward-looking statements and the factors that may cause differences, please see the Company's risk factors in the Company's annual report on Form 10-K and other filings Astro-Med makes with the Securities and Exchange Commission.

With that I will turn the call over to Greg Woods.

Thanks, David, and good morning, everyone. Astro-Med reported a profitable second quarter highlighted by strong orders, a healthy backlog and our 12th consecutive quarter of year-on-your revenue growth. Net sales increased 7% to $23.9 million as we continue to execute on our multi-pronged strategy built on new products, geographic expansion and the recurring revenue stream of our consumables business. Sales in our domestic channel increased by 14% year-on-year in the second quarter.

In addition, we are beginning to see the benefits of our expansion into countries within Europe, Asia and Latin America. Also we are broadening our sales reach in Canada branching out to more of the Western provinces.

Joe will review our financial results in more detail shortly. But first let me give you a couple of additional data points and provide some perspective on our performance.

Sales in our QuickLabel Systems segment grew 12% to more than $17 million for the second quarter, a record for the Company. QLS continues to perform as expected and new color inkjet label printers we launched in the recent quarters are beginning to be well received by customers around the globe.

As our worldwide installed base of printers continues to ramp up, we are seeing a very rapid rise in the demand for consumables for our inkjet printers. This pushed our current two-shift production at our largest converting center here in West Warwick above its normal operating range and we therefore incurred a significant amount of overtime to meet that customer requirements that occurred in Q2.

To accommodate the increased demand and reduce operating costs, we will be moving to a three-shift production schedule this month. This is the first time in the Company's history that we will have a 24-hour operation.

Moving to an around the clock production schedule provides improved asset utilization and efficiencies that will lead to margin improvements as we transition more of our operations to a three-shift schedule throughout the year.

Going beyond three-shift utilization of our existing equipment, we are in the process of upgrading our presses and other aging equipment in order to meet the demands of the future requirements from our consumables business. Many of our machines are 20 to 30 years old. This process which will include the phased installation of state of the art fully automated production equipment began about six months ago. Our first new press will go online in Q4 of this year and we expect this to continue roughly 18 to 24 months to roll out that whole program there.

In T&M, our Test & Measurement segment second-quarter T&M sales were off slightly from the same period last year. There were two factors at play. First was the timing of orders in our ruggedized product line. While bookings continued to come in at a good pace, some of our customers extended deliveries beyond Q2.

The other issue affecting T&M sales in Q2 was that we are in the process of ramping up a couple of new products in our data acquisition line, both of which were introduced in the previous quarter.

First is the Daxus which offers a unique combination of power and affordability for distributed networking environment. Second, we debuted the DMX-8000, a modular system that is ideal for engineers and technicians looking for intuitive set up and data capture in virtually any setting. These new products were not released until the end of July which only allows a small amount of time for selling during the quarter.

In terms of the other segment highlights during the quarter, at this summer's Paris Airshow, we announced that our ToughWriter 5 became the only flight deck printer to receive Apple's coveted AirPrint certification. Using our new AirPrint printers, pilots have the ability to print approach plates, weather maps and other graphical data wirelessly from there iPads or iOS devices.

As I mentioned in our Q1 call in May, the growth strategy here at Astro-Med centers on continued development and application of our data visualization technology within our business segments. We are building our technology portfolio internally as well as externally through joint ventures and acquisitions.

Last year we acquired the ruggedized printer business from Miltope adding new printer models to our lineup. In addition, we significantly expanded our airline customer base both domestically and internationally. This past June, we further strengthened our market position with the acquisition of RITEC's rugged printer product line for civil and commercial aircraft for approximately $7.4 million in cash. The transaction enhances our portfolio with the addition of RITEC's narrow format printer technology and further enhances our position with major air framers such as Airbus, Boeing and Embraer.

In addition, we believe that the acquisition will enable us to build our ruggedized printer business at a faster rate going forward as a number of RITEC contracts move into production next year.

Currently manufacturing of RITEC's civil and commercial aircraft printers is taking place in their facility in Southern California. Pending regulatory approvals, this manufacturer will be transitioned to our facility in West Warwick by the end of the year.

