Astronics Corp (ATRO) 2008 Q2 法說會逐字稿

Greetings, and welcome to the Astronics Corporation second quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, investor relations for Astronics Corporation. Thank you, Ms. Pawlowski. You may begin.

Thank you, Rob, and good morning everyone. We appreciate your time and interest in Astronics. On the call today is Peter Gundermann, President and CEO and Dave Burney, Chief Financial Officer. We also have Mark Peabody with us from Seattle. He is Executive Vice President with Astronics. We will be covering the results, outlook and the prospects for the Company, and you should have the release that went out this morning; if not it is available on the website at Astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and the question-and-answer portion of this teleconference. These statements apply to future events with are which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in our earnings release as well as in documents filed by the Company with the Securities and Exchange Commission. And they can also be found at the SEC website, SEC.gov. With that, let me turn it over to Pete to start the discussion.

Thanks, and good morning, everybody. Thank you for tuning in. We will talk about our results here in a second and as you've seen it is a very positive quarter in many respects. These are as good a times as the Company has seen; we had record revenues. We had record profits. We had record bookings. Very strong performance, I feel, across-the-board. And yet we are living in an interesting time, one where there is a lot of speculation about very negative macroeconomic trends that people seem to expect these to affect the aerospace industry. And those include things like high oil prices, those include the cyclical nature of the industry itself and those include things like more general economic issues like the subdebt crisis. But from our perspective inside obviously everything continues to be really strong and reconciling the perspectives on the industry in general and on our Company's performance specifically is not an easy task, and it is not one that I am going to be able to do other than tell you that things continue to look pretty positive and we will get into the specifics as we go through this.

First-quarter revenues were just shy of $48 million. That is a record. It is up 15.8% from the second quarter of last year and up 16.5% from the first quarter. That is a little stronger than we expected, but it is in line with where we needed to be and expected to be. We have things that slide from one quarter to the next, and we view a certain lumpiness as kind of being inherent in our business at this point.

For the first half sales were $88.9 million. That is up marginally 5.6% over the first half of last year, 2007. Net income for the quarter was $5.1 million or $0.60 per diluted share. That is almost double our performance in the first quarter this year where income was $2.6 million and $0.31 a share, the contribution margin on the increased revenue obviously helps our bottom line as you might expect.

For the first half earnings were $0.91 a share, which is down slightly from the first half earnings of last year when we earned $1.08 a share. And for those who are new to the Company or haven't been following us all that long we have talked in previous calls about how margins these days are different than they were last year this time; last year this time the Company was going through a dramatic growth phase and for the first half year in particular, our revenue growth in my opinion significantly exceeded our infrastructure. So we posted some pretty fantastic results.

Now a year later on a comparable revenue level our infrastructure has grown up a little bit and that is a little bit of an iterative process in my mind for a growing company like ours; it would be perfect if revenue and infrastructure grew in exact lockstep quarter-to-quarter, year-to-year. That is not the way reality works in my experience, so sometimes revenue is a little bit ahead of infrastructure. Sometimes revenue growth is a little bit behind infrastructure, and that does have an impact on our margins throughout the income statement.

Customer demand continues to be strong, as I said. Not only did we have record shipments, but we had record bookings of $52.4 million, which exceeded shipments by about 9%, a book to bill of 1.09 for the quarter. Looking back at bookings for the last 12 months, rolling 12 month average so to speak ending on the June of '08, we booked $170 million. So that is pretty much where we need to be to support our shipment forecast, both as it stands and gives us confidence that we can raise our shipment forecast for the year a little bit. We will talk about that in a minute.

Our mix is evolving in some interesting ways. Our growth for the last few years has really come from our cabin electronics products and transport market. Most of you are aware we divide the aerospace world into three markets when we talk about markets; one is the commercial transport, which is Boeing and Airbus of the world and Embraer and Canadair's regional jets primarily. Then in the airlines that operate those airplanes; then there is the military segment, which is pretty self-explanatory and then the private aircraft or business jet market, which is largely consists of companies like Cessna and Hawker Beech and the rest of Bombardier and people like that. And we've been benefiting tremendously from transport growth over the last couple years. And today it is still very important to us.

