FARO Technologies Inc (FARO) 2009 Q1 法說會逐字稿

Good morning, everyone, and welcome to FARO Technologies' Conference call in conjunction with its First Quarter 2009 Earnings Release. For opening remarks and introductions I would now like to turn the call over to Mr. Vic Allgeier. Please go ahead, sir.

Thank you and good morning, everyone. My name is Vic Allgeier of the TTC Group, FARO's Investor Relation's firm. Yesterday, after the market closed, FARO released its first quarter results. By now, you should have received a copy of the press release. If you have not received the release, please call [Nancy Setaducati] at 407-333-9911. The press release is also available on FARO's website at www.faro.com.

Representing the Company today are Jay Freeland, President and Chief Executive Officer and Keith Bair, Senior Vice President and Chief Financial Officer. Keith and Jay will deliver prepared remarks first and will then be available for questions.

I would like to remind you that in order to help you understand the Company and its results, management may make some forward-looking statements during the course of this call including statements regarding the future state of the economy, the Company's future financial condition and results of operations, the Company's operational plans and strategies and their impact on the Company's product development and sales model, the introduction of new generations of the Company's products, the Company's ability to grow and invest in itself, the Company's ability to streamline operations, improve efficiencies and reduce inventories and their short and long-term impact on the Company, the balance between new and existing customers and the success and continuation of the FARO Test Drive program. These statements can be identified by words such as "expect," "believe," "predict," "intend," "will" and similar words. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those projected in these forward-looking statements. Important factors that may cause actual results to differ materially are those set forth under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.

I will now turn the call over to Keith.

Thank you, Vic, and good morning everyone.

Sales in the first quarter of 2009 were $31.4 million a 31.8% decrease from $46.1 million in the first quarter of 2008. On a regional basis, first quarter sales in 2009 in the Americas decreased $6.6 million or 34.5% to $12.5 million compared to $19.l million in the first quarter of 2008. Sales declined 34.5% in Europe to $12.4 million from $18.9 million in the first quarter of 2008. Sales in the Asia-Pacific region were down 19% to $6.6 million from $8.1 million in the first quarter of 2008. The effect of changes on foreign exchange rates on sales was a decrease of approximately $1.6 million for the first quarter of 2009. New orders decreased 41.7% in the first quarter of 2009 to approximately $27.4 million compared to approximately $47 million in the first quarter of 2008.

On a regional basis, first quarter orders in 2009 in the Americas declined 43.5% to $10.4 million compared to $18.4 million in the first quarter of 2008. Orders decreased 39.7% in Europe to $11.7 million from $19.4 million in the first quarter of 2008. Orders in the Asia-Pacific region decreased 32.4% to $5.3 million compared to $9.2 million in the year ago quarter.

The top five customers by sales volume in the first quarter of 2009 were Global Tooling, Northrop Grumman, the US Military, IHI Corporation and Aeronautica Militare and represented only 7.3% of sales. The top ten customers in the first quarter of 2009 represented only 11.4% of our sales, once again indicating our lack of dependence on any one or a handful of customers.

The Company initiated two reductions in force during the quarter ended April 4, 2009. The first reduction in force was announced on February 20, 2009, effective immediately and affected approximately 7% of the Company's workforce. The Company expects to save approximately $4.5 million in compensation costs on an annualized basis as a result of the first reduction in force.

The second reduction in force was announced on April 6, 2009, effective April 3, 2009, and affected approximately 14% of the Company's workforce. As a result of the second reduction in force, the Company expects to save $7.4 million in compensation costs on an annualized basis.

Severance costs were approximately $700,000 related to the first reduction in force and approximately $1 million for the second. These costs are reflected in the financial statements for the first quarter of 2009 as follows. Cost of sales include $600,000 of severance costs, selling includes $600,000, administrative includes $200,000 and R&D contains approximately $100,000 of severance costs.

Our gross margin was 51.7% in the first quarter of 2009 compared to 60.1% in the year ago quarter. This decrease was primarily due to a change in the sales mix between higher margin product sales and lower margin service revenue.