Looking ahead, we expect to continue to strategically grow the business while making investments in new equipment and related infrastructure that will improve our competitive advantage, enable us to further optimize our processes and strengthen our margins.

Now let me turn the call over to Joe for his financial review.

Thank you, Greg. Good morning everyone. I am pleased to be with you to discuss the Q2 fiscal 2016 financial results.

As Greg noted, Q2 marked the 12th consecutive quarter of revenue growth on a year-over-year basis. Our net sales grew 7% to $23.9 million led by our domestic sales channels. Sales to domestic customers were up 14% over the prior year at $17.3 million. Sales to our international customers were down 7.8 to 6.6. However, the lower international sales volume is due to fluctuations in foreign exchange rates which lowers our revenue by $900,000 or 12.5%.

Turning to the business segments, QuickLabel Systems reported sales of $17.1 million another quarterly record. That represents an increase of 12.1% from Q2 of fiscal 2015 primarily driven by the Kiaro! family of printer products. Sales in our Test & Measurement group which consists of ruggedized products and data acquisition systems, totaled 6.8. That is down 3.8% from the prior year period. As Greg mentioned, the variances relates to some aerospace customers extending orders beyond the second quarter.

Moving to the second quarter sales by product categories, our consumables totaled $13.3 million, that is up 22.1% from the second quarter of fiscal 2015. Hardware sales were down from a year earlier to $8.6 million while our service, parts and repairs contributed $2 million dollars to the second quarter sales, an increase of 31.5% from the Q2 of last year.

Second quarter 2016 sales generated gross profit of $9.8 million compared to $9.6 million in the prior year. Gross margin for the quarter was 41.1% compared to 42.9% in the second quarter of 2015 and was up from 40.7% in the first quarter of our current fiscal year. The 180 basis point change in the gross margin from Q2 of last year was primarily a result of our product mix, some expedited production costs and related costs associated with the RITEC acquisition into our manufacturing operations.

Turning to our operating expenses of selling, R&D and general administrative expenses, were $8 million in the second quarter or approximately 33.5% of our sales. This compares to an operating expense of $7.5 million -- $7.4 million, excuse me -- or 33.2% of sales in the year-ago quarter. Operating income in the second quarter was $1.8 million or an operating margin of 7.7% compared to $2.2 million or a margin of 9.7% from the comparable period in 2015 and the 6.5 margin that we experienced in the first quarter of fiscal 2016.

Looking at the segment operating profit for the quarter, QuickLabel Systems earned $2.7 million in segment operating profit with a record margin of 15.9% while the Test & Measurement segment had operating income of $900,000 on a corresponding margin of 13.1%. Our federal, state and foreign tax provision in the quarter was $687,000 representing an effective rate of 37%. Second-quarter net income was $1.2 million or $0.16 per diluted share as compared to $1.4 million or $0.18 per diluted share in the second quarter of fiscal 2015.

Turning to the balance sheet, our total assets at the end of the second quarter were $75.4 million. Our equity balance for that same timeframe was $65.4 million representing a book value of $8.98 per share.

Our cash and marketable security position at the end of the quarter was $18.3 million. Keep in mind that during the quarter we used $7.4 million to complete the cash acquisition of RITEC. On the working capital front, our accounts receivable at the end of the quarter were $15.2 million which represents some 54 days sales outstanding and compares to the 52 days sales outstanding at the end of fiscal 2015.

Inventory levels at the end of the quarter were $13.9 million representing some 89 days. That compares favorably with the inventories of $15.6 million at the end of the year representing 104 days.

Our capital expenditures in the quarter were $637,000, our spending was primarily related to information technology, building improvements, machine equipment, tools and dies. Our dividends in the second quarter of fiscal 2016 were $512,000 representing $0.07 per share.

Our employee population at the end of the quarter was some 336 folks. Our sales per employee improved by 9% to $271,000 from $248,000 on a year-over-year basis. Astro-Med's EBITDA at the end of the quarter was $2.3 million, that is down some $400,000 from the prior year's EBITDA for the same timeframe.

