CPI Aerostructures Inc (CVU) 2011 Q2 法說會逐字稿

Greetings and welcome to the CPI Aerostructures Inc. second-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. The 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, Edward Fred, Chief Executive Officer for CPI Aerostructures, Inc. Thank you. You may begin.

Thank you. Good morning and thank you all for joining us for our second-quarter 2011 conference call. If you need a copy of the press release issued this morning, please contact Lena Cati of The Equity Group at 212-836-9611 and she will fax or e-mail a copy to you. Also, if you would like to listen to this call again, you can hear a replay on our website's Investor Relations section in about an hour at www.cpiaero.com.

Before we get started, I want to remind investors that this conference call will contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results.

Included in these risks are the government's ability to terminate their contracts with us at any time; the government's ability to reduce or modify a contract if its requirements or budgetary constraints change; the government's right to suspend or bar us from doing business with them; as well as competition in the bidding process from both government and subcontracting contracts. Our subcontracting customers also have the ability to terminate their contracts with us if we fail to meet the requirements of those contracts or if their customer reduces or modifies its contracts to them due to budgetary constraints.

Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statements contained in this conference call. Additional information concerning these and other risks can be found in our filings with the SEC.

As reported earlier this morning, for the first half of 2011, revenue was approximately $33.436 million compared to approximately $23.550 million in the first half of 2010, an increase of approximately 42%. Pretax income was approximately $4.107 million compared to pretax income of approximately $3.130 million for the same period last year. Net income for the first half of 2011 was approximately $2.939 million or $0.41 per diluted share compared to net income of approximately $2.066 million or $0.32 per diluted share in the first half of 2010.

Selling, general, administrative expenses for the first half of 2011 were approximately $3.883 million or 11.6% of revenue compared to approximately $2.870 million or 12.2% of revenue for the same period of 2010. So with that prelude, I will now hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details for the quarter. Then I will comment on the current business environment, our guidance for the current year and 2012 and then briefly wrap things up and open the call to questions. Vince?

Thank you, Ed. As reported in this morning's press release, comparing the second quarter of 2011 to the second quarter of 2010, revenue increased 38.9% to $17,426,223 from $12,544,625. Gross margin was 24.4% as compared to 26.7%. Pretax income increased 14.7% to $2,094,816 compared to $1,826,254. Net income increased 30.3% to $1,570,816 or $0.22 per diluted share compared to $1,205,254 or $0.18 per diluted share. Selling, general and administrative expenses were approximately $2.082 million or 11.9% of revenue compared to approximately $1.485 million or 11.8% of revenue in the prior year. Ed?

Thanks, Vince. New orders through June 30 of 2011 were $58.6 million, significantly higher than the $31.1 million reported this time last year. This award growth was driven in part by the fact that we received the expected follow-on releases on two of our major subcontracting programs, the E-2D and the G650. The G650 release was for $8.3 million while the E-2D order equaled $11.2 million.

In addition, we received a $2.9 million award from Sikorsky to provide structural assemblies with stairs on the Blackhawk military helicopter. There is also real business potential from the approximately $0.5 billion worth of unawarded solicitations outstanding once these programs are funded and/or awarded.

In the past several years, our reputation has been elevated in our industry thanks to our impressive list of customers, the successes we have experienced on important programs we're working on and the exposure we have had on contacts we have made at various aerospace and defense institutional investment conferences. This has manifested itself in the expansion of our customer base this year as we have added to prestigious companies -- Honda Aircraft and Bell Helicopter -- to this list. We are now in the midst of establishing relationships with additional prime manufactures, including other helicopter and business private jet companies who have come to recognize CPI Aero as the premier supplier of aircraft structures.

Among the unawarded bids outstanding are contract opportunities with these potential customers. We look forward to reporting on our progress of turning solicitations with these prospects into awards and contracts in the very near future.