Year-to-date 58% of our sales are to the transport segment; $52 million is actually down a little bit from last year, about 7% down and that is pretty much in line with where we thought it would be. Actually maybe a little bit stronger than we thought it would be, and we expect as best we can see that transport sales will continue to operate in that range over the next couple of quarters.

Our two smaller segments, however, military and business jet sales year-to-date are up 29% and 37%, very strong growth. And together those two make up 41% of our revenues at this point. And one of the things that I commonly talk about when I describe our business is that we like to be balanced in those three markets. Certainly we will take the growth wherever it comes and it has come recently in the transport side, but that is not necessarily been by design. That has just been the most fertile ground and we have continued as time has gone on to make investments in these other markets, too, and we are seeing growth right now there, a very strong growth.

I don't know what the -- we don't know what the business is going to look like in five years necessarily but we are going to continue to pursue opportunities in those three different markets as we see fit. I think I'd like to turn it over to Dave now for some balance sheet and funding discussions.

Thanks, Pete. Two quick comments. During the quarter, back in May, we took some action to solidify our access to capital in the future by closing on a five year committed revolving credit facility. Our revolver was increased from $25 million to $60 million and has a $25 million accordion feature. And we added two banks to participate along with HSBC. Our ability to close on the facility with HSBC as lead bank and the participation from Bank of America and KeyBanc speaks to the strength of our business.

The facility is available for general corporate purposes, and while there is nothing imminent requiring us to utilize the facility of this size we felt given the attractive pricing and the opportunity and the unsettled nature of today's credit markets, the time was right to lock up an arrangement that was appropriate to our future.

To the balance sheet some of you have undoubtedly noticed an increase in our receivable balance, this quarter which now stands at $29.6 million. While this appears to be rather large it is important to know that our shipments during the quarter, during the second quarter, were heavily weighted toward the end of the quarter with $20 million shipped during June alone. So the timing played a big part in that growth in that receivable balance and accounted for the increase to $29.6 million. And that is all that I had to add there. Pete.

Before we go to Q&A, for those of you that are just getting on with the webcast right now, we did have some technical difficulties in getting that started up. The archive will be available, though, on the website following the call so you will be able to listen to the formal remarks there. And we also post the transcript once it is available usually about a week from now. So Pete, do you want to start the Q&A?

Before I go to Q&A I want to talk about raising our revenue forecast. It is usually something people want to know a little bit about.

Okay, sorry.

We are raising our revenue forecast as the press release said, to somewhere between $175 million to $185 million. That is a little bit of a wider range than we would normally expect maybe at this time of year, but there are some things that are driving the business that could cumulatively throw us to the high end, could cumulatively throw us to the low end. We consider this, though, this range pretty safe. And again, there is a little bit of upside potential maybe beyond that. There is certainly always downside potential in -- if you look from the certain experts in our market. Again, we recognize and we don't mean to belittle the macroeconomic concerns that are coloring the way a lot of people are looking at the aerospace industry. It is historically a cyclical business. It is likely in the future to be a cyclical business.

We are in a unique time for some very real reasons, we feel. Oil prices are definitely high, and they are definitely stressing airlines around the world. And how they respond to that and how that gets worked through the system could potentially dampen things for us. The subprime crises, finance crisis in general is something that has yet to play out according to many experts in the economy. But when we get done watching the news and we get done reading the paper and we go back to our offices and we look at what is going on in our business, things continue to be very, very strong.

There are little pockets of weakness here and there that are pretty well documented, troubles with the VLJ market getting going; I don't necessarily view that as due to any macroeconomic trend. There are slowing sales in the single-engine piston line at major manufacturers for various reasons, and there are some stretch outs and slip outs of deliveries from certain airlines to buyers. But by and large backlogs at airframe manufacturers continue to be at record levels and growing, especially in the business jet arena. I think the cheap dollar is one thing that is really helping the US aerospace industry.

US made airplanes are on sale from the rest of the world's perspective right now, and with backlogs going out many years, it seems to us to portend pretty strong demand for the foreseeable future. And as some major well-known platforms get on track, including the 787, the A380, we expect to continue to have good news, balance out bad news. We are at a loss to explain a lot of the pessimism that the markets are placing on the aerospace industry.

And with that as a little pep talk, I guess I will open it up for questions and answers now.