Orders received in the second quarter were up almost 20% to $25.4 million. Our backlog at the start of the third quarter of fiscal [2000] is a robust $16.4 million. That is up 36.2% from the prior year end. We generated $2.9 million in free cash flow during the quarter.

Before handing it back to Greg, let me remind you that we will be participating in two upcoming conferences. On September 2, we will be presenting at the Sidoti Emerging Growth conference in New York City. And on September 17, we will be presenting at the Singular Research's Best of the Uncovered 2015 conference in Los Angeles. Webcasting details for these events will be available on the investor section of our website.

Now let me turn back the called to Greg for closing comments.

Thank you, Joe. In summary, we move into the second half of fiscal 2016 with a substantial backlog and continued strong demand for our products and services. Orders through the first six months of the fiscal year stand at a robust $51.5 million, 15.4% ahead of the prior year. We are continuing to deploy our lean tools throughout the organization. We are taking the necessary steps to upgrade our infrastructure to support our long-term growth plans.

The Company is generating positive cash flow and based on current business environment, we are well-positioned to achieve our key operational and financial objectives including our full-year revenue guidance of $93 million to $103 million with an EPS of $0.70 to $0.75.

With that, Joe and I would be happy to take your questions.

(Operator Instructions). Jeremy Hellmann, Singular Research.

Good morning, guys. Thanks for the mention of our conference, look forward to seeing you guys out in LA in September.

I've got a number of questions here, some kind of bits and pieces on the financials and then some more larger strategy stuff. But on the bits and piece questions, you mentioned CapEx in the quarter was $637,000. Taking that in context of your comments about adding new equipment and such over the 18 to 24 months, is that $600,000 to $700,000 going to be a reasonable figure for each of the next six quarters or so?

I don't think so, Jeremy, I think it is $1.2 million for the first six months of this year. The first quarter was comparable to the second quarter. I think we will probably end up there around $2.4 million for the year, a little higher than normal but I think we will drop back towards an annual of probably a $2 million level after that. I think this year we had just some interesting capital expenditures that position the Company for the future.

Okay, sounds good. And then tax rate was 37% in the quarter, is that a reasonable number to use to model or should it come down?

Good question. I think year to date we are at 33% with the first quarter we had some rollback of some FIN 48 items. Probably 36% I think probably for modeling purposes for the next two quarters I think is probably a reasonable expectation.

Okay, thanks on that. And then going into the foreign exchange question, there is obviously the direct impact of $900,000 you mentioned. But beyond that, was wondering how much the currency represented a headwind in sales opportunities that might have been deferred or missed or otherwise where a company -- a customer in another country might have purchased but otherwise found the pricing to work against them and deferred doing business with you if that happened at all?

It is tough. We don't have any direct data that tracks that exactly and saying that is the reason why people didn't order or delayed in order. So I don't see that being as a major impact. A lot of our businesses, it is in local currency so there is not a direct impact on that. With the aviation business, most of that business worldwide is done in US dollars so that kind of helps mitigate it in that case.

So in certain countries they are facing bigger issues than others but it really more would impact potentially margins from our branches because they price in local currency.

Okay. One last one for me and then I will hop back in the queue. Just want to double check some of the numbers that you mentioned, Joe. Did I get that right that total consumables in the quarter were $13.3 million and thus about 55% of overall sales were recurring?

That is correct, Jeremy.

Okay, great. Thanks. I will hop back into queue, guys.

Joe Furst, Furst Associates.

Good morning, gentlemen. Can you discuss a little bit about your multiyear backlog in the airplane printer area?

Yes, not sure exactly what you want to know about it. But yes, it continues to build. We don't give exact data on that but we have said in the past it as well over $100 million and continues to be in that range. Obviously it is growing both from our existing accounts and certainly the RITEC acquisition as well as the Miltope acquisition last year added to that -- the number of contracts that we have which of course go out five to 15 years typically.

Fine, thank you.

Evan Greenberg.