As announced this morning, because some anticipated contract awards have been delayed by our customer, we are providing revised guidance for both revenue and net income. The net income reduction will also take into account the additional cost to relocate the Company to the larger facility we announced previously, which was obviously not anticipated when we issued the original guidance. Therefore, we are now projecting that 2011 revenue will be approximately $74 million with the resulting net income in the range of $7.4 million to $7.5 million.

However, because of this award delay that pushes revenue into 2012, and the strong year we have had to date in receiving new orders, we are pleased to be able to raise the 2012 guidance to the following. We project that revenue will be in the range of $95 million to $98 million with the resulting net income in the range of $12 million to $13 million.

As the final piece of the guidance discussion, we expect that the third-quarter results of 2011 to be the lowest revenue quarter for the year. Although fourth quarter will be the highest revenue quarter in CPI Aero's history and by a significant margin. While we don't typically issue individual quarterly guidance, we feel it is important to point out the expected revenue levels for each of these quarters as the revenue timing is somewhat different than it has been historically. This is simply due to the timing of deliveries and the requirement to purchase materials to coincide with these delivery schedules.

On a separate note, CPI will continue to tell its story as often as possible and to that point, we have been asked to participate in the B. Riley Aerospace and Defense Conference on September 20 and have accepted that invitation. We look forward to seeing some of you there. We look forward to the next two years with great anticipation and excitement as we execute on our current contracts, develop new customers and deliver unprecedented financial results for our Company. At this point, I would like to open the floor to questions. Diego, can you allow callers to place questions now please?

(Operator Instructions). Rick Hoss, ROTH Capital Partners.

Hi, good morning. Hey, Ed, was there stock comp in the SG&A and anything else you can share with us as far as the sequential increase from the first quarter?

Yes, absolutely. I will let Vince handle that, but, as you can see, percentage-wise, it is still lower than last quarter -- second quarter last year, but Vince can answer that.

Yes, the biggest part of the increase in the SG&A was the Black Scholes computation on the stock options that are given to our Board of Directors in equal, which are fully vested. So the full expense is taken within that one quarter.

At the time of the option grants, the stock price was extraordinarily high, which caused the Black Scholes computation to come out and be very, very high. That is by far, by and large the biggest increase item in that SG&A line.

Would you say it's worth maybe $200K or --?

More. More than that.

Okay. So then excluding what happened to the share price then, when I think about the second half of the year, if I get to a more normalized, call it, $1.7 million in SG&A, then I need to factor in the cost to move as well, correct?

Correct.

And what do you think that's worth, $100K?

Ballpark it at $150,000.

Okay, okay. That helps. Now the guidance -- I think once we get to those numbers, the guidance implies a decent sequential uptick in gross margin. Am I reading that correctly?

The gross margin will -- we anticipate that the gross margin in the tail half of the year could be slightly better than the gross margin in the first half. In the first half, gross margin was 24.2% I think for the six months. We will be closer to 25% for the second half.

Okay. So then the tax rate needs to come down. The tax rate for the second quarter then, are we somewhere between the first and the second for the second half of the year?

Second-quarter tax rate was extremely low because we got a tax refund of some old 2007 taxes that ran -- well, we had a few things that happened in the quarter. One, we had a refund of some old 2007 taxes that we took a carryback on some research and development credits, which we anticipate doing going forward, but we have not affected for that yet since it will be a contingent gain I guess. We also had some [exercise] nonqualified stock options, which caused the tax rate to be lower.

Okay. And then last question from me. Ed, can you share any reasoning behind the delay from this particular customer? Is it internal, is it external, just anything?

Rick, everything points to it being 100% internal, not anything new from this customer quite frankly who just has a tendency to be a lot slower than anybody would like or anticipate and things that we anticipated hearing on and where we as a management team had a certain confidence level that we would win new business from still has not been awarded. Now that doesn't change our confidence level one bit, but what it does is say to us, okay, if we win it now, we win it today, they are not going to generate enough revenue out of that unless we were to buy a product in advance and that's ridiculous. We are not going to do that. We are not going to manage to a guidance number; we are going to manage to what is the best thing for the Company, especially from cash flow. So that's really all it is.