As a percentage of sales, selling expenses were 40.8% of sales in the first quarter of 2009 compared to 31.3% in the year ago quarter. Selling expenses declined $1.6 million to $12.8 million in the first quarter of 2009 from $14.4 million in the first quarter of 2008.

As a percentage of sales, administrative expenses were 20% of sales in the first quarter of 2009 compared to 12.3% in the first quarter of 2008. Administrative expenses in the first quarter of 2009 increased by $700,000 to $6.3 million from $5.6 million in the first quarter of 2008, primarily as a result of increased professional and legal fees of $400,000 and $400,000 related to increased costs of additional leased facilities.

Research and development expenses were $3.5 million for the first quarter of 2009 or 11.1% of sales compared to $2.7 million or 5.9% of sales in the first quarter of 2008. The increase is primarily related to an increase in staffing levels and the related compensation expense.

Operating margin for the first quarter of 2009 was a negative 24.3% compared to a positive margin of 8.5% in the year ago quarter as a result of the previously mentioned decrease in sales and gross margin.

Other income and expense changed by approximately $900,000 to a loss of $500,000 in the first quarter of 2009 from a profit of $400,000 in the year ago quarter. Interest income decreased by approximately $400,000 in the first quarter of 2009 to approximately $200,000 from $600,000 in the first quarter of 2008 due to a decline in interest rates.

Foreign currency transaction losses were $700,000 in the first quarter of 2009 compared to a gain of $200,000 in the first quarter of 2008. The first quarter of 2008 also included an accrual for interest expense of approximately $400,000 associated with the Company's FCPA resolution.

Income tax expense decreased to a benefit of $1.6 million for the first quarter of 2009 compared to an expense of $900,000 in the first quarter of 2008. The Company's effective tax rate for the first quarter 2009 decreased to $19.1% compared to 21.8% for the first quarter of 2008.

Net income decreased to a net loss of $6.6 million, or $0.41 per share, in the first quarter of 2009 compared to net income of $3.4 million, or $0.20 per share in the first quarter of 2008.

The number of fully diluted shares outstanding in the first quarter of 2009 was 16.2 million compared to 16.7 million in the first quarter of 2008. The decrease of approximately 500,000 shares is primarily related to the purchase of approximately 600,000 shares during the first quarter of 2009 of the Company's common stock as part of its share repurchase program offset by stock issuances related to option exercises in 2008.

I will now briefly discuss a few balance sheet and cash flow items.

Cash and short-term investments were $94.2 million at April 4, 2009 compared to $105.5 million at December 31, 2008. In the first quarter of 2009 the Company sold its investment of $82 million in variable rate demand bonds and now holds $65 million of US treasury bills.

As mentioned earlier during the first quarter of 2009, the Company purchased approximately 624,000 shares of common stock totaling approximately $8.8 million as part of its previously announced share repurchase program.

Accounts receivable was $30.7 million at April 4, 2009 compared to $49.7 million at December 31, 2008.

Days sales outstanding at April 4, 2009 increased to 90 days from 81 days at December 31, 2008 primarily as a result of an extension of the collection cycle in Europe.

Inventories remain flat at $46.3 million at April 4, 2009 and December 31, 2008.

Finally, I will conclude with some statistics regarding our headcount numbers. We had 821 employees at April 4, 2009 compared to 959 at December 31, 2008, a decrease of 138, or 14.4%. Account manager headcount decreased from 187 at December 31, 2008 to 176 at April 4, 2009 with 55 account managers in the Americas, 56 account managers in Europe and 65 account managers in Asia. Geographically we now have 343 employees in the Americas, 271 employees in Europe, 207 employees in the Asia-Pacific region.

I will now hand the call over to Jay.

Thanks, Keith. Business conditions in the first quarter of 2009 continue to be weak. As a result we took action. We executed two reductions in force during the first quarter. We chose to do these in phases for a couple of reasons. First and foremost was to cut our back office operations. Then we prepared a thorough analysis of all functions globally. This required more time and careful thinking. We realized the current economic situation will turn around so we did not want to inflict permanent damage to the Company, however, we needed to get costs back in line with the current reality. The result was across the board headcount reductions.

