Astronics Corp (ATRO) 2008 Q4 法說會逐字稿

Greetings and welcome to the Astronics Corporation fourth quarter 2008 earnings conference call. At this time all participants are in a listen-only mode and 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, Ms. Deborah Pawlowski, Investor Relations for Astronics Corporation. Thank you Ms. Pawlowski, you may now begin.

Thank you, Jackie, and good morning, everyone. We appreciate your time this morning and your interest in Astronics. On our call today is Peter Gundermann, President and CEO; Dave Burney, Chief Financial Officer; Mark Peabody, Executive Vice President; and for his first call with us today is Brian Pierce (sic), who is Executive Vice President, General Manager of DME.

Pete and David will cover the results of the quarter and the year for you and talk about the prospects for 2009. If you do not have the press release that went out this morning it is available at our website at Astronics.com.

As you are aware, we may make some forward-looking statements during the formal presentation and the Q&A portion of this teleconference. These statements apply to future events 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. They can be found on our website and at the SEC website, www.SEC.gov.

With that let me turn it over to Peter to start the discussion.

Thank you. Good morning, everybody. Thanks for tuning in. My comments today are going to focus first, backwards at the quarter we just completed, the fourth quarter of 2008, and then we will summarize the year 2008 from a performance standpoint. And then we will look forward to 2009 before we go to questions.

The fourth quarter from our perspective overall was a pretty good quarter. Revenues totaled $44.4 million. That was our second-highest quarter ever, up significantly from the fourth quarter of 2007. I am not going to do a whole lot of year-over-year comparisons because if you look back 2007 fourth quarter was a pretty weak quarter so most comparisons look pretty positive. We are also up, though, from the third quarter of 2008, up 10% in terms of revenue. So revenue was strong.

Bookings were also pretty strong at $41.3 million, not quite a one-to-one book-to-bill but in the current environment a level that we felt was pretty positive. Our earnings for the quarter were clearly affected by a pretty big write-down that we took related to our activities with Eclipse Aviation which filed for bankruptcy in November. We took a $7.5 million write-down for receivables and for inventory and tooling.

The simple matter is that Eclipse set up a business plan that was dependent on some pretty high aircraft production volumes. We went along with that and it's pretty clear at this point that that original model based on air taxis and some really high volumes is not going to come to fruition.

We should say that Eclipse is working its way through the bankruptcy courts. We don't really know exactly how that is going to turn out. We assume the company will continue to survive and will continue to make aircraft, and we are retaining approximately $2.7 million of inventory on our balance sheet to support that anticipated production rate over the next year or two. And for completeness, in 2008 we had about $8.8 million in revenues to Eclipse.

So given the write-down our net income for the fourth quarter was a small loss of $180,000 or $0.02 per diluted share. I know everyone can do the numbers, but without the write-down our net income would have been pretty strong, estimated at about $4.7 million during the quarter or 10.6% of sales.

For the year, 2008 was also a pretty strong year. Revenues were $173.7 million, an increase of almost 10% over 2007 and our best year ever. Bookings for the year, importantly, were $170 million almost identical to our relatively big shipping numbers with a book-to-bill ratio of 0.98, just shy of 1. Our net income for the year was $9.96 million; 5.7% of sales or $0.94 per diluted share, down from $1.44 per diluted share in 2007.

And, again, we have talked over previous calls about our relatively high infrastructure cost in 2008 versus 2007 as the Company grew up so to speak and our relatively high engineering and development expenditures in 2008 versus 2007, which I will talk more about a little bit later in the call here. Then, of course, the Eclipse write-down had a pretty big impact on our margins at the end of the year also.

Looking at our markets and our product lines for a moment, I am going to refer here to page 8 of our press release. Excuse me, page 7 of our press release for those who want to follow along. For the year 2008 Transport sales made up about 60% of our total. Commercial transports are the big airplanes, the stuff made by Boeing and Airbus and flown by the major airlines around the world.

Our sales to commercial transports were up marginally for the year, essentially flat, up about 4%. Military was about 20% of our sales and an important driver of growth during the year with totals up about 36% and business jets were the remaining 20% with sales up about 9% for the year. So basically commercial transports are the majority of the business and we were flat for the year. Military and business jets together were 40% and accounted for most of our growth.

In our Product lines, cabin electronics continues to be our dominant product of our base business prior to the recent acquisition, making up about 49% of our sales for the year. And flat cabin electronics, again, primarily is our product line that develops and distributes power to passengers in commercial transport cabins and to in-flight entertainment systems.