(OPERATOR INSTRUCTIONS) Michael Ciarmoli, Boenning & Scattergood.

Thanks for taking my call. Real nice quarter. I guess Pete or Dave, if you can give me the breakdown; what kind of percentage of revenue did Panasonic contribute in the quarter?

Give me a second and I can get that for you. If you have any other questions, go ahead.

And along with that how much of your receivables is made up by Panasonic? And then I guess while you are digging up that I will go to the next question. There was obviously a big sequential increase in your commercial transport business. Do you see that being sustainable, and were there any particular programs that came online? I guess I'm trying to understand if it is being driven more now by OEM side of the business. You guys have talked about the retrofit to some extent in the domestic market being very slow if not stalled completely. So I'm trying to get a feel for what is really moving the needle there.

It is a very good question. Dave, first, are you ready to answer the other one?

Yes, they are in that 24%, 25% range of sales. I don't have the detail on the receivables.

That is obviously a very large percentage of our cabin electronics and commercial transports sales. One of the answers which isn't probably one that is ideal is that the way we have a business arrangement with them, we don't always have a lot of foresight. And things can go up one month and down another month and they can push things in or pull things out pretty quickly. We bill to a forecast. We invoice when they take delivery. So there is a little bit of clutter there.

Our general sense is that -- also to back up one more step, their system can go equally as well on a new line fit airplane as well as a retrofit that has been flying for 20 years. So when we sell to them it is not always clear to us how their mix is changing between those two kinds of markets. Our general sense is that their business is shifting from one that was more heavily weighted for field retrofits to one that is more heavily weighted towards new aircraft production. And if we had to guess at this point we would guess that is roughly a 50-50 split.

Okay, and then just to get back, do you think this rate is sustainable? Do you see anything out there? I know you've got it seems like there is the Talus relationship that should be starting to contribute, build rates. If you can give us an update on maybe where the 787 and A380 stand. And I know it sounds like the test flights or first delivery for the 787 should be third quarter next year, but if you can give us a sense as to what your lead time to some of those programs might be. Just to try and get a sense of when we start seeing some meaningful revenues there.

Unfortunately that is hard for us to do. That is an active point of discussion at this point between Boeing and its major suppliers for that airplane. Because Boeing in many respects from our perspective we believe would like to get the parts, but they would like to pay for them when they ship the airplane. And the suppliers would like to ship the parts more closely to when they are going to ship the airplane. So there is some discussion going back and forth there. But we are starting to see revenues ramp up for Talus, in particular the early 787 deliveries seem to disproportionately have selected Talus IFE systems. So we are experiencing demand from them in that regard. I guess I would say that we expect 787 volume deliveries to begin happening over the next couple years, and we would expect to be kind of a year ahead of that when we start seeing real demand.

Okay, that is helpful. And just on the backlog, what percentage of that is shippable over the next 12 months? And if you can give us a sense as to the composition maybe across your different -- the segments, military, commercial and business jet.

I will turn that to Dave.

We don't have it broken out by product lines or the market, but and actually in the room I am sitting in here I don't have the detail. But during the next six months, in other words by the end of this year, roughly $80 million of the $101 million backlog is currently scheduled for 2008.

That's not exactly what you asked, but that gives you a sense of it, right?

Yes, so you have $80 million scheduled to ship for the remainder of this year. That would put you at about $168 million in revenues, so you're really not accounting for a lot of book and ship business in that guidance to get to the low end. You would only need $7 million of book and ship business over the next two quarters. Is that fair to say?

That is the math, yes; but things can slide out of that schedule number, too. So it takes a lot of that into account. And we are getting closer and closer to the end of the year and we would like to think that we are going to have orders pretty quickly for delivery that is still going to happen yet this year.

Thanks, guys. I'll jump back in the queue. I've got some more, though.

Tyler Hojo, Sidoti & Co.

Good morning Dave, Pete and Deb. I guess you guys were breaking up a little bit just in the prepared commentary, but huge quarter in cabin electronics. And I guess what I am wondering and you might have been alluding to it a little bit on Mike's question, but your expectation is basically that that strength is sustainable over the next say two quarters. Is that fair?

I think so, yes. Based on the forecast that we have and the build rates that we are planning to we expect to be at the levels that we've been at in the recent past.