Now, we have no doubt because of constraints on the customer that these awards will be given out in 2011 before the year is over and we have a high confidence level within these four walls that we will win a nice chunk of this business.

Given that, it will generate the revenue in 2012 and along with other contracts we have won that allowed us to raise the guidance for 2012 beyond the reduction we took in 2011. So people put the numbers together and say, okay, they lowered guidance by $4 million, but, hey, wait a second, they raised it by $7 million. They can see there are positive things happening here. We never liked the lower guidance obviously, but it is what it is. And in the overall scheme of things, this report would be better than previous because we are showing in the combined numbers a $3 million increase in the total guidance.

Fair. Okay, thanks for the additional insight.

No problem, Rick. Thanks.

Mark Jordan, Noble Financial Group.

Good morning, Fred. A question for you relative to longer-term outlook. I know that historically you have been able to give sort of commentary on multiple years. Looking at 2012, obviously, you have bumped that up as you have had some push-outs, but I think also, for example, the 650, the significant increase in deliveries planned in 2013 versus 2012, at this point in time, can you see -- make any comment on 2012 versus 2011 from a revenue standpoint, if you see the probability of continued growth or is it more flattish with the bump-up that you've seen because of the push-outs in 2012?

I think you're asking me do I see 2013 being better than 2012, not 2012 better than 2011, correct?

That is correct.

Yes, I think you have to look at us as an overall entity here. We are developing a new customer base. Whenever you develop a new customer base, that opens up the door to so many more new programs. You are 100% correct. The G650 will have a major tickup in 2013. We as a group are taking on 170,000 square feet of office space when we have 75,000 here now. We are not doing that because we anticipate flat revenue years going forward. We see a tremendous potential for upgraded business within this company and therefore my answer to your question in short would be yes, we still anticipate significant upticks each year going forward. That is part of the plan, that is why we've worked so hard at developing this additional base. So there is more and more potential for to raise that. So yes, we do see the trend continuing. We are not looking out and saying we expect flatness.

Okay. Question relative to your open solicitation for $446 million. Could you give us an idea what delivery timeframe that encompasses and what percent of that $446 million would be represented by your large A-10, 650 and E-2D contracts?

First off, none of that $446 million is represented by the contracts we currently have. In other words, we don't have follow-ons in there. We won those contracts already. They are out of that number. Follow-ons just get added in as contract awards. These are contracts that are new that are yet to be awarded.

Now normal process is that number reflects something that has been put into the bid cycle in the 12 month or less time period. Right now, there is an exception. Sikorsky's number, which is approximately $125 million, which I've reported numerous times, is still in there. Pieces of that $125 million are still -- are past the 12-month period now. Why I have made an exception with them is I don't want to mislead the reader into thinking, okay, some of that was awarded or some of it went away or whatever, so we left that particular piece as is until there are awards on that contract. Everything else is stuff that has been submitted within the last 12 months and should be awarded within the next three to six months.

Okay. Any commentary as to the competition for that business? Is this primarily in-house or are you competing against other subcontractors?

Some is offloads, which we are competing against their in-house pricing and others are flat-out competitions where we have been involved with up to eight companies at one time. Some of them have been downselected to two. Haven't seen me pull it out of the number yet, so you can use your imagination and figure where one of the two was made to downselect. So it's a mixed bag of things like that.

Okay, thank you very much.

Alex Hamilton, EarlyBird Capital.

Hi, good morning. Can we talk about -- not the slide-outs, but can we talk about the rest of the core business? A little concerned given the wide expectation for a CR going into next year. I believe you don't have a major recompete until about 2013, but can we talk about the chances of any of that business that's not scheduled for recompete sliding out and sort of the dynamics of that? In other words, what is the chance of that happening and why would it happen?

On our major programs, right now, we don't see that. The only one I would give you a slide-out on potentially is E-2D. We are not hearing that. Again, the whole world was waiting to see how they were going to cut a gazillion dollars out of a budget, but that would be the only one that I think would be even mildly impacted by any kind of a cut.