In manufacturing we reduced direct and indirect employees as well as overhead driven primarily by lower unit volume and higher than anticipated inventory levels. We're also taking the opportunity to implement additional lean manufacturing practices and realign our manufacturing floor to optimize productivity. These actions are in addition to the activities we initiated in 2008.

In sales we reduced the mix of account managers and realigned sales territories. We eliminated certain territories while increasing the size of others. We eliminated a layer of sales management and put some of our best sales people, those who had been promoted, back into the field dealing directly with customers and doing demos.

In marketing we cut costs and increased our focus on the web. We have a tremendous amount of talent in our global marketing organization and that team has become even more creative after taking a hard look at our advertising spend. We will capitalize on this talent and new web-based programs going forward.

In R&D we reduced the number of projects and have focused on those specific programs that have the most benefit to the customer, have the best ROI and produce cost savings. Again, we have realized this is an opportunity to focus and prioritize projects without sacrificing technical advances which will keep us the leader in the market.

In the administrative areas we reshaped the team to reflect lower unit volume and have refocused our efforts on utilizing existing systems to make permanent productivity gains.

In addition to the cost cuts we made through the reduction in force, we've also cut our discretionary expenditures across all departments. We've revamped the Power of One initiative focusing it solely on identifying and executing savings ideas that will drop directly to the bottom line. The Power of One program has been a success since launching it three years ago and in this environment we expect it to be an easy way for the entire FARO team to keep things tight.

All of these actions will generate near-term economic benefit for the Company. Ultimately, though, they will also position us to gain leverage across all functions once growth returns to the business.

In the marketplace, leads and demos are both growing but decision making has come to a crawl, particularly for capital expenditures. If leads and demos weren't growing it would be a very different warning sign for the business. Unfortunately, the global economic downturn has created a deer in the headlights scenario for many of our customers. There's plenty of interest in our solutions but minimal ability to cut the PO. However, due to our strong cash position and the strength of our balance sheet we are able to get creative in helping our customers work through the near-term financial constraints they are facing.

Traditional financing, rental contracts and programs like the recently announced FARO Test Drive are all geared towards getting our equipment into the hands of potential users so they can prove the ROI to themselves before making a more meaningful financial commitment. Initial interest in the Test Drive has been good but it's still too early to predict if that interest will translate financially. If there's one thing we know for certain right now, it's that customer behavior is extremely unpredictable.

You'll see us using the current crisis to experiment with newer and different ways to test the market. Some of these experiments could alter the FARO sales model permanently remaining in place even after economic stability has returned to our end markets. When economic conditions do recover and our customers feel stable enough to make capital purchases, we intend to be ready.

On the technology front we introduced the latest generation of our cutting edge Laser Scanner technology in March. The Photon 20 and 120 provide greater scanning speed and range as well as a 90% improvement in the time required to register the images within our software. Existing customers are also able to upgrade to this latest version which provides value for them, particularly in these difficult economic times.

As I mentioned before, we made cuts to the R&D team during the reduction in force but by reprioritizing their efforts we believe we can run a tighter ship while still developing new generations of our most promising products. We have a more granular focus on ROI but we're still investing where we expect to see growth. We see the current economic climate as a short-term condition. As a result, we're continuing to invest with a long-term view of the Company.

In summary, Q1 was tough. Most likely all of 2009 will be tough but we are positioned well to weather the storm. It is possible that we will see quarter over quarter sales declines throughout the year. However, as I previously stated, we will not be providing specific financial guidance this year due to the continued uncertainty in our markets.

My thanks go out to the global FARO team, our customers and our investors. Your support during difficult times like these is invaluable to the Company. We are committed to returning to profitable growth and will be working diligently to do so as quickly as possible. I appreciate your attention and will now open the call to questions.

(Operator Instructions) Mark Jordan, Noble Financial.