Okay, and the kind of strong sales volume this quarter didn't come as somewhat of a surprise; it was kind of what you guys were anticipating going into the quarter? Is that fair?

I would say it was in the range, maybe a little bit above expectations but not significantly so.

Okay, and just to I think the point that Dave made with a lot of the sales shipping counted in the last month of the quarter, is it fair to say that you got a lot of book and ship business kind of hit you in the second quarter? Is that a good way of looking at it?

Not necessarily. I think it was more so just a matter of when we got the instructions from our customers and when we got our stuff in order to get the stuff out the door. I don't necessarily think it was a lot of book and ship, no.

Okay, that's fine. And just, I mean when we think about the guidance, and I guess Pete you alluded to the fact that maybe there could be a little bit of upside to that range, but you look at the high end of the guidance and basically I think what you guys are suggesting is that the call it $48 million in sales we saw in the second quarter is kind of doable on average in the back half of the year. So when I think about that and I think about the fact that it seems like R&D should be coming down a little bit from the 5.8 that you put up in the second quarter, should the read here be that kind of a $0.60 plus average EPS number for the back half of the year is doable or maybe there was some mix in the second quarter that keeps that from happening? How should we think about that?

You know we try to stay away from providing guidance on earnings per share, but I think your comment on the engineering and development costs we expect for the year that we are going to be in that $20 million, $22 million range. It looks like right now if I had to bet I would say it would be up closer to $22 million than down at $20 million. But a lot of it depends on us being able to get the resources on board to accomplish the things that are on our calendar to do. So I think the margins that you see were strong this quarter. A lot of it has to do with mix, and we talk a lot about mix, not necessarily being product line or market driven but more program driven mixes. And we are not going to get into the details on which programs are better or worse for us. But we have a lot of programs, and the mix was very good for this quarter. But I think if the engineering and development were to slow down, then you would see naturally stronger EPS. But I am not anticipating that right now.

And could you kind of couch that statement in terms of the mix? I guess on the scale of one to 10 where would the mix be me this quarter; just to kind of get some sort of general understanding of it?

I would say it was up around seven or eight.

That's very helpful. Okay, great. Thanks, guys.

David Cohen, Athena Capital Management.

Good morning, guys. Welcome back, Debbie. We missed you last quarter.

Thank you.

Let me just tackle the guidance question in a slightly different way. If we look at the first half you generated $89 million in revenues. If I were to double that, that would put me toward the low end of the guidance range for the year. Could you talk a little about the margin dynamics for the half and whether -- if we were to generate the same amount of revenues in the second half, whether the second half net income would be likely to be comparable to the first half or whether there are some dynamics going on that would make that not the case.

We are looking at each other trying to figure out how to answer that. I think the trend to keep in mind is that we are continuing to make investments in the business where we find opportunities. That we think are going to propel us not necessarily in the fourth quarter, but maybe in the fourth quarter next year or the year after. And to a certain extent those, I call it kind of infrastructure or investments in the business, both in terms of R&D but also in terms of general systems and personnel, we are ramping up to be a bigger and better company. So one answer to your question is if we do exactly the same revenue in the second quarter as we did in the first quarter and everything else stays the same except for the infrastructure costs continue to rise. There might be slightly lower margins, but that difference could be more than offset by mix change or revenue boost or anything like that. So I don't think we see significant changes that are easily explainable.

I would agree.

Okay, one more follow-on to that and then I have one totally unrelated question. You've given the $20 million to $22 million E&D target for the year. You are at $10.9 million for six months, which is almost exactly half of $22 million. That suggests a certain leveling off, and I know that how much you spend depends on how big the opportunity that is. But do you want to take a stab at giving us a sense for whether that leveling off is likely to continue next year?

I think it is a little bit beyond the planning horizon but I would be surprised if it was less.

Okay, fair enough. And then the unrelated question is this; I saw the press release on the new business the other day, and I'm wondering whether I need to take you out of the aerospace column in my portfolio run, or whether I should expect you to continue to be largely an aerospace company.