The A-10, there is no recompete on that and I'm not sure where you got 2013 from, but we don't see any of that on the competition front. I think that things runs out till 2016. The A-10 is a fully funded program, so it's not like they have to go back each year and try to get it refunded. All they do is release the money for it. It is a fully funded program.

G650 obviously is not necessarily dependent upon the military or defense budgets and you don't have to take my word for G650. Just listen to what the CEO of General Dynamics is saying about the 650. That plane now everyone seems to believe is well up over 200 orders. They have not given out the number yet, but they have led people to believe that they have more than 200 orders for it.

As you just heard Mark say in the last question period, they have stated publicly that they are going to uptick production for 2013. So I don't see any sliding in any of those. We don't have an awful lot of direct to the US government, so I am not real concerned on that front. So as much as any company can be comfortable with where they are sitting, we are comfortable.

Now I will not sit here and tell you there is nothing that can happen that would keep CPI from having to reduce its sites if you will, but I still think we are in a better position than most companies just based on the nature of the contracts we currently have.

That said, how come you -- how come -- not that I'm pinning you to it, but you said the E-2, if there were one to slide out, maybe that -- what's in that program that would make you think that?

Well, because they have E-2Cs onboard aircraft carriers right now. If somebody wanted -- and they all firmly agreed we need to change them to E-2Ds. We need new production aircraft, get rid of the old production aircraft. But in times of ridiculously squeezing down spending, and I don't mean that as a political statement, I just mean to get the kind of money out of a defense budget they're looking for, something has got to give.

It's possible you might say, you know what, instead of ordering 12 E-2s, we are going to order six E-2s and we will use the E-2Cs in the meantime. That's all I'm saying. Now again, that's not what we heard, but if you're asking me what could happen, that would be my only --.

Okay, thank you very much.

You got it.

Steve Shaw, Sidoti & Company.

Hey, guys. How long is the move going to take and are you guys going to lose any bill days to that?

Absolutely not. We wouldn't do it that way. What we will do -- we are going to move in phases. The building is coming along real rapidly. Very odd that you can say, hey, you know what, they are ahead of schedule, but they are.

On what we will do -- we have built-in breaks this year into the production lines of the three major programs. That was by design, it was by contract where you have to stop, recalibrate everything. It's like a two-week shutdown on those major programs. So what will happen is when we hit that spot, that's when we will pick the tools up, they will literally move in less than a day from where they are now to where they will be, get fired back into the floor there, recalibrate it there and then we will start up at the end of that two-week period. So it works out extremely nicely for us.

On some of the smaller stuff, yes, we are going to -- what we are going to do is we are going to build up a bubble to allow for the office move. We anticipate making -- starting the major moves in October at some point and having the entire thing finished by year-end. We usually close down between Christmas and New Year's, as most of the aerospace industry is. We will not be this year. We will take that time to make sure the move is complete, that everything is up and running and that when we open the doors on January 2, there are no hitches.

And can you just briefly discuss the terms? I know you are able to still use the current facility as storage, is that correct?

No, no, no. What happened was the building across the street is 170,000 square feet. He is not making them pay for the 170,000. We are paying for the 60,000 we are in and 60,000 that we are in essence using to get started over there. So we are only paying for 120,000.

Past December 31, the whole thing will shift over, this building we are in today will be empty, he will get a new tenant in and we will then start to pay for the 170,000. So he's basically giving us 50,000 square feet now that we are not paying for and only charging us for 60,000 of the 120,000.

Okay. And lastly, what is the primary reason that the C-5 TOP is lower margin work?

The C-5 TOP contract is at the end of the cycle of a long-term program and over the seven years that we had that program, the vendors, the suppliers that were originally around at that time, a lot of them just didn't make it to seven years. A lot of them are not in business anymore and when we had to move some of those supplies around, move some of that procurement around to new suppliers, it ate into our margin a little bit.

Okay. Thanks, guys.

Marco Rodriguez, Stonegate Securities.