Most of our growth came from our airframe power which is our product line where we develop core power or system power for complete airframes and our lighting product lines, which were individually up somewhere from, say, 10% to 26%. You can look at the table, the second table, on page 7 of the press release to get a sense of that.

We like our diversification as a company. When our certain product lines are performing a certain way a lot of times other product lines make up the slack so to speak and contribute to pretty positive results.

Looking forward to 2009 we think from today's perspective that 2009 is shaping up to be a reasonable year for the Company. Certainly better than one might expect given the general economic gloom that is pervading the world these days.

Talking about our core business first or our base business, I should say, prior to the acquisition. We are forecasting revenues to be down somewhere in the neighborhood of 5% to 10%. That is an estimate and it's an evolving estimate as probably everybody understands.

Our main assumptions in that estimate are based on the expectation that commercial transports will be again flat this year. Our understanding from the major OEMs, Boeing and Airbus in particular, is that production rates will be overall pretty flat this year. There are some voices predicting cuts, especially later in the year. We will see if that is true, but at this point we feel our job is to tell you what we sense from the customers and we sense things will be flat.

In addition, we are working in our estimates from our important in-flight entertainment customers, specifically Panasonic and Talus. Based on what we understand from them, we are expecting our overall sales efforts directed at commercial transports to be essentially flat in 2009.

We are similarly expecting the military part of our business to be stable and flat. We are going to continue to do some pretty important work on some pretty good platforms. We think that that work is not directly and immediately affected by economic problems in the worldwide economy, at least immediately. So a big part of our business, commercial transports and military, we are expecting to be pretty flat in 2009.

Business jets are a little bit of a different story. There has been quite a few headlines in this area and I am sure everyone is familiar, but new orders have dropped for the OEMs pretty significantly and financing is making delivery of airplanes problematic. Accordingly, major OEMs -- everyone from Cessna and [Hawker Beech] -- our major customers, for example, have cut their production plans pretty significantly. In addition, as we look at 2009 we are obviously not building in the same $9 million of shipments to Eclipse that we had in 2008.

So collectively we think business jet sales will drop pretty significantly for us in 2009. But the volume drop, though, I should point out is somewhat being offset by higher ships set content over the airplanes that are being built. In other words, if customers drop production volumes they are tending not to drop the newer airplanes that they have introduced and those newer airplanes are the ones that tend to have our higher content levels. So we are not getting a proportional drop in revenues compared to what the top numbers look like in terms of production rate drops at the OEMs.

We aren't going to talk specifically about the details related to our DME acquisition recently, but with respect to going forward, let me tell you that after two weeks I continue to be pretty impressed with the business and pretty optimistic about its contribution to our company. The bottom-line contribution is hard to estimate in part because we don't have the allocation of the intangibles done yet. That will be disclosed in a filing in April, we expect.

But the top line we are expecting DME to contribute collectively, the two operations, somewhere in the neighborhood of $75 million to $80 million in revenues to us in 2009. Together between our base business and the DME business that gets us to the neighborhood of $230 million to $245 million. Our combined backlog at year-end or rather our base backlog at year-end was $89 million. DME's backlog at the acquisition in late January was $45 million, so we are going into the year with a backlog combined of about $134 million to support that $230 million to $245 million shipping budget.

A final note on our engineering and development expenses. The press release talks about an estimated budget in the $20 million range. That is down slightly -- and that is just for our core business, I should say, or our base business. That is down slightly from what we spent in 2008.

As we looked at that line, it's a big number obviously. A majority of it, approximately three-quarters of it we feel we are under obligation to pursue with our customers. An example is a press release we put out yesterday where we are doing the electronic power distribution system for the Lear 85. This is a derivative to the system of the system that we put together on the Eclipse airplane.

The Lear 85 is a bigger and stronger business jet and we are very pleased to put our EPDS on that airplane. We have been working at it for a little while here. It took us a while to get the contract finalized and to get everything okayed to make it public, but we would direct you to the Bombardier and to Leer for details on the airplane.

But it's a first of a new family of airplanes with the Learjet product line and we are pretty excited about its prospects and we are pleased to put that system on the airplane. Of course, the development of that system is pretty expensive and it's one in today's world where suppliers -- that expected to foot with obvious returns coming when the airplane goes into production. So a big part of our obligated E&D budget is dedicated to that program, for example.

We have another significant portion of our obligated expenditures directed at the IFE market. Our attitude is that we have a very strong and positive position with our IFE customers in cabin power and we essentially will do whatever we can, whatever they ask, to maintain and further that position. They have asked for some things and we have agreed to do them. So to the extent that we want to protect and grow that portion of our business, we will continue to spend money accordingly and spend resources accordingly.