I guess my first question was kind of addressed by Jeremy. But I wanted to know where it fell on the revenue line. Was it just in terms of the currency issue, was it on the top line?

Yes, absolutely right. Exactly right, Evan.

So we could say that came right out of profits on that?

Of course you've got the impact on the expenses also with the foreign currency so it is somewhat, it represents the whole P&L but the $900,000 that I talked about really is the topline impact.

Okay. So needless to say it did have an impact on earnings?

Yes, it did. Absolutely right.

And how much longer do you think this will last? You think it is another quarter or two?

It is hard to say. Obviously the currencies are fluctuating pretty significantly these days. We are all just obviously very closely paying attention to what is happening but there is a lot of uncertainties right now in the foreign currency markets.

Okay. It is hard to assess. And the other question I had was the acquisition costs for the last quarter, were they significant? Were they over a couple of hundred thousand dollars and did you fund the acquisition yourself?

We did, we certainly did and at a little less than a couple hundred thousand in the numbers. As you know, Evan, everything now gets expensed so there is no deferral of the costs associated with those kinds of integrations but it did not reach the level of $200,000.

Okay, that is impressive, Joe. You guys should run an M&A shop. Of course Gregory has done a lot of that before. But very, very efficient job. Also I wanted to know what the impact was in terms of the Oracle implementation, was it an Oracle implementation you had?

It was a J.D. Edwards product. It is called an Enterprise One. Actually as you know Oracle purchased J.D. Edwards a couple of years back but it is really their state-of-the-art platform. I guess at this point it is probably one of the more popular if not the most popular ERP product that Oracle is marketing. But it does change the dynamics for us in terms of information that is available to us on the platform that was not available through the old green screen world product that we had with J.D. Edwards.

So the benefit for this of course is it will be in the years ahead because information now is available to people who put together a number of different opportunities to tie it in with our CRM application as well as our product lifestyle management program. So there is a number of completely integrated platforms that now we will be able to provide information to the various functions in the organization.

And then at some point we will try to bring in our branch operations. As you know, our four branches are on a cloud-based application that eventually will basically move the four operations into our Enterprise One platform so that we will have on a global basis we will all be looking at the same information.

Okay, that is terrific. So look forward to a much more efficient, faster growing Astro-Med, very exciting stuff.

Jeremy Hellmann.

So you mentioned at the outset and I know there is not a lot of time in the saddle with Daxus yet, but I was curious for any early feedback you have gotten from your customers or potential new verticals that you are looking to get into on that.

I am sorry, I didn't catch that, Jeremy.

Daxus, your new product line I know it hasn't been a while but curious for any kind of early feedback you are getting out of the marketplace.

Sure. Of course like you said, we didn't have a lot of time in the open marketplace although we did beta test it and had it out with our dealers so the response has been extremely favorable. If you look at the products that we have out there and since I've been here which is about three years now, it is the first major new release in that data acquisition marketplace for us and it was started really over a couple of years ago. So it has been a long time in development but it is based on internal technology that is 100% owned and developed by Astro-Med. Because of that, we have very good control and we are able to tweak it as we went out and did voice to customer over the past year and a half or so.

So in the initial run around, they have already sold kind of the first batch of units that we have orders for those and of course we have to deliver those over the next coming month. So it is looking very favorable. The nice thing about it is a gets us back into the automotive area where we didn't have a product where we could compete in that sector for the last probably six years or so. So it is nice to be able to reenter that market with a strong product and we continue to be very strong in the other transportation markets especially aerospace.

Great, that is good news. And then just kind of switching gears a little bit, I think the overall takeaway here is certainly positive, these are continuing to move up into the right as everyone likes to say. But kind of borrowing from consultant speak and the [SWAT] analysis sort of look in terms of weaknesses and threats over the next couple of years, what do you see as your biggest worry points?

On the weaknesses and threat side you are asking about?

Yes.

I think it is really just a matter of doing a good job with the integration of these acquisitions. Our typical rule is the faster the better so we try to move those along very rapidly. And then again I don't necessarily call it a threat so to speak but as we are a growing organization, it is bringing in the "best and brightest". So it is getting the right people quickly enough both from an internal training and moving up process as well as going to the outside because we certainly don't have enough capacity inside.