Hi, guys. Thank you for taking my questions. I was wondering -- I have a clarification question here in regards to the updated guidance for fiscal 2012. The net additional $3 million that you mentioned for the 2012 guidance on the revenue side, is that primarily driven by the customer that is delaying the order, anticipating you will receive more from them or is that from some other types of -- or rather other potentials?

Other potentials or other work we have already received. No, the basic -- the $4 million swung between this year and next. Okay, that is the anticipated revenue right now on the programs that we expect to win. The additional $3 million is because of things that are in the pipeline that we have a high confidence level of winning and also what we have done already this year, with our new customers. Yes, I mean for example, the Bell contract started at $86,000 and is now $800,000. So things like that.

Okay, got it. And then in regard to the bids outstanding, the Sikorsky portion, can you provide, whether it's a dollar figure or percent, of that $150,000 or so that is passed that 12-month period that you normally take out of the number?

You know what, Marco, I wouldn't be comfortable breaking it down that far only because I'd be giving out contract values or contract bid values that I wouldn't want to do at this stage in time.

Okay, fair enough. And then last question, obviously, there is a lot of discussion with the debt deal and potential negative impact for Pentagon cuts and I know obviously it's very difficult to plan and predict, but I was wondering if you might be able to provide some sort of color in regard to how you are thinking about that and how you might be positioning the Company for a worst-case scenario if you will.

I think, like I said, given the programs that we are on, significant cuts to the defense budget, etc. I think would only impact us, I am going to say, $10 million a year at this stage. Again, as I said, the only one that I see as very vulnerable there is the E-2D and I shouldn't say that because now they are going to think I think it's very vulnerable.

Of the ones we have, the only one I see having a potential vulnerability to any great extent is the E-2D. And so if they push it out a little and instead of delivering $12 million, $15 million a year in revenue, they only deliver $4 million or $5 million, okay, my revenue has gone down $10 million.

Where I position the Company, well, next year, the Company wouldn't be $95 million to $98 million, it would be $85 million to $88 million, which would still make it the best year we've ever had in history. So I think we are cautious about it, we are always in touch with our customers to see what's going to happen with that program or if they have gotten any information to exchange. But other than that, it's simply being diligent on everything we are working on and making sure that we are on the kinds of programs that don't suffer those vagaries.

And if you look back at our history, we have always been that way. We're not a company that goes into programs that are highly debatable between parties, etc. where one minute you are getting $10 million a year in revenue from it and the next minute, you are getting zero because the new administration came in.

So again, I don't think anything on the horizon at this moment that we can all see will impact us so greatly that it would change the Company or the business that we are. Now, I can't promise you that won't change in the future, but I can tell you as we sit here today, that is our opinion.

Okay, great. Well, that's helpful. And just one last quick housekeeping item. What was cash flow from operations, CapEx and D&A in the quarter?

Cash flow from operations was $1 million negative. What was the other question?

CapEx and D&A.

CapEx was about $70,000; depreciation and amortization was $104,000.

Great. Thanks a lot, guys.

Michael Potter, Monarch Capital Group.

Hey, guys.

Hey, Mike. Mike, you stepped in between all the analysts. What are you doing?

They allowed me to ask a question. Just a couple quick questions. Can you give us any update with regard to Spirit on -- are they talking any further plans of offloading additional work as they ramp up 787 production?

Mike, since they just few the 787 for the first time with the tail painted finally, that's a huge sign. It actually looks like this may be right now and they may have gotten their act together and if that's the case, we are anticipating being able to go in and at least compete for a ton of offloads, not just on 650, which we are currently working on, but we would like pieces of the other aircrafts they have, which basically all the Boeing 7 airplanes.

As of now, we are, again, as we have always been and continue discussions with them about it, it appears nothing would happen until 2012, but we have had people out there twice in the last month talking to them about new business and I think we are at the stage where everybody is just going to sit tight until they see that the 787 is real and then I think you will see, not just for us, I think a lot of the industry will see activity as a company like Spirit gears up now to handle 787s, which they been waiting for now for three or four years.

Is any of that in our pipeline yet of potential business?