So of the $20 million, again, we view $15 million of it as expenditures that are pretty much directly obligated to specific expectations of specific customers. That leaves about $5 million that might be considered discretionary. I will tell you that the majority of our discretionary expenditures in 2009 will go towards some new technology relating to what we call higher reliability starter generators for turbine engines.

This is an important extension of our electronic power distribution system. It's one that we think has significant advantages to operators in the market and it's one that we think the market is looking forward to pretty strongly. We are not in a position today to say much more about it than that, but we are working with some high profile OEM customers that are expecting to seriously consider this technology for upcoming requirements that they have in their fleet.

So, overall, an E&D budget $20 million. Again, for a company of our size we realize is a significant investment. It's down slightly from what we spent in 2008. A majority of it we feel we are obligated to continue and pursue without -- in the interest of protecting our franchise and protecting our customer base, some portion of it, about a quarter of it is discretionary. But we feel that those funds are going towards really important technologies that could have pretty significant impacts on our business in the near term.

This discussion on E&D budgets excludes DME. I am not prepared to talk about that today but DME, obviously, also has certain R&D-related expenditures pertaining to products and technologies that that business is expending. But we are not going to talk about that so much today.

I think that concludes my prepared remarks. So, Jackie, we are ready for questions now.

(Operator Instructions) Tyler Hojo, Sidoti.

Good morning, everybody. First question, just in regards to R&D, I appreciate the color you gave but could you maybe just talk broadly about what the DME business looks like from that perspective?

Well, I will put Brian on the phone here. It's Brian Price, by the way, but we will let Brian answer that question.

In terms of [IRAD] for DME?

What the intent is for development in general, kind of what the goals are or what we are looking at.

From a DME viewpoint what we are developing are a radio test solution product line. We have contract with the Marines providing fairly complex radio test gear to support the emerging software-defined radio suites. And in parallel to that what we are doing is we are developing a family of these testers to test it at all levels of the maintenance round from the depo all the way to forward deployed.

I mean directionally, are your expenses going up, are they staying flat, or are they going down in 2009?

Over 2008?

Yes.

Staying flat.

I think it's safe when in doubt to kind of view DME as very similar to Astronics in momentum and trust. It's a company that has been growing pretty dramatically and it has been over that time period making relatively big investments in technologies to support continued growth. But like our base business in 2009, it's a little bit of a retrenchment or a little bit more of a conservative look at what the opportunities are and what the expenditures should be.

Okay, that sounds good.

But I would add to that, Tyler, that looking at the list of options or the list of potential here there are very significant contracts out there on the horizon. And there are things that we are certainly interested in pursuing and investing in just like our base business.

Pete, that actually reminds me, last conference call I was asking you just in regards to payback periods for some of these R&D investments that you make. I believe, I'm not certain, but I believe you said that you were kind of going to think about it and maybe get back during this conference call. So any kind of further thoughts there or have you just been kind of tied up with the acquisition and all of that stuff?

I remember your request, Tyler, and I thought I actually responded to it. I am a little taken aback, but specifically the payback. Mark is on the phone. Learjet is, on the 85, expected to go into production quite a few years out. Mark, do you know --?

Yes, 2012 I think is --.

Okay, so that is an example that kind of defines the outside range of payback for some of our programs. I will tell you that some of the others, for example, some of the things we are doing with the IFE guys could be significantly quicker than that because they obviously go out and sell to an installed base of airline customers. So I don't think it's unreasonable for things that we develop now to be elements of our revenue stream, say, next year in 2010. Mark, do you agree with that too?

Yes, that is accurate.

So I would say in their somewhere is the range. Obviously, when you are doing work on a Lear 85 or you are doing work on the Joint Strike Fighter it's a longer-term investment. But some of the other things we have are shorter than that.

Already, thanks for that and just one more for me. I am just thinking about this DME acquisition and you gave kind of the unaudited revenue for DME '08 of, I think it was $86 million. I am just trying to think about this because about 80% of that business is military. You expect military to be flat in 2009, which would imply whatever the other 20% is would be down anywhere from like 35% to, call it, 65% assuming the guidance range that you gave. So I am just -- could you just help me with that math maybe?

Yes, let me clarify that a little bit. When I was talking about military being flat, I was mostly talking about our core or organic business. Organic -- military is about 20% of our organic business; we are expecting that to be flat. DME, between government and defense, it's pretty much all of it. There is a little bit of a commercial element, but the majority of the business is either government or defense related. We are expecting, overall, even for DME, that those revenues in 2009 will be flat to 2008.