Good morning, Jay and Keith. Question - I understand your reluctance to give guidance but, historically, you have stated that you typically got about 20% of your year's revenue in the first quarter and 25% in the second and third and 30% in the fourth. Clearly the first quarter was probably as tough an operational environment as we've seen at least to date in the cycle. Is it reasonable to assume that from a planning purpose that you would look at the second quarter showing that same kind of seasonal pattern off of be it depressed Q1 of $31.4 million?

Yes. It's extremely difficult to tell, Mark. Given the current economic environment it is hard to state whether we think the normal patterns would continue. So I think at this point it would be too difficult to say.

Looking at your gross margins, thank you for breaking out service, that helps us in our discussion a lot. The question I have there is, obviously, the hardware piece held up pretty well but you did see year-over-year almost a very sizeable decline in the gross margin on the services of the side. Why did that fall off so dramatically from [28-2] to [16-2]?

There is approximately $500,000 to $600,000 included in that service piece related to the reduction in force. The severance costs are quite a bit of people in customer service and application engineers so that's a one-time anomaly. Also, the first quarter of '08 we did not have our Asia service centers in operation but we did this year and that added quite a bit of an impact to our costs as well.

Like to talk a little bit about the -- if the -- headcounts you said was down in the quarter, I think it was 14%, [14.4%] from year-end, does this imply that you still have some more heads to take out of the organization that just weren't reflected at the end of the quarter?

Well, a couple of thoughts there, Mark. Relative to the two reductions in force, all of the people who were affected have left the Company. We did have additions during the month of January. We had, in particular, account managers, specifically Europe, where you've got a waiting period after you make the offer, the people accept and then they could not come on board at the end of last year so they came on board in January. So the starting point in December increased some in January and then the reductions that we made came off of that number from there.

What I have told the entire team, of course, is that we cannot predict whether we would need to make another reduction in force or not. Obviously, we have tried to do this as carefully as we can but with significant amount of impact to reflect what we're seeing in the marketplace. If the market conditions were still difficult or more difficult than what we are currently facing, obviously it's possible we would do another one. But that would be separate from the two that we just did, obviously.

The two we just did, the people who are affected have left the Company at this point.

Okay. So that's included in that -- the quarter end is fully reflective of all of the departures?

It is. And the severance costs associated with those.

Okay. Could you talk a little bit about the accounting for the Test Drive? Are you going to be booking the rental revenue and a profit against -- or costs against that? Or are you just holding it in reserve to see if you get a sale out of it at some point in time and then true it up upon the sale?

Yes. The accountants tell us that we should be recognizing that rental revenue. Of course whatever -- the unit is actually going to, like, a rental pool and there's some depreciation associated with those units and basically we apply that rental proceeds for those first few months toward the purchase of a new unit that simply becomes basically a discount and a reduction in the margin at the time if they do decide to purchase the new unit.

From an operational standpoint, the intention is to utilize the assets that we already have in finished goods inventory or in demo stock, obviously. We've got an inventory level that's higher than what we currently need to support the business and so there's two different ways to control that. One is you just continue burning it down through sales which is obviously part of the plan. But the other part of the plan is by using the Test Drive we can put those assets to work versus just sitting in finished goods.

Okay. Buy-back, where was the share count at the end of the quarter and what are your plans moving forward for the buy-back?

Share count, I believe, was 16.2 million. The plans going forward is we have been purchasing selectively. I'll tell you that obviously we spent a little more during the first month of the quarter, let's say, than we did during the second two months of the quarter. I manage it -- during the open periods I manage it directly with the transaction house that's doing this for us and we will buy if the prices get to a point that is -- what we feel is still an appropriate level. But it has been probably two months, maybe more than two months now, since we made our last purchase.

And then a final question if I may. Given the -- you talked about the cost savings related to the headcount reduction of being $3 million and the fact that you had $1.7 million in severance, so should we look at the second quarter and sort of say that the cost structure therefore is fundamentally $4.7 million lower than the first quarter?