So that is something that we are working at diligently. It takes a lot of guidance to make sure that we are moving that in the right direction.

Externally, there is always different competitors that are going to be coming and going in the business. The different segments, I think we are pretty well diversified so the aerospace business looks very strong, the airlines continue to have big backlogs so that looks good.

And in our QLS business, it is a very broad spectrum of customers. The thing on that horizon could be who has the unknown killer product that might be coming out in the future. And of course to mitigate that threat, we have a very robust product development process. As you have seen, we are releasing products at a much more frequent pace now than we have in the past. That is kind of our defense against that is to try and be out in front of everyone else.

Great. I appreciate that perspective. Keep up the good work. I look forward to seeing you guys in a month.

[Andrew Reading].

Hi, Joe. I think some of my questions were already answered but the G&A increased about 90 basis points over the second quarter of 2015 and I was wondering if there are one-time items? It sounds like there are at least almost $200,000 of acquisition costs, would that be included in there and are you expecting to go down to the same percentage in the future?

I think we should, Jeremy, that is a good point. We did also a little depreciation in there also as a result of the amortization on the investment we have made in the E1 product. But yes, I think as you say you are seeing some of that acquisition cost resident in the G&A category.

Okay, great. Thanks. On the RITEC asset purchase, Greg, I think mentioned that there are contracts that go into place next year. Are you expecting to see much revenue impact in the second half of this year or really not anything until next year?

The latter. They are just starting to ramp up now so they have a number of new -- in the past calls we have talked about how this works is when you win one of these deals, there is typically anywhere from one to maybe sometimes two years or more of certification qualification before the aircraft is in production. So we have a series of contracts, we have a nice one that is in production right now but it is just in the early stages but in fiscal 2017 and 2018, there is a nice ramp on that one.

Okay, so a long runway so to speak. And I think you are going to get royalties if there are products sold on the military side by the other company, the seller. Is that expected to be material or is that pretty much a very minor item?

It is reasonable but it is not material.

Okay. Great. That is really all I have right now. So I appreciate it and it has been a great quarter and have a great second half of the year.

[Ronald Cohen].

Good morning, Greg. Good morning, Joe. I like to know, our Company -- Astro-Med has been around since 1969 I believe and now we are getting away from the medical field or we are out of the medical field for the most part. I would like to know have you guys had any discussions about changing the name of Astro-Med? If you are aware, recently Google changed its name and a couple of other companies have changed their name and I would like to know where do we stand on changing the name of Astro-Med?

That does come up from time to time. As a matter of fact I go to some of these conferences I get to sit at the tables with the medical people and they start asking me medical questions. I have to tell them we are not in that business anymore. So good point.

We actually have retained an outside marketing consulting group to review that because we do get that quite a bit. We are hoping to have something, it takes a little while. It is a big move but we are looking at that very seriously and we would likely make some type of change before the end of the year.

We've got to get a good name and we've got to get the URLs, there is a lot involved with making these kind of changes.

You answered my question in a positive way because I would suggest that you hire an outside firm to do it because I think it is a monumental task but I think it needs to be done.

My second question to you is -- I will put it two ways, I will put a comment. You guys are doing an excellent job with the Company and repositioning the Company for future growth. My worry is that we are not getting enough shareholder value. We are not increasing shareholder value. And I have called and said hey, what are we going to do about the dividend, we have a lot of cash. Obviously you made a comment that you are going to make acquisitions which you are doing so you answered my question several conference calls ago.

But looking forward, our stock is down. I want to know how we are going to increase the dividend and also get more investors to buy Astro-Med stock? And I guess we answered one question, changing the name could help. But I would like to know what we're going to do to increase shareholder value because at the end of the day here, all these people that are calling in, they're calling about the progress of the company but they really care about the shareholder value.

And right now our shares are down so we need to take action and increase shareholder value and I would like to know more how you are going to do it other than we change the name and I have some suggestions too but I would like to hear what you have to say.