Maybe you are confused because I gave you an expected contribution of DME to our business. You have got to remember that we didn't buy -- we didn't close January 1. We closed later in January and if you were to look at it specifically, DME had a little bit stronger sales at the end of 2008 which made 2009's expectations and little lighter. But, overall, we are looking at the business as basically flat for the year.

Okay. That is helpful. All right, great. Thanks.

Michael Ciarmoli, Boenning & Scattergood.

Hi, guys. Thanks for taking the call. Just to follow up on Tyler's questioning on DME, we can kind of back our way in based on what you paid. I think what the margins -- even commented on the margins to some extent. Is it fair to assume that I guess SG&A would be running similar to Astronics' business? So to make some estimates, kind of 10% of DME's revenue should be allocated to SG&A?

Mike, this is Dave. I don't have the DME statements handy with me here in the room we are sitting in. But, overall, it's a very comparable in terms margins and SG&A but I can't give you an exact percentage of where things were running.

Okay. Does there R&D go into the cost of goods line as yours does or are they below the line?

Well, we will show it consistent with the way we show the rest of the business.

That is helpful. Then shifting gears, what was your percentage of business from Panasonic in the quarter?

Let me see if I have that here. Another question while we wait?

Well, I was to follow what more -- I guess if you can look at your current bookings and even backlog, is there any concentration between customers in there or specific segments or products that you are seeing that we should be aware of? If you can give us maybe a breakout of where the strength is in your backlog.

The Panasonic number was about 23%.

23%, okay.

Of revenues. Our backlog with them is typically quite small. I don't know if I can really tell you -- I would say it's more of the same.

Kind of consistent with your revenues and expectations would that be a fair assessment?

Yes, I think so. I guess the dynamic that is going on in the business that is most notable is that the business jet expectations are dropping pretty significantly. When we last talked last August or so, the feedback we got from the OEMs was that they were expecting another year of significant increase. Then things were revised to be flat or marginally up, and now we are getting word that things are going to be dropping a little bit.

There are high-profile things that have played out in the press related to the Big Three and trips to Washington, DC, and things like that which are quite unfortunate combined with the Eclipse bankruptcy. So I think the biggest trend in our base business is that our business jet expectations have dropped. But, again, that being said Cessna may cut production rates. They are not cutting Mustang; we put a lot more on Mustang than we do on the other airplanes.

So our impact on these production rate cuts is muted the fact that we are putting more product on newer airplanes than we did on the older airplanes. And the newer airplanes are tending to survive okay.

Okay, that is helpful. Has your visibility into Panasonic's business gotten any better? You can look out, they are pretty hazy, I guess, with what they provide but it looks like they have got some recent orders that they have put out there from Hawaiian Airlines, China South. Are you getting any sense that their business is going to remain strong this year or do you just still not have that visibility so it kind of makes it a challenge to predict?

Well, it's a little bit of all of that. Mark, I am going to throw this to you in a second. My sense is that Panasonic continues to be very successful in the market. We don't get specific orders to match their orders so it's hard for us to know when they announce an order like that how it plays out to the forecast that we have already been receiving, if that makes any sense.

Okay, yes.

And their forecasts do tend to jump around quite a bit, but it's generally in line with what they told us it was going to be months ago. So I think at this point all we know is what we know and what we know makes us pretty comfortable as it's going to be another pretty good year with them.

Okay.

Mark, do want to color that at all?

Well, I think our visibility is about the same as it always has been. I think we expect to see revenues fairly flat with what they were in '08.

Okay, that is helpful. Then two more here and I will get out of the way. Pete, on the 787 it looks like they are finally starting to get ready for some deliveries. I guess they are saying first quarter 2010. What is your lead time?

I was under the impression you guys would start to see revenues maybe 12 to 15 months ahead of those deliveries. Do you see that potential uptick in activity to support that program from Panasonic and Talus?

Well, certainly when that airplane gets into production we are going to see an uptick. We have delivered quite a bit I don't know if -- Dave is looking through his numbers here, maybe Mark had some off the top of his head. But we have delivered quite a bit already that was requested of us by the IFE guys because they were in turn being pushed by Boeing. Then Boeing started sliding things out and those deliveries have slowed down a little bit.

So I think our general plan is that maybe towards the end of 2009 we will start to see some impact. We are counting on that program being more of a contributor to 2010 results.

Do you have a lot baked in to your 2009 guidance for the 787?