Right. You could look at it if you take the combined compensation cost savings -- it's approximately $12 million on an annualized basis. So on a quarter it would be $3 million and, you're right, the first quarter does contain about $1.7 million in severance costs.

Okay. Thank you.

Jim Ricchiuti, Needham & Company.

Jay, I was wondering if you could talk a little bit about the tone of orders toward the end of the quarter in March and how would you characterize the bookings thus far in April?

I won't characterize April at all. What I will tell you is that the end of the quarter - when I mentioned to Mark that predicting the second, third and fourth quarter would we see the normal kind of 20, 25, 25, 30 pattern that we've seen relative to percent of sales for the year - when I said that it was unpredictable, one of the things that we're seeing that's also unpredictable was that we're not seeing that normal hockey stick at the end of the quarter like we traditionally do. We had anticipated this in some respects, obviously, but the buying pattern has not been anything close to what we've seen historically. It is very, like, unpredictable. I hate using that word but it really is very unpredictable.

The orders we're getting are very good orders. We've got good customers in there and when they do finally decide to pull the trigger most of them are still pulling it on their own. There's still very little that's actually running through financing arrangements for those that pull the trigger, that lead and demo count is the only part that's still been predictable from the past and it's continuing to grow at the rates we would expect. It's just, boy that back end has obviously elongated substantially and you've just got a huge bubble in there right now.

And when you do see the bookings, are the -- is there any change in the make-up of the bookings? By that I mean higher percentage from newer customers or from existing? I'm just curious what you're seeing.

Yes. For the quarter and as you know, historically, we've always been right around 50/50, you know, 48/40 -- 48/52, etc. But it did dip a little bit this quarter. It was about 42% new customers and 58% existing. That's probably not a huge surprise in this type of environment. Those who already know the ROI are probably more likely to pull the trigger or at least pull it quicker than newer customers. So how that continues during the following three quarters is hard to tell.

Our guess is that certainly the intent to, when we've targeted a Test Drive, is that that would be more geared toward newer customers. So perhaps the Test Drive picks up the rate again closer to 50/50. I just don't know at this point. But you would think logically that the Test Drive customers, it's more likely they'd be the newer ones.

And I just had a question on the headcount on the account management. And I know there's some moving parts in Europe but as I look at the account managers in the Americas and Europe sequentially, it looks like the Americas were down around 11% from Q4, Europe down around 8% and Asia it looked like it might have picked up very slightly. So I'm wondering how we should think about that. Is this partly due to the changes in the organization you've made or are you seeing, maybe, the Asian market -- potentially that coming back a little sooner?

Yes. I think it's a little of both. One is Asia was still relative to the total, kind of, land mass and quite frankly the cost of the team there we saw opportunity to keep adding. And, as you know, we added a lot of account managers in Asia in 2008. Do we believe that Asia has the potential to recover quicker than the rest of the world? I think it's a possibility. Now, I'm no better predictor than any of the other economists that are out there but I think there is, generally speaking, I think we would see a little more recovery at least a little bit quicker in Asia than we will in Europe and the Americas.

Okay. And could you, just one final one, if you could just elaborate on what you meant by as you come out of this potentially some more permanent changes in the way you go to market. Are you talking about possibly looking at some ways of going to market indirect or maybe if you could just elaborate on that comment.

Certainly there's always opportunities there. We've had experiments in the past and we continue to try some experiments of running indirectly whether it's through other OEMs or, of course, through normalized distributor channels. But even things like -- if the technology Test Drive, if it works, it wouldn't be impossible to see that being a way in the door for some of our, again, for the new customers as we go forward where they prove the ROI to themselves. So right now, and now is a good time to do it, you have this period of -- it's three, four months of rental income so to speak versus an actual -- the full sale and if you have a normalized kind of pattern then at the end of four months those start balancing each other out with the new sales that are coming in. So do I think it's a possibility that regardless of economic conditions that you might see us continue having a program like that available for the long-term? Yes. I think that's a possibility.