I think if you recategorize us you would be guilty of taking a very short-term trend and extrapolating it very far into the future. We do have certain pieces of business that are not purely aerospace. That is one of them. And it is one we've been working on for a while. We have some missile products out of our AES facility, and we look at those as kind of situational opportunities that come up from time to time. And they largely come out of aerospace related pursuits with aerospace related customers. They don't necessarily represent a significant strategic move away from our core business. So I would look at that TLS press release in that vein.

Okay. Thanks a lot, guys.

Keep us categorized as an aerospace company.

All right. Fair enough.

[Edward Dutch, Partners for Business]

Congratulations for the (inaudible) team on this quarter. Kind of following up on that previous comment, you mentioned not making a strategical move, but considering it's a situational opportunity is there any advantage to exploring or expanding your product use? Especially in the electronic entertainment systems outside of the aerospace industry?

I guess I would, of course, Ed, there always are opportunities out there and trying to be an entrepreneurial kind of company we keep our eyes open for them and we respond to them accordingly. If we get to the point where we see an opportunity that we think lines up well with our skill set, we will try to go after it in a systematic and strategic way. But the reality is that we are so much more familiar and established in our existing aerospace market, and we continue to see pretty good opportunities there, and we continue to enjoy a pretty good reputation there our focus will continue to be on the aerospace side largely. If we have something come up we will pursue it, but if we were to announce a major initiative outside of the aerospace industry we will talk about it and tell everybody about it. We don't anticipate that happening at this point.

Do you say that because maybe the margins are better within aerospace than in the other industries?

I think companies tend to do best in markets and segments they know and understand, and we've been at this one for a long time, and we've done pretty well with it. And we think we've got a lot of room to run.

Keep running. Congratulations next quarter.

Scott Lewis, Lewis Capital Management.

Great quarter. I wanted to ask about the new EPDS on the business jet; that still on track?

Mark, you haven't said anything yet. You want to answer that one?

Yes.

Mark is always a man of many words.

It is early out there on the West Coast, as you know.

Yes, it's still (inaudible)

Okay.

I would go back to what -- we look at EPDS on several different types of aircraft. There is some question, as Pete mentioned earlier, on VLJ market and where that is headed.

Okay.

To color that in just a little bit, we are continuing to work; we've been named a supplier on a new business jet. We're expending a lot of resources and a lot of energy on it. We have not gotten to the point where we have permission to publicize it yet, but it is definitely making up a big portion of the R&D expenditure that we make every quarter.

Okay, but you have signed a contract for it?

I don't think technically we have; we've got a memorandum of agreement and I don't -- we haven't signed that right, Mark?

That's right. That's correct.

But even if we had signed it, the customer is such that they want to control the distribution of the information so they get to say it first.

Okay and my second question, Pete, is on the military increase, a nice increase you had there, was that kind of a new product or just an increase in existing units for existing platforms?

It was just general volume increase. You know we are on many, many different platforms. We had an increase in our spares deliveries during the period, but it was really across the board on many different programs, platforms, customers.

Just to refresh my memory on the, it is a cruise missile platform?

Yes, the Tactical Tomahawk?

Yes.

Yes, we probably did have a little bit of an upbeat (multiple speakers) on that one.

Yes, we had an increase on that.

We had some issues that pushed some deliveries from the first quarter to the second quarter. That's a good memory.

Okay and that product is not ending its lifecycle anytime soon, is it?

No, not as far as we can tell.

Okay, super. Well, thank you. Great quarter, guys.

[Russ Taylor, Cheshire Capital]

Thank you, gentlemen. Could you give us a little more color on the VLJ market and the factors that you alluded to some things changing and perhaps maybe slowing in some areas; but could you give us some more color on that?

The VLJ question. We got through like seven people before that came up. I'm amazed.

All my other questions have been answered.

Usually it is number one or number two. In fact Scott came and went and did not ask about it. That is a first. Anyway, the VLJ market, we are heavily involved. For those who are not familiar the VLJ is a very light jet. A couple of prominent programs, one was the Cessna Mustang, although they don't appreciate it being called a VLJ, so my apologies in advance if anybody is listening. The Eclipse 500 is the other one that is of some prominence. We have a lot of work on that market. I think it is a market in transition in many respects.

It is pretty apparent that the widely anticipated take-off of the air taxi operator hasn't quite developed as some proponents guessed. And there is some pretty compelling reasons on both sides as to why it might still yet develop at some point depending on how well the commercial carriers adjust to changing markets of their own.