I would say we don't. Mark, do you want to color that at all?

No, we have very little in this year.

Okay, that is helpful. Then last question here, Dave, regarding the DME transaction, is it fair to say that your interest expense will probably be in the range of $1.5 million to $2 million for the full year?

No, no, that is low.

Okay, where do you -- can you help us out where you think that will be?

I think right now we -- most of our debt right now is floating and my intention is to enter into an interest-rate swap for at least half of the $40 million term note. That will raise -- we are at LIBOR -- most of our debt now is at LIBOR plus a spread with the bank. The rate that I would kind of steer you towards for the year is on our total debt somewhere in the 5% to 5.5% range on our overall debt.

Okay, so that would put you probably closer to $3 million?

Yes.

Okay, that is helpful. Thanks a lot, guys.

David Cohen, Athena Capital Management.

Morning, guys. One point of clarification, first. With regard to the Eclipse -- the remaining Eclipse exposure, you said you were keeping about $2.7 million of inventory on the balance sheet to support ongoing production. Is there a corresponding number for the tooling or did you write all the tooling off?

That $2.7 million includes both I believe.

Okay. All right. And then help me -- on this Learjet 85. Obviously, it is several years off. We don't know how big the program is likely to be. But can you -- I am interested in using this as a window into the EPDS, the potential for that business. Can you give us some idea, order of magnitude of how much content there might be as particularly related to how much content you might have had on a predecessor plane?

Let me ask Mark if we are allowed to talk about that specifically. I don't think we are.

Yes, we can't give numbers.

How about orders of magnitude?

I could tell you that compared to say the Eclipse it's at least two to three times revenue.

Right.

Per ship.

And we have never had anywhere near that content on a previous Bombardier business jet of a similar price range, correct?

Oh, I think that is definitely correct. I don't know if we get ever got over 10,000 on another Bombardier -- well, I take that back. We put quite a bit of stuff in the cockpit of the Global Express, but I don't think we are probably 15,000 to 20,000 in the ship on that maybe. I am looking at Dave and he is looking at me. We have been doing this for years. But this is a big amount of content certainly on a Learjet airplane.

And whatever this is replacing in the customers eyes, can you give us some idea of what the unit volume is these days on the comparable jet in the old product line? Again, order of magnitude is fine.

This program is the first of an intended line update for Learjet whereby their product line, basically, gets complete upgrade. Now their product line is not all that broad. I think it's three airplanes, three models currently. But of those threes models, Mark, do you know what the total volume production is?

No, not off my head.

I want to estimate it -- this is a big estimate; I'm not sure because I don't have the numbers in front of me. I want to tell you they build 80 to 100 airplanes a year.

All right, I mean that is fine as an order -- I know you are not going to be wrong by a factor of 10.

I doubt I am wrong by a factor of 10, but I could be wrong. I just don't have that in front of me.

Okay, that is great. That takes care of me. Thanks a lot.

Jay Weinstein, Oak Forest.

Twice in two weeks, what a thrill. I have got a bunch of questions from all over the place. I wanted to rephrase a question that I think was previously asked just to get a little more clarification. Regarding DME, on a relative basis -- I think what the other gentleman was trying to get after is -- is it more E&D intensive, less E&D intensive, or about the same as kind of your base business?

In other words, obviously you are spending this big nut in the base business. Would you regard DME as about the same in terms of intensity, a little less, a little more, or where? I think that is a question you can answer.

I would not say it's more. It probably varies depending on what the opportunities are, but I would say it's about the same or maybe a little bit lighter. Why don't we take the plan to talk about that in our next conference call in more detail since it's obviously an item of interest.

Okay. Do you have a target, Dave or Peter, for debt repayment? What kind of targets are you setting for yourself?

The term debt principal payment is $2 million a quarter for the next five years.

So that is a pretty significant amount then?

Right, yes.

So you are looking at roughly $8 million a year. Dave, this is sort of an obscure question. I actually managed to find your IDB debt on my Bloomberg after about 20 minutes of searching one day and the interest rate was like that whole market all over the place in the fourth quarter.

The IDA --?

The IDA (inaudible), right. That is something that you hedged against the LSI stuff in New -- is it New Hampshire or New York that is back (multiple speakers)? I can't remember. It was sort of all over the place. Where is the latest reset of that rate? It's a weekly right?

Yes, we have three long-term industrial revenue bonds that you are referring to that amortize from over roughly a 20-year period. We entered into a couple of them about eight years ago; most recent one we entered into about a year ago. They are reset on a weekly basis. We have one of those we entered into an interest rate swap a few years back and fixed that rate at 3.99%.