Absolutely not. No, if we were to land more 650 work or the things that we originally won and they gave it back, or we got 737 or 747 or 777 work, that would just be add-on work to the numbers that are out there now.

Okay. And speaking of the G650, can you give us an update on where that stands with regards to production?

We are in full scale. The unfortunate accident that occurred in early spring had no impact on the build schedule for us, as I don't think it did for anybody else. They are back in test flight. They still -- and I think it was a week ago that the CEO came out and said they still expect to deliver planes this year and then are going to upscale the production in 2012 and 2013.

2013 is supposed to be significantly more deliveries than originally planned and though they are not saying the number at the moment, they are saying they are now well past 200 orders. If you recall, I said to you that industry intelligence, which is not factual and nobody hold me to it, but six months ago said they had almost 300 orders. May or may not be true, but it certainly does appear that they have well more than the 200 they originally said. So I think on that program everything is about as good as it could be, especially when you consider the crash.

The company is saying that they have over 200 orders but the industry is saying that they have close to 300?

That was the industry scuttlebutt being written in magazines and everything that the belief was they had more or close to 300 orders. That was about six months ago. GD has consistently stuck to we have 200 orders until the most recent press conference where they said that they had increased orders. It was now above 200, but they weren't saying how many.

Okay. And in our backlog, it consists of how many planes of -- of leading edges for how many planes?

134 chipsets, 134 planes.

Okay. And with regard to HondaJet, you had a nice win of a new customer I guess back in May. Can you give us a little bit more color on that contract?

Sure. Combined, it's for about $57 million. It is -- Right? $57 million? Yes. It is for right now two different pieces of structure. One is the engine inlet, okay, with just a round circular opening if you will, goes about halfway down through the engine housing and the second is the flaps on the back of the wing. Two very nice pieces of structure, very exciting that -- I guess what's most exciting about that entire event if you will was we never went to HondaJet looking for business. They came to us through someone because they had heard we did structure very, very well and they were looking for subcontractors.

What's also great about it is, start to finish, it took nine months to win the program, which normally it has taken us two and three years sometimes to develop a customer. I would like to say they were impressed enough that, in a nine-month period of time, they met us for the first time, came and toured our facilities, checked our capabilities and awarded us two very important pieces of structure in that period of time.

There are more things to be bid on on that aircraft. We will continue to bid on them. We had wonderful meetings with HondaJet in Paris. So again, I think there can be huge potential there. If you think about that $57 million, basically, at this moment, makes it about the third-largest contract we have ever won and again, it basically came out of nowhere.

The $57 million represents how many planes?

I'm not sure I can answer that, Mike, at this moment because they have not put out the number. I can't go out and do that.

Okay, okay. But that is another manufacturer that has a pretty substantial backlog of planes?

That's correct. That is correct. And understand this is only like a $4 million, $4.5 million executive jet or small company jet if you will. So there is this low-end market and let's face it, one of the things that really, really makes us excited about it is anyway you want to slice it, it's Honda and it's one of the biggest corporations in the world.

Okay. Terrific, guys. Thanks. I will get back in queue.

[John Collar], Oppenheimer & Close.

Hi, good morning, gentlemen. Was wondering a couple questions if I heard right. The $150,000 cost, that was incurred in the quarter? Did I hear that correctly? It was one of the first questions.

$150,000 cost to move. That has not occurred yet.

It is in the projection for the second half of the year.

That is your projection for the second half of the year. Okay.

I was helping Mr. Hoss do his modeling.

Okay, got you. Any expense beyond that you think you'll incur in Q1 or no?

Not any period -- we'll call it period expenses. We will have some additional depreciation and amortization of the capitalized expenses, but -- capitalized costs, leasehold improvements and such.

Everything expense-wise pertaining to the move will be done by December 31.

Correct.

Okay, great. So then the decline in the guidance then is strictly contract -- primarily contract-related in the net income line? It's not -- the cost to move is going to be relatively small, if I'm understanding that right?

Correct.

Yes.

Okay, great. And then you all expect to get that back at some point, which is also pretty positive.