There is also reason to think that demand for that type of product and service was just over hyped. And it is not going to develop. We don't know. But what we do know is that most of the VLJ's are coming in at price points where demand can be very strong even excluding the air taxi market. And today there are quite a few product offerings in the market in the $500,000 range, small single-engine piston aircraft. There are quite a few offerings in the business jet market kind of beginning at the $3.5 million to $4 million range. In between the $500,000 and the $3 million there are really not a whole lot of prominent established product offerings.

And we think that the advent of these lighter, smaller, less expensive jets are very promising, and we think that our products, especially our electrical power distribution system that we were just talking about, is very well suited for that type of product. So we continue to be pretty optimistic.

You didn't ask specifically about Eclipse. Some people on the (technical difficulty) might be listening. They have been in the news quite a bit recently. We can't speak for them but there is obviously some issues that they are dealing with, trouble in paradise so to speak. We continue to do everything we can to help them along and to make that program successful.

From our internal business planning perspective I will tell you that our internal expectations of what they were going to do in terms of shipping volume this year is coming into line very, very well with their revised internal shipping estimates of their own. So we are pretty comfortable with where that is going with respect to how it affects our business at this point. That is a short answer and a long question. Did I get it there?

Great. Also, could you give us a little bit of color on the 787 and the A380 content on each platform? And I know someone earlier tried to get you on the timing of when you would see sales so I won't push you on that one.

Well, we have a wide range of offerings that could go on those airplanes, and it is probably reasonable to assume that our volume there would exceed (technical difficulty) if we put inseat power on an airplane like that, the number that we generally use for estimating purposes is somewhere around $750 a seat. I think we talked about that before. So it can be higher, it can be lower. It depends on the configuration of a specific program. What we do with, for example, Panasonic versus what we do on a stand-alone system are two pretty different things. But that gives you a range. It can be quite a bit of money. A fully loaded A380 will be very good for us.

Okay, I am looking forward to the date that it is launched. Lastly, CapEx expectations, do you have any programs you are looking at that we don't know about yet that are going to cause you to need to put much money into CapEx?

I don't think so. I think we will continue to operate at a level where we have been.

Yes, we are still looking at $6 million to $8 million this year in CapEx.

Okay, great. You guys have done a great job. Keep it up.

Dick Ryan, Dougherty & Co.

Good morning. Pete, just a little more clarity on yesterday's orders; $8 million in orders for this year. When will those products start shipping? I know you had a comment in there that it will ship through 2013.

They've already started. That is a project that we've had underway for a while. This is a repeat order, so we finally just one of the realities of our world is getting a press release approved sometimes can take many months, and so we finally got that one out. And we let it go yesterday because it was a pretty major driver to our booking performance in the second quarter, and instead of releasing it next week and not being able to talk about it today we decided to do it yesterday.

The actual orders were booked over three quarters, about $4 million of that $8 million program was booked in the second quarter. About $2 million was booked in the third quarter, and the balance was in the first quarter.

Okay, now is this for new Abrams as they roll off the line, or is this a retrofit opportunity, and is there -- can you kind of put a potential how big could this opportunity be?

It is for both retrofit and new builds and I think it's one of the situations where an Abrams tank is going to have this system. And so they build more Abrams, we will get more orders. But this is a pretty complete order as we understand the program.

They are installing it out in the tanks in the field as well as the tanks coming off the line, so we ship a part. We don't necessarily know if it is for a tank out in the field or a tank that is coming off the line.

You don't know how many tanks are in the field at this point?

No, I don't know that. Sorry, Dick.

No problem.

We can try to find out.

No, that's fine. In conversations with customers on delivery schedules any anecdotal conversations of people getting a little hesitant on delivery schedules, any talks of pushouts or is any of that occurring?

Very little. I have heard some bits and pieces here and there, in the business jet world about the big fractional guys exploring certain delivery stretch out options. But it is more in a speculative kind of posture rather than, oh no, we can't take that airplane next month kind of thing. We have heard that and we understand that the single-engine piston market is slowing pretty dramatically. That is probably not real surprising given mortgage issues but those are generally individual buyers. But the business jet side continues to be really strong, and a lot of that is due to foreign sales and a lot of that is due to cheap dollar, and emerging countries getting wealthier and wealthier. So from an overall perspective I guess I look at the pockets of weakness as being just that, little pockets and the overall picture continues to be pretty strong.