Let me just start out by saying that we are not focused on increasing a short-term share price. So our belief is that continuing to put the infrastructure in place and to expand our markets and product lines to deliver increased revenue and operating income, that is really where our focus is and ultimately that will lead to a higher share price. We are very convinced of that.

So on an ongoing basis the name, the name, that is not really done to increase share of stock price. That was done to better reflect our strategy and where we are going in the marketplace so I think what will happen is it is a natural occurrence of improving our operations and we would expect that the shareholders would reward us for that.

Okay. My other concern is we have a Board consisting I believe of five people, is that correct?

Pardon?

We have a Board at Astro-Med consisting of five Board members, is that correct?

There is six actually.

Six Board members. What about some of those Board members have been serving a long time and they are getting up in age. I want to know if you also hired an outside firm to look at the Board, the way the Board is picked, if we need to make some changes in the Board, maybe add a Board member? Because obviously some of the Board members are getting up in age and I have a concern that when Albert Ondis was CEO that we didn't have enough succession plans in place. And so I would like to know if you have looked into maybe hiring another Board member and making some changes in the Board level of the Company?

That is not up to me of course but we have a nomination and governance committee so they do review that at each of our Board meetings. So on a quarterly basis that is reviewed and they take a look at the members and also do look at possible additions to the Board.

Okay. I guess you've answered all of my questions and I want to restate that I think you guys are doing a good job. I think you have positioned the Company for growth and I have been a longtime shareholder, probably over 20 years and have been affiliated with Astro-Med for over 30 years. So I am glad you guys are doing a good job and I'm glad to be a shareholder and I'm going to end my call. Thank you.

Evan Greenberg.

The question I had, I know everyone loves the cash position of this Company or thinks issue dividend or buy back stock which I think you bought back stock from Albert's [estate], helped reduce share count which was fine. But we don't have enough float as it is and in terms of dividend, I think it is adequate for this Company being that we are in a growth mode now.

If you found an acquisition that were sizable that would increase the size of the Company, maybe even double the size of the Company and it were significant and it were a [mid-A] figure acquisition, do you have the credit lines already lined up and the bank lines that are adequate to make that acquisition? Is that something you contemplated?

It is a good question, Evan. We have actually talked to a number of banks in terms of as you say, position the Company because of the possibility as you say of a significant acquisition being available to us. So we have had a number of folks expressing interest in being able to step up and help us if we were to come across an opportunity that looks very attractive to the Company's growth.

Okay, great.

Steve Busch, Southpaw Investments.

Good morning, guys, and thank you again for your hard work and continued execution on the operational front.

So most of my questions have been answered. I do want to say I am glad to see you are out there going to roadshows or at least going to investor conferences now. That I think will help the stock. Certainly your execution and our earnings should be starting to show and our revenue growth should be starting to show Astro-Med as a growth company but sometimes it takes time for investors to see that.

My main question revolves around our ruggedized printer business and our airline business in general. So we have about $100 million backlog over five to 15 years. What percentage is in the five-year range do you think?

It is tough to break that out. We don't actually have or we don't disclose I should say. Just to give you a picture on how that works though is it really varies by airline manufacturer or OEM, we call them OEMs and then the Tier 1 suppliers to those OEMs. We have some of them that we will get an order on Friday and they want it delivered in five days. We get other ones we would get an order it is a blanket for 12 months. So the actual releases of those kind of contract orders is very variable depending on the different customer.

I guess what I'm trying to get at is global airline orders as you stated are up nicely, are strong, air traffic is increasing. Warren Buffett just bought Precision Cast Parts because of that. Is there any chance in the next two years that we are more heavily weighted orders will start to increase more rapidly or are we still on just a steady trajectory for 15 years on that particular line?

I would expect, again because of the work that we have done on the acquisition front that you would see in fiscal 2017 and 2018 you will see that ramp at a faster pace.

I'm pretty happy so keep up the good work.

Tom Spiro, Spiro Capital.

Good morning. First on the subject of RITEC, if I understand this call, the sales at this point are negligible but we are expecting a pretty significant increase in the next couple of years. Am I right?