Again, it really depends on how well it's received and are customers using it or not. And that part is difficult to determine. We've had traditional financing in place through a third party for a couple of years now and a FARO-branded program for over a year. And most of our sales, though very few, still go through that financing channel. Now maybe something like this -- financing, you're still making the commitment. This is a little bit different because you don't have to pull the rigger right out of the gate so it might be that this is something that gets a few more people over the hump and in a robust economic environment might get even more people over the hump.

Thank you.

Rob Mason, R. W. Baird.

Going back to your commentary around your planned restructuring savings, how that would impact you on an annualized basis or a full quarter basis, and obviously you absorb some costs for that this quarter, but if you back those out at the current sales level it looked like you would still be running at a slight operating loss and so, one, I guess is that math somewhat correct? Are there other mitigating factors there as you go forward?

And then if that is the case is that something you're comfortable doing, again, assuming that sales were to track at the current level. And I understand you're not giving guidance. But a slight operating loss, is that -- and perhaps that leaves you to be cash flow neutral. I'm just curious, Jay, as you go about trying to balance the near-term cost expense management versus your longer-term view, what parameters you have in place?

I think your math is correct to say that. Yes, it would have obviously been better but it still would have been at a slight loss. Would we operate at a slight loss through the balance of the year? Potentially.

Look, we clearly want to operate in a profitable scenario. We want to make money. We want to, obviously, we want to grow as well.

Would we operate at a slight loss if I felt like additional cuts would inflict damage that was more permanent or would be more dramatic to the Company in terms of its ability to come out when the economy improves? That's the balance. And it really depends on what we're seeing traction-wise from an order standpoint or a sales standpoint. So do we want to operate profitably? Absolutely. And we're trying to do everything we can to get it there or at least try to get it to break even for the remainder of the year or whatever the case is.

Particularly if you assume if volumes don't follow that normalized pattern with up-tick at the end of the year. Obviously we're thinking through all of those scenarios. Could it operate at a loss through the balance of the year? Possibly, if I really felt like doing the additional cuts would hurt the Company from a long-term view.

And with respect to your gross margin and specifically the product gross margin, is that level -- it did drop year-over-year in accordance with the sales drop. Is the margin degradation, gross margin degradation on the product side, is that a function of volume or mix and is that something that's -- would it be stable at a 62% level at the current sales rate?

Yes. I won't give a view of the stability, obviously. But what I will say is certainly volume and mix had some impact on the gross margin. Price definitely had some impact on gross margin, as well. Look, we've always had good pricing. We are still the price leader. We definitely felt more pressure on price than ever before. And I do see that all as purely economics than anything else right now. We've talked with the sales team about this. If it used to be monthly, which it was about monthly during the back half of last year, it's every other week at this point.

The sales team feedback, though, continues to be, "Please don't lower prices on us because we don't want to have to work that recovery when the economy gets better. Give us the flexibility to do a little bit more discounting if necessary but don't lower the list prices that we have in the marketplace." So we have not done anything like that.

Have you seen your competitors take that step?

The competitors -- it's interesting. Because they are always kind of the lower-priced player and consistently drop their price the second they get in the door I can't say their behavior or the pattern has changed any there. Some of the price discounts have definitely gotten steeper on their side but we've also, when we've done our analysis, we've not necessarily seen a change in our losses versus just customers who are sitting on their hands.

You recall we studied that hard at the end of the third quarter actually using an outside firm to do it and that confirmed it for us. And then through our internal analysis in Q4 and again in Q1 we've not seen a change in that pattern based on what we know about the transactions that we were bidding on that did not end up as a win. Most of those still are customer wants us, they keep talking about it with us but just cannot get the PO cut.

Okay. Do you feel like your customers gained any additional clarity on their capital budgets at the end of the quarter or is it still very difficult to understand who much money they may have available to spend or willing to spend?

What I've seen, it's still very difficult. I think they are all, even the bigger customers that we have, it's almost month-to-month in terms of how they are taking their view right now. At least that's the feedback we seem to be getting.