Great. Thanks, guys.

Jay Weinstein, Oak Forest Investment.

You guys are giving me whiplash. Can you please cut it out?

Well put.

All right; I only have one question, most of them have been answered. A follow-up on David's question but in the way that an earlier gentlemen I forgot put it and I like the way he put it, is that on your scale of 1 to 10 and he asked about the margin mix in the second quarter and David asked about the first half. So on that same scale how would you put the first half, in that same seven to eight range? Is it more like a five? Or as best you can.

I think I answered that (multiple speakers) said 7 to 8 in a quarter, but I was wondering about the half as well. And what David of course is getting at is in the lumpy business the longer periods you can look at it of course it should be somewhat smoother quarter to quarter.

While Dave is dreaming up his number here let me, I would say (multiple speakers).

I like the way -- I forget who it was but whoever you are I like the way you phrased it because it allows us some semblance of information without giving away too much.

I think that was Tyler, and I think we can expect to get that one again, but anyway, my perspective is that the big difference between the first quarter and the second quarter was more driven by the overall volume in the business. We have a certain amount of fixed cost to carry and we get real profitable when we drive through those volumes. But with that stalling for time, Dave, what is your --?

Since it is an inexact question, I expect a very inexact answer and obviously -- (multiple speakers)

Looking at the judges, I think the first quarter was a similar mix but not quite as favorable as the second quarter, so it would be I guess a little bit one mark below.

Okay, we are just sort of trying to figure out what to expect in the world going forward since you've confused us so much on a quarterly basis. I kind of think you've left me speechless; all right I will get back in line.

That's not like you, Jay. We will wait for you.

You've tired me out. You guys have exhausted I think all of your shareholders that have been around for more than about a week and a half, we are all exhausted.

I understand.

I'm sure you do. All right, thanks.

(OPERATOR INSTRUCTIONS) Michael Ciarmoli, Boenning & Scattergood.

Just a follow-up. Dave, I guess you've talked in the past about the business on a quarterly rate being sized to do anywhere I guess $44 million, $45 million where that referencing I guess where your margin expansion leverage really kicks in. Can you talk about the facility expansion or how you guys are rounding out that facility and maybe where you guys are -- is that breakeven point still around that same level or has that pushed higher?

Are you talking about our building?

I am talking about your building in terms of how full that is right now in capacity and I guess is the breakeven point for your business or where that leverage really kicks in, is that moved above that $44 million, $45 million target?

Let me take a cut at that. We built a new building here in East Aurora where we are headquartered East Aurora, New York, outside of Buffalo, and that facility is -- I would guess only 10% filled. It is pretty empty. And that is good because it gives us plenty of room to build into. The other part of your question I would say the margin question, the building itself is not a big driver to our margins. It is all the stuff that we would put in it in terms of the people and the equipment and the engineers and the work in process and everything else.

But we got to the point where we had outgrown the facility as it was, and it became in our opinion most economical to maximize the building on the existing lot. And those of you who have been here know we are kind of wedged back in the corner of an industrial park. So we built a building that we did not expect to fill right away. We think we definitely are starting to and we've got other prospects even within our own company where we might move things from one -- maybe an outside supplier to an internal process here, for example. So we've got plans for that that are kind of working themselves out. But I don't view the building in and of itself as changing our breakeven, so to speak.

Okay, then I guess what I'm getting at it sounds like you are still sized at that breakeven so we can expect these kind of margins going forward.

Yes, I think we had a certain revenue forecast for the year, and we have a business plan for the year, and the major change in that business plan has to do with the higher level of engineering and development expense. And other than that to a certain extent despite all the pessimism with respect to the aerospace industry that is out there, we have been pleased with our results that have kind of gone along as we hoped it would.

Okay. It's probably too early to tell but on the engineering and development, where do you see -- do you have any reason to believe that these levels kind of increase dramatically going forward. Beyond the second half of this year or do you see a modest up -- or is it too hard to tell depending on what projects might be out there?