Right, I remember that one.

And the other ones are reset -- the interest will be reset on a weekly basis. And most recently -- I think I looked at the recent rate a week ago and the New York one was less than 1% and the New Hampshire one, I think --. No, the New York one was 1%, a little bit less than 1%, and the New Hampshire one was a little bit more than 1%. I don't remember the exact rate.

There was a week or two where they got like around double-digits, didn't they? In the fourth quarter.

Back when the banking crisis and the liquidity issue -- it was back in September -- first hit the news and everything kind of froze up. I think we got up close to 10%.

Yes, it was a bizarre --.

In addition to those there is a spread that the bank gets in addition to those now that will increase because of the amendment to our credit facility. In the past, we were paying 70 to 75 basis points for a letter of credit that supports those bonds. That cost has gone up with the amendment here that will be priced based on our pricing grid for the spread, which is going to be 2.5% to 3% under that.

So those things have become more expensive for us because of this. And that is why I am saying the overall rate that I use for our interest cost will be somewhere in the neighborhood of 5% to 5.5%.

The swaps that you are looking at what kind of -- how long is it fixing those terms? Is it just for the term of the agreement, for five years, eight years? Is that kind of what you are looking at?

Right now I am just focused on the term debt, which would be a five-year swap and anywhere from half of the notional amount up until all of it. I would like to retain some flexibility there. But the rates on an interest rate swap now where you can lock in for five years it's somewhere just above 2%, which isn't a bad rate to fix your debt at. Plus, of course, the spread that the bank would get.

On the other hand, the LIBOR rates right now are running about half a percent. So is this -- how far do you run with the 0.5% before you lock it in?

Well, that is right. I wish I knew the answer to that question. It would change my investment philosophy because we are all worried that once rates start to go the other direction they are going to go awfully far awfully quickly with what is going on. But nobody knows when, where, why, and how.

I agree and that is why I look at 2% and say in the big picture 2% is a pretty good rate to lock-in at.

That seems appropriate I guess. I will probably think of something else, but I will get out of the line. Thank you.

[Ross Taylor], [Cheshire Capital].

Thank you. Could you guys comment on the impact of the Boeing strike in the prior quarter? And when you are talking about build rates being fairly constant year-over-year for commercial is the strike impact factored into that or are you expecting some kind of catch up out of Boeing?

I would not say that we look at the strike as a major impact to our results. It certainly doesn't help, but a big part of our commercial transport sales are aftermarket, not new line fit. And a fair amount of it also is not direct to Boeing but say to the IFE guys who in turn ship to Boeing.

So while the strike obviously affected production rates on the line, it didn't necessarily affect demand for our product. So I would respond that that wasn't a major issue in understanding or explaining our financials. Mark, do you feel differently?

I totally agree.

Okay. And so therefore the uptick coming forward shouldn't really be a big player for you guys as they try to catch back up?

It will help, but it's not something that we itemize and put a lot of weight on.

Okay, thank you very much.

Scott Lewis, Lewis Capital Management.

Good morning, guys. Going back to the EPDS system can you compare that at all to when you guys developed the exterior lighting suite for the Joint Strike Fighter, which was new for you and the industry, and it got picked up pretty quickly were on several other programs within a few years. Do you see something like that happening with the new EPDS or is that going to be a longer process to see it on some other planes?

Good question. It's going to be a longer process and it's different from our lighting technologies in a number of regards. One is that it's much more of a big effort to design this kind of system for any particular airplane, and it is not something that is doable easily on a retro fit basis. It's something that has pretty much got to be designed in from the ground up.

And I would take it one step further and say that it's really -- it's like the central nervous system of the airplane. It is absolutely flight critical and, frankly speaking, if a light doesn't work chances are it's not going to have disastrous consequences. If your electrical system fails, all of a sudden you are glider, at best, out of control and so the level of scrutiny that goes to an electrical system is totally different.

Our system is very different from traditional electrical systems, specifically in smaller airplanes. I don't know if you want to go into those differences at this point, but while it has certain advantages that are obvious to OEM engineers and program people, anytime you start talking about significant modifications to something like the central nervous system of an airplane there is a certain level of concern and backlash that happens. So I guess I would look at it and tell you that the adoption of this technology has been a little bit slower than we might have thought a little while ago.

A number of airplanes that we were pursuing decided to stay with conventional systems or largely conventional systems. But, again, every time a new airplane is developed we bring this system and we talk about the advantages of it and we gauge this customer's interest in it and their ability and willingness to make the program work and pay for it.