Even in places like Asia where, Japan, a lot of our customers in Japan, their year-end is in March so we didn't see the normalized up-tick that you would see there as they flush their budgets for the year and in Japan, of course, they are always very good at planning budgets going forward and we've not necessarily seen a lot of hard budgets yet out of the customers over there either. So it's kind of across the board.

And maybe just last question, you mentioned inventory in your desire to try to address that, work that down. Do you have explicit goals irrespective of the success of the Test Drive program to work inventory lower? And then maybe as a follow-up just, Keith, if you have demo inventory where you ended the quarter there?

Yes. As Keith gets that number ready we have specific goals for all three of the managing directors as well as the manufacturing and procurement folks as to what level we're trying to drive inventory to. And, of course, we've not disclosed those externally but we are looking to take a several million dollar chunk out of the inventory pool before the year is over.

Of course the biggest issue right now is the forecasting side of it. Because it's become so unpredictable we've dropped our forecast by an amount that we think is reasonable relative to the market but it takes awhile still to burn some of the finished goods that we had in there from before when you had slightly higher predictions from a build standpoint.

Demo inventory is about $16.8 million at the end of the quarter up from approximately $16.3 million at year-end.

Thank you.

Our next question is a follow-up from Mark Jordan, Noble Financial.

Two quick ones. First, can you confirm the rep breakdown by region? I seem to be missing some inconsistency with the total one. So is America 54, Europe 56 and Asia 65 for a total of 175 or 76?

It's 176. It's 55, 56 and 65 for a total of --

176. That's my mistake in America. Thank you. Secondly, you mentioned $4,000 [sic - see press release] of legal expense. Can you tell us what that is and also what's the status of the FCPA monitoring liability?

Yes and Yes. The $400,000, the bulk of it is tied to -- we have this current patent suit with Metris, one of our competitors. We are in the process now of heading towards mediation. I had tried to resolve this two different times with Metris but we are still into the discovery phase and that did increase the costs associated with it in some respects. And right now, of course, we look at the cost benefit of continuing versus trying to finish this off and, like I said, we tried to resolve it and the perspective from their side has been unreasonable for sure, particularly when we believe that -- we still fully believe that we did not infringe this patent at all.

So now relative to the monitor? Unfortunately, there's still no change. We do not have a monitor in-house. We have not gotten any indication from the Department of Justice as to when we will receive the monitor; when they will actually start. We do know from a couple of other companies who have had some direct interaction with them that they are -- we are not alone in, kind of, the silence or the lack of response. They have a lot going on right now, obviously, and so I think it's affecting many companies who are going through any relationship with them.

Thanks.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Jay, in the press release you talk about weakness across all the verticals but I wonder if you could maybe spend a moment or two just talking a little bit -- in a little bit more -- specifically about what you're seeing. Obviously, I assume automotive is probably the weakest market that you're seeing but I wonder if you could just characterize the other markets - aerospace and heavy machinery - some of the other markets as well?

Clearly auto is in a bit of a stall pattern right now. We had automotive customers purchasing during the first quarter just like we did in all the other previous quarters but they are, clearly, they are in a stall.

Aerospace, it's actually been selective. There's two primary players there in the whole supply chain that feeds it. We've gotten some orders from the supply chain. We actually have one that we're working on right now with one of the majors that they are actually -- it's known, firm activity that's going to happen at some point here during the course of the year so they actually -- there is still some activity on that side.

And then the heavy manufacturing, also hit or miss. Anything tied to the construction industry is sizably slower. Any heavy manufacturing that is tied to other verticals have not been -- I mean, they are slower but not quite as slow as the guys who are spending the bulk of their time in the construction world.

And then light manufacturing, again, a bit hit or miss. True industrial manufacturing is a little bit slower but you've got some that we have been selling into that are tied to, say, the food industry where the slowdown hasn't necessarily -- hasn't necessarily hit or at least it hasn't hit at the same rate.

Thanks, Jay.

And there are no other questions.

Very good. That being the case, thanks very much everybody for joining us and we look forward to updating you again at the end of the second quarter.