That is right, Tom.

What was it about RITEC's technology that enabled RITEC to win those significant contracts in the face of competition from us and Miltope and the other folks? What did RITEC have that we didn't?

I don't want to divulge all the details there but they had some nice manufacturing techniques in terms of some of the mechanisms that they used in the printer, some of the firmware that they used in terms of the control algorithms. So there was a nice features set here and some printhead control technology that we liked as well. So that gave them a viable product and then once you've got a viable product it is a matter of salesmanship and relationships and that type of thing. So we kind of inherit obviously all of those -- both relationships and the technology they had.

And are the contracts that will kick in in the next year or two contracts with the OEMs or with the airlines or a little of both?

It is really both.

I see. That is exciting. Secondly on the ERP system, I know we began the implementation I guess a couple of quarters ago. I wondered if we have now reached a point where you feel that it is perhaps a net positive or it is not too much of a drag? There is a learning curve in these things and it takes a while for an organization to adjust. Where do we stand in that adjustment process?

No, you are absolutely right, Tom. It is a learning curve and obviously because we had a system almost 20 years old, folks were very comfortable I guess with the application. I think each day people get more comfortable with it. I think certainly we went live as you know at the beginning of March and so I would think -- every day I think there is an opportunity for people to get even more familiar and more comfortable with the product. I think the productivity aspects of it I think are evident as you talk to whether it be the data entry folks or the analysts to be able go through and get information today that they had more difficulty getting from the old system. So it will continue to improve each day.

That's helpful. Thank you. Next, R&D, Greg, I think you may have mentioned in a call or perhaps two calls ago that we are going to shoot this year for an R&D as a percentage of sales of between 7% and 8%. We are a little under that in Q2. I am curious, are we sticking with that 7% to 8% figure for the full year?

Yes, I think I mentioned it last quarter too is we get some pulse work in there, some of these aircraft certification programs you get some big bills for those things. We can't really control that but we have more of those in the queue so exactly on the timing it is hard to predict exactly on the quarter by quarter but I think if you look at it for the full-year we are comfortable with the 7% to 8% range.

I see. When I see the cash sitting on our balance sheet I guess I come away with the sense that the Company is certainly not capital constrained. So I guess R&D, we can spend the money we need on R&D or the upgrade of our equipment, CapEx of $2 million to $2.5 million isn't a whole lot if we've got 20-year-old equipment. Is there an opportunity to accelerate any of that or we are really going at the appropriate pace?

One of the things I mentioned were these new presses and just to give you one type of equipment that we use but just to give you an example, we go a little bit slow upfront and then we will be more aggressive after the fact. But we've spent really the bulk of this year, probably first half of the year anyway selecting the proper type of equipment. It is being built right now. We will get the first one in here just before the end of the fourth quarter and sometime during the fourth quarter it will go online.

Assuming that does what we expect it to do, and this is all Servo driven, vision controlled, so it is a very automated piece of equipment. Its productivity, it should be coming in almost at 3X what a current press does. So we just want to validate all of that and make sure that is true and then we can go forward and bring on multiples after that.

So if we wanted to take higher risks, we could bring three or four of them in at once but then of course you run the risk of if it doesn't do what you would expect, you have got three or four machines to rework so that is kind of how we are approaching it.

I see. Okay, that is helpful. I noticed G&A as a percentage of sales was up in the quarter, I think we mentioned there's a little bit of acquisition expense and there. Sales as a percentage of sales, selling expense as a percentage of sales down in the quarter. It seemed to me those were sort of trends we wouldn't want to continue, G&A growing as a percent and selling as a percent declining.

That is a fair statement, Tom. I think that is not our expectation. I think this quarter here did experience a little bit of a spike in terms of the G&A.

I see, I see. Lastly, on the subject of foreign currency, obviously no one knows where it is going to go, the dollar may stay here, it may not. Is there anything we can do over not the near-term but sort of the medium-term, a year or two or three to shift some of our costs into the similar revenues, moving assemblage or distribution or those kind of things to diminish our exposure somewhat?