Along these lines -- you didn't ask this question, but I will tell you -- we do get interest regularly from platforms that, frankly, we are concerned may or may not succeed in the market. We are not interested in expending our resources, customizing our technology for platforms that aren't going to go. So we have been a little bit choosier than we may have been in the past.

So I guess, in summary, I would tell you we think it's great technology. We think that at some point in the future it's going to be a dominant technology and it's going to be a standard feature of modern airplanes. The adaptation has been a little slower than we expected. We think the Learjet program is an excellent platform to demonstrate its capabilities, even beyond what has been demonstrated at Eclipse. And we think Eclipse, from the perspective of our EPDS system in particular, has been quite successful.

Mark, do you want to add anything to that?

Well, I think it's clear that this platform will only go on new aircraft and I don't really foresee a lot of new aircraft coming out in the next three or four years.

That is another good point is that there has been a spurt of development efforts. Pretty much every airframe company out there has a number of programs that they have announced and are working on. That level of announcement or the flow of new announcements may drop quite a bit given the current economic climate.

Okay. Then how about with the brushless starter motors, is that the same kind of thing or is that -- maybe it can get traction a little quicker?

Another good question, a very different answer. That one is certainly applicable to new airplanes like any new technology, but it is also retrofittable. We are designing it in such a way that -- it's not completely plug replaceable but it's possible to retrofit that starter generator onto existing airplanes. And that is important because there are a number of -- well, obviously, a big install base of airplanes out there.

The starter generator is typically viewed as one of the higher failure-prone items on the airplane and nobody likes having their $20 million jet stuck in Omaha when they want to be in Seattle because they can't get an engine started. So the cost of the starter generator, we feel, is quite compelling given the added performance capabilities that it provides. So we believe that there are opportunities to port that over to existing airplanes in production and even do certain field retrofits if customers are so inclined.

And is the revenue from a system like that, is that closer to an external lighting suite or closer to an EPDS kind of?

It's somewhere in between. It's somewhere in between. We are in a pretty competitive situation. I don't know if I would want to go into too much more detail than that, but it's definitely more than lighting systems typically.

Okay. Super. Thanks a lot, Pete.

Tyler Hojo, Sidoti & Co.

Just a couple of follow-ups here. Could you give us some help with what to look for in 2009 in regards to taxes, CapEx, and D&A?

Sure. I think the effective tax rate that we expect is to be kind of in the 32% to 35% range. In terms of CapEx, $6 million to $9 million.

Okay.

And if you look to the organic business, roughly the same for the organic business and a to-be-determined on the amortization with regard to the intangibles.

No help there?

We have to go through the appraisal process to put values on the identifiable intangibles and there is quite a wide range of results that usually can come from those depending on the type of intangible and the identified life of the intangibles. So we will have a better picture on that in April.

The appraisal process will take about a month or so here as we walk through it. I expect there will be a fair amount of value assigned to intangibles between goodwill and specifically identified intangibles.

All right. Look, I know you guys don't want to give too much that you don't actually know just in regards to the acquisition. I think that is fair, but I mean do you think this deal is going to be accretive in 2009 to earnings or do you really just have no idea?

Yes, I expect it to be. Again, with the caveat that I don't know where that appraisal will work out and to the extent that there is a lot of value assigned to intangible assets that may get amortized over a very short period of time. That would have an impact on the earnings.

Sure, okay. Just one more for me. There was an article in Aviation Week a short while ago -- I'm not sure exactly sure what the date was -- and it cited Talus saying their IFE business was up somewhere in the neighborhood of 15% to 20% in 2008. And I am just -- you give us your Panasonic breakdown and just looking at that business it looks like you guys were basically flat year-on-year, up just a tiny bit. So I guess what is the disconnect?

Well, we do a lot more work -- was Talus referring to shipments or bookings?

They said that their IFE business all-in was up 15% to 20% in 2008.

When you look at our business you have got to keep in mind that we do quite a bit of work directly to the aftermarket. So we do a big program, say, with Air Canada, it contributes $10 million to $15 million in one year and nothing the next year. And we do programs, not necessarily of that size, but we have a steady flow of work that goes to certain airlines. So if you look at our customer base it's a little bit lumpy in that product line so a major customer one year may not make the top 10 the next year.

And if you have two of them that drop out one year to the next and nothing equally offsetting, there can be a pretty significant change in customer mix, so to speak, one year to the next. So Talus maybe up 20%, it may be up 20% in products that we are not associated with.

Right. You will have to remind me, was the Air Canada business that you got was that an '07 event or an '06 event?