I think it is a little hard to tell, but I said earlier I don't see it going down. But I don't see a dramatic increase either. It is not as though there is a big project out there that we know of that we are just waiting to spend $30 million on.

Okay, fair enough. Thanks, guys.

Tyler Hojo, Sidoti & Co.

I just want to go back to the cabin electronics for a second. I think why I was so surprised just by the performance there looking certainly at the December quarter and the March quarter, my thinking was that you weren't really going to see a substantial pickup in that business until kind of the retrofit market came back. And just given the status of the domestic carriers which I thought was where your next opportunity was, I was surprised and it seems like OEM is picking up, which is great. But maybe if you can just talk about kind of the second leg to that and when you think -- what your thinking is just in terms of the retrofit market on the cabin electronic side.

Well, we continue to be pretty optimistic about North America. Things may be sliding a little bit, but we continue to see pretty good expressions of interest, and we continue to think that that is very fertile ground. So we haven't got kind of the big order that we thought might come at this point. But we haven't given up and it is not forlorn of that situation at all. I think one of the dynamics which is happening is that the systems that Panasonic in particular is selling to the ISE marketplace, the mix that they are selling is very heavily skewed towards programs that we are involved in. We are not involved at all their programs, so part of our market forecast has to make assumptions about what the overall demand in the industry is doing and then how that demand is going to be satisfied with the three or four different families of products that Panasonic might offer, for example.

It turns out that the one that we are on is doing really well, and so it is increasingly being put on as almost standard equipment on certain line fit programs with certain airlines, and we are benefiting from that. So that trend is helping to offset maybe the retrofit decline in North America that we talked about previously or retrofit delays.

Okay, and if you had to take a guess what would you think -- what would you think just timing wise, when you expect that to come back?

Mark, do you want to venture a guess on that one?

Wow.

Are you going to break out the crystal ball here?

Prices are going to (inaudible).

Yes, it is really hard to say. The travails of the North American airline market continue to be pretty well documented. I'm not sure we can lend anything over and above what is already being said. On the one hand people still will continue to travel and there is reason to believe these guys will get it figured out and these higher oil prices will probably result in higher ticket prices, and they will learn to make money in this new environment. In the meantime are they going to go ahead and do kind of major fleet retrofits and upgrades? We are just not in a position to know that at this point.

All right. That's fair. But I think if we look at, to go back to your revenue guidance, 11% to 17% year-over-year growth is I guess what it is low to high, and it just seems like that kind of excludes retrofit coming back. Would maybe a good way of looking at the story be that you are talking about low to maybe mid-double-digit growth? And maybe it accelerates from there if retrofit comes back, or is it too early to really talk about that?

Well, one of the things that your question raises is what does it mean to have retrofit come back.

Right.

Our AES operation developed this MC power product in the mid-90s pretty much from scratch. There was not that kind of product out there at that time, and the revenue levels that we've seen in recent years are all-time highs. It has just never been there before. So for it to even stabilize at the current levels, I think is pretty good. We think there is more demand, and that demand hasn't materialized due to certain economic conditions in certain markets. But I guess I would be a little careful to characterize it as some kind of slump.

We see the current demand level being pretty healthy business level. We think there is room for growth and the growth would come in part from the demand for retrofits like you are saying. The other part of it is the increasing standardization, so to speak, of line fit airplanes. More and more this is becoming a standard feature that high paying passengers, especially on long-haul flights expect to have. So when it comes to the 787 and the A380, for example, the latest airplanes, we expect pretty much every airplane to have a system, and that is a much higher ratio than what was ever expected in the past.

And we expect those new airplanes to have systems from nose to tail rather than just in business class, for example. So as those trends continue to spread throughout the industry there is reason for us to be optimistic about our prospects. So all those things are kind of playing out all at once, and we would hope that the sooner the North American airline market gets its capacity issues sorted out, gets its business model issues sorted out, hopefully oil comes back to some reasonable level by historical norms we could pop out of whatever the delay has been; to the extent there has been a delay, pretty quickly under those set of circumstances. If oil jumps to $200 a barrel my guess is there is going to be a lot more hand wringing. Does that kind of answer your --?

No, it definitely does, and thanks very much. I appreciate it.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Very good. Thanks for tuning in. We will be back with you in another quarter to talk about third-quarter results. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.