Yes.

I was listening to another 650 supplier, I won't name names, who talked about costs getting out of whack. I'm wondering what you are seeing on that front, if that's specific to them or if there's something else going on?

I would have to say it's specific to them. We are building, we are supplying, we haven't seen any cost issues whatsoever.

Okay. Great, thanks very much.

Michael Callahan, Capstone Investments.

Hi. Mike, we've been waiting for you.

Yes, good morning, guys. You stuck me at the end of the line.

Holy mackerel.

Anyways, I was hoping you could walk us through a little bit the mechanics of really the top line on the guidance for the balance of the year I guess first off and then you might've said this in the opening remarks, but what exactly is causing the third quarter to be so low? And then I guess into the fourth quarter, same point would be so high, even when you are moving or when I would assume the move is going to take place as well. How are you going to get there and what's causing those factors to swing that way?

Okay, well, I did say in the opening comments basically all it is is simply the timing of deliveries. This is a very strange occurrence for us because we've never really had a period where a third quarter came down and the fourth quarter got so big. But given the fact that we are bigger, we're on some of these different programs, we are simply operating under the delivery schedule that is in front of us.

Percentage of completion is what we derive our revenues from and that is determined by what we procure and what we build, etc. Obviously, procurement being the real driver to all of this. Now, we will never manage to earnings expectations or anything else, so we are not going to go out and buy products in the third quarter so that we have a good third-quarter revenue and we balance it out with third and fourth because that's, A., illegal and B, it's bad for cash flow. Why would I buy something that I don't need right now and have to sit on the interest or whatever for three or four months? Makes no sense.

It just so happens that the third quarter this year, we do not have this major requirement for early fourth-quarter deliveries, so the revenue number is going to be down somewhat. However, given the full year and the expectation and the deliveries we have to make in the first quarter, etc., the fourth quarter just became almost monstrous and I will use that word as I said in my comments. It will be the largest quarter we have ever had and by a significant margin, a significant level. And to be able to use that word without my lawyer slapping me in the head saying you can't use words like significant, that should let you know and you can do the math. If it's going to be slightly less in the first or second quarters, you can plug in the number that's going to take you to $74 million for the year and see, yes, that really is a huge number. And there's not much more I can walk you through. There is not something strange going on. It's simply offmanaging to the delivery schedule we currently have.

Okay. So the unusually large fourth quarter though, is that dependent on the same customer who delayed you so far?

Absolutely not. All of that revenue is now in 2012. We've given up the ghost on that one for now. I don't know that it will -- it's possible that it will come now, but even at that point, the delivery schedule can't be the same. So even if I told you guys tomorrow that I had won a couple of contracts from this particular customer, I don't think you'd see me touching this year's guidance on it because I just don't think it will generate that much now.

Okay. Okay, then I guess lastly, looks like you drew on the line of credit pretty significantly in the quarter. It looks like most of that went into working capital. Is that something that's going to repeat in the fourth quarter and I guess the second half of the year? And if you had a repeat of Q2, you would exceed the line of credit by the end of the year. What are your guys' thoughts around that?

To answer the first part of the question -- yes and yes. We did have a use of the line of credit and built-up. We have anticipated some more significant receipts in the second half of the year so that we wouldn't have that dramatic an affect. Actually it, as Ed was talking about, reduced the volume in the third quarter. Just by its nature we would have less cash used in the third quarter because our procurement will be lower. So we don't expect to have that kind of dramatic impact in the third and fourth quarters.

Okay. The opposite is going to take place in the fourth quarter then on the procurement side?

Yes.

Okay. Okay, that's all from me. Thanks, guys.

(Operator Instructions). Ladies and gentlemen, there appears to be no further questions. I will turn the conference back over to management for closing remarks. Thank you.

Okay, thank you, Diego. I would like to thank all of you for participating in this call and look forward to speaking to you again in early November for our third-quarter earnings call. Thank you very much.

Thank you. This concludes today's conference. All parties can now disconnect. Have a great day.