It was largely an '07 event. We had about $11 million in revenue at Air Canada in '07 and about $3 million in '08.

So we had to cover that $8 million with other revenue even to stay flat in 2008.

Okay. Is your expectation to see maybe some follow-on airline type orders? I believe I remember you guys saying that more of that business was actually coming through guys like Panasonic and Talus?

Over time -- Mark, I am going to turn this over to you in a second -- but certainly over time more and more of it's coming from Panasonic and Talus. And over time, we expect A380 and 787 to be pretty significant programs for us, so as those start rolling we expect to be boosted. I would say that this time last year we thought North American airlines were going to strengthen considerably, given the economy and air miles, passenger miles, and the tendency towards mergers there.

That hasn't developed quite as quickly as we thought it would, but we continue to think that the North American fleet is weak relative to the rest of the world with respect to passenger amenities. So in-flight entertainment is certainly s a major passenger amenity. We view it as something that is good to happen sooner or later, it's just not yet I guess. Mark, do you want to add anything?

Yes. There is one or two maybe larger opportunities that we are pursuing directly with the airlines. But, of course, given some of the budget cuts that some of them are doing now, that remains to be seen if those are going to follow through. Then I just want to comment relative to Talus just kind of reminder that a significant portion of what we are doing with Talus is relative to the 787 program so those revenues will tie more to the 787.

Okay. Are there opportunities on some of the older stuff as well outside of 787 with Talus?

I wouldn't say at this point, no.

Okay, all right. Thanks for that. I appreciate it.

Alex Hamilton, Jesup and Lamont.

Good morning. All of my questions have been answered. I just have one, I guess, for modeling purposes going forward. You usually break down or you tend to break down or help us break down revenues by product. I guess with the DME acquisition going forward should we just add a separate line or is it going to be intertwined in all of the other products?

We are going to reconsider that display with respect to the acquisition or in light of the acquisition, and you can expect a different format coming forward. But I would think that DME would be -- certainly the Orlando portion of DME, the test systems business, would be broken out separately somehow.

Okay, thank you.

(Operator Instructions) Michael Ciarmoli, Boenning & Scattergood.

I just had two quick follow-ups. Regarding the DME revenue streams, are there any seasonal trends that we should be aware of or do you envision that $80 million kind of being recognized evenly throughout the quarters?

Let me start. Dave is going to get his turn in second. It is certainly not seasonal, but it is especially a big part of the business subject to what I would call major program awards, which can come and go. So while we think the DME business will balance us in the sense that it's not prone to the same kind of economic pressures that much of our business, core business or traditional business is, it is subject to its own kind of ebbs and flows.

And it's one of those businesses where you can get a major award one year and then you can pretty much live off that award for two years. So over that period of time your backlog drops and your production may depend on what customer timing and customer demands are, which can vary period to period.

But that being said -- Dave is saying he would say exactly what I said.

Okay, great. And then last quick question, any updates on the V-22 or the Joint Strike Fighter? It seems like the V-22 is going to see a ramp in production. Can you comment on your specific revenue streams related to that program and if you are seeing increased aftermarket activity related to the high usage that plane is getting overseas right now?

I don't know if we are seeing specific aftermarket. We like the V-22. We have a wide range of products on the V-22 from the cockpit. We do wing fire suppression controller on that airplane. We do a lot of exterior lighting, a lot of cabin lighting. It's a pretty -- outside of -- actually even including the Joint Strike Fighter it's probably our biggest military airplane ever.

I want to tell you we issued a press release on this a couple of years ago so I don't have that off the top of my head. I want to say it's $85,000 a ship set or something like that if you add it all up.

Okay.

And Joint Strike is a good program for us. We are not able to necessarily forecast revenues on that one because we are going through some costing and tracing exercises with Lockheed. But that is one that is not going to be a major contributor for a couple of years yet, but we continue to like the program a lot and we continue to like our place on it.

Okay, great. That is helpful. Thanks, guys.

Scott Lewis, Lewis Capital Management.

A Talus follow-up, I think I have read that they just introduced a new narrow body IFE system and I was wondering if you guys were on that product with them.

I can't comment on that.

Okay, that is the old Mark we remember. Okay, thanks. That was it.

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

Well, we would like to thank everybody for tuning in. We think 2008 was a challenging year, but one that was overall pretty successful. And we think 2009, similarly, will be a pretty challenging year but we think the pieces are in place that it will be similarly successful. So we appreciate your interest in the Company. We look forward to talking to you next time. Have a good day.

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