Good question, Tom. We have actually looked at a number of opportunities to realign the organization if you will to be able to mitigate some of those problems. So I think in the months ahead we probably will have a lot more to talk about in terms of some of those possibilities.

Okay. Thanks very much and good luck.

(Operator Instructions). [Charlie Doe].

Good morning. A follow-up question on the CapEx. So when you look out beyond fiscal year 2017, it sounds like you have got a lot of money that will flow to the bottom line. Do you expect CapEx to come down dramatically at that point?

I think, Charlie, I think probably for planning purposes we put in a model of $2 million, maybe up around between 10%, perhaps higher than that. But I think $2 million to $2.2 million is what our expectation is for the next couple of years.

Right, but after that it should trail off dramatically?

Well, historically we probably average maybe $1.5 million if you will for just kind of maintenance type of things. So I would say it will drop off but I don't think it will not drop off in half. I think as you say, we have some programs that are going to be pretty ambitious to grow the business so I would say somewhere in the neighborhood of $1.5 million to $2 million is probably what we will think about for the next few years.

Right. So in terms of the ruggedized printers, what is the size of the contracts that have been responded to in terms of RFPs and the size of the RFPs in hand that haven't yet been responded to?

We don't disclose that. The only thing that we kind of put out there is that the backlog is over $100 million as we have said in the past and then the quarter to quarter orders you will see those as they come in.

Right, so that is a kind of change in policy over the last year in terms of information provided. So what is the rationale for not providing the more specific information?

What, details of the backlog?

Right, so last year you were indicating that you had $192 million of backlog information or contracts in hand. So the Company has decided kind of not to release that information so just curious as to what the rationale is for that?

Just for competitive reasons, quite frankly. We've gotten some feedback from other people in the marketplace that they can kind of use that information against us.

Yes, yes. So what is the ratio of the expected consumable revenues to kind of initial sales prices for the printing products, the data acquisition products and the ToughWriter printers?

In general, the rule of thumb that we have used and it has pretty well held over the last several years is that we look to get really the purchase price of the printer and consumables for at least a three-year period after the sale. So some people will use them for four, five, six years but for our modeling purposes we figure about 3X the printer sale price.

I got you. And so it sounds like the research development costs kind of expected to be stable over the next couple of years in terms of percentage of revenues?

As a percentage, yes.

And what is the outlook for new products for the rest of fiscal 2016 and 2017?

So you have seen the clip that they have been coming at. We are trying to maintain that pace really going forward so the whole idea is to get the vitality of the products up there. And like I said earlier in this call, the best way to stay ahead of the competition is just to be releasing things that cannibalize your own products instead of waiting for the competitor and trying to copy them. So we kind of have a three- to five-year plans for each of our product lines that say exactly what is coming out.

Some of those will be minor enhancements and then some like the Daxus, a brand-new product that didn't exist before. So we have got really three main product lines that we have in the marketplace right now all have three- to five-year roadmaps of new products.

Right, and how would you describe the success in the outlook for the Asian market, how has that been developing?

Yes, of course we are kind of late to that party there so we have just established our operations over there. But I was just at a tradeshow in Shanghai last month and it is amazing to see a lot of the same things we saw in the states and in Europe, same type of demands are there for our products. Just a matter of getting out there and getting things set up. So we have got some nice initial sales but mainly right now we are looking at getting the dealer networks established.

If you take China for example, obviously it is a huge country and it is not a few salespeople that cover it, it is a big dealer network that we need to put in place. But the good news is that dealers are excited about the products and we have been making some joint calls with some of the dealers that we have added and they have been successful already.

So I wouldn't expect a lot in this fiscal year. I think you will start to see that of course in 2017 and 2018 ramp up nicely.

All right, thanks for the information and keep up the good work.

It does appear we have no further questions so I will return the program back to you Mr. Woods for closing remarks.

Great, thank you. Thank everyone for joining us here this morning. We look forward to keeping you updated on our progress and we will be back to you on the next call. Have a good day.

This does conclude today's program. Thank you for your participation. You may now disconnect.