Griffon Corp (GFF) 2006 Q4 法說會逐字稿

Hello, everyone, and welcome to Griffon Corporation's Fourth Quarter and Full Year 2006 Earnings Call. With us today we have Harvey Blau, Griffon's Chairman and Chief Executive Officer, and Eric Edelstein, Executive Vice President and Chief Financial Officer. (Operator Instructions.) I would now like to turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon, and welcome to the financial overview of our fourth quarter and year ended September 30, 2006. I am Harvey Blau, Chairman of Griffon Corporation and with me is Griffon's Executive Vice President, Eric Edelstein. I will discuss the overall results of the quarter and full year, and then Eric will answer questions with respect to operations and financial results.

I should point out that to the extent that matters to be discussed in this call include forward looking statements, they involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those in the forward looking statements.

Consolidated net sales for the quarter were 483 million, up from the 388 million in last year's fourth quarter. Pre-tax income was 29.5 million, compared to $35.4 million last year. And net income of 18.4 million for the quarter compares to 22.6 million, resulted in diluted earnings per share of $0.60, compared to $0.71 last year.

For the full year, net sales were 1.6 billion, compared to 1.4 billion last year, and pre-tax income was 78.7 million, compared to 78.9 million in the prior year. Diluted earnings per share was $1.65, compared to $1.55 per share last year.

Telephonics, our electronics information and communications systems segment, had sales in the quarter of 152 million, compared to 67 million last year. Telephonics operating income was 19.2 million, compared to 9.4 million last year. Telephonics sales for the year were 387 million, compared to 221 million last year. And operating income was 39.6 million compared to 18.1 million in the prior year.

Telephonics increase in annual sales of 75% and operating income of 119% were primarily attributable to the Syracuse Research Corporation contract. Telephonics has now received contract awards in excess of $250 million and expects to complete this work by the third or early fourth quarter of fiscal 2007. Also, discussions continue about additional orders.

In general, all of Telephonics other programs are doing quite well. Specifically, the Navy MH60-R Helicopter program is proceeding as planned. Production is ramping and it continues as planned. This program will be at an annual revenue run rate of $100 million in 18 months. Telephonics backlog at September 30, 2006 was 373 million with the increase from a year ago reflective of the SRC work and the ramp up of the MH60-R program.

Our garage doors segment continued to reflect solid performance for the year. Sales in garage doors for the quarter were 146 million compared to 149 million last year. Operating income was 13.6 million, compared to 15 [press release indicates 15.6] million in the prior year. The decline in sales for the quarter was caused by a volume decline in sales to dealers, partially offset by some selling price increases and improved product mix. The decline in operating income for the quarter was primarily caused by the sales volume decline and material cost increases that were not fully passed along to customers.

For the year, garage doors sales were 550 million, up from 532 million last year. Operating income was 41.2 million, compared to 37.7 million last year. The increase in sales was primarily attributable to selling price increases and improved product mix, and the increase in operating income was primarily attributable to improved product mix.

Consistent with our forecast of a year ago, steel costs in 2006 were relatively stable compared to 2005. At this point, we are projecting similar stability for fiscal 2007. This stability could be negatively impacted, if recent efforts by suppliers to reduce capacity are successful.

With respect to the overall outlook for garage doors, we are cautiously optimistic. We continue to expand our business as a result of market share gains achieved by our retail and dealer customer base. Also, we are excited about the opportunity to expand the product line and improve manufacturing effectiveness as a result of the recently acquired facility in Troy, Ohio. And the continuing shift in our product mix should also contribute to revenue and margin improvement. Offsetting these positives is that in the last three months we have experienced some softness in our markets

Finally, we wanted to point out that based on historical precedents we do not believe that the weakening new home construction market will have a significant negative impact on our business as long as consumer confidence stays strong, fueling our repair and renovate business.

Our service and installation operation had sales in the quarter of 89 million, an increase of 5 million over last year; and operating income was 3 million, compared to 4 million last year. For the year, installation service had sales of 339 million, compared to 300 million in the prior year and operating income of 9.2 million, essentially the same as the prior year. The increase in revenue for the quarter and the year was primarily attributed to increased sales in our Las Vegas and Phoenix markets.

As we expected, our installation service customers are experiencing slow downs in new residential housing starts. Due to the lag time between the start and completion of construction, the impact of the slow down is likely to be felt in the coming months. Our forecasts reflect a period of adjustment before starts return to healthy levels, somewhat below the record levels experienced recently. This adjustment period is likely to be six months with new housing starts off by as much as one half during this period.

While market share loss due to competition in Las Vegas will not be as severe as expected, the market downturn will more than offset this favorable development. We continue to see an earnings decline commensurate with the market downturn. New sales and product initiatives are not expected to contribute in the year sufficient to counteract the volume decline. Workforce reduction opportunities will be continually evaluated for short term benefits versus the inherent longer term detriments.

In specialty plastic films, sales for the quarter were 102 million, compared to 94 million last year, and operating income was $39,000, compared to 10.7 million last year. For the year, films sales were 381 million, an increase of 11 million over the prior year, and operating profits decreased to 15.5 million, from 31 million [press release indicates 31.6 million] in 2005. The increase in revenue for the quarter and the year were primarily attributable to increased unit volume to several major diaper manufacturers in Europe and higher selling prices to pass along resin cost increases, somewhat offset by product mix.

The decrease in operating profits for the quarter and the year were primarily attributable to the impact of resin price increases and the production inefficiencies, somewhat offset by unit volume increases. Operating profit was also reduced by approximately 1.4--$1.5 million for the severance cost of a reduction in force, completed in the August/September timeframe. The reduction focused on non-direct labor personnel and will result in approximately 5 million of annual cost savings.

In September, we started shipping commercial quantities of our important new product, elastic laminates, for the hygiene market. Our product and process is in qualification with key target customers and we expect that volume will ramp up for this product over the remainder of fiscal 2007 in North America and Europe.

As we noted in the prior quarter, we are continuing to address start-up inefficiencies that are resulting from bringing on new business. This is a major focus for fiscal 2007 and we are confident that over time the inefficiencies will be effectively addressed. The capital expenditure requirements for this segment have averaged 33 million for the past 3 years. For this year they were about 11 million, an amount we believe to be more indicative of the level needed for the next few years.

Finally, resin price increases had an unfavorable impact on operating income of approximately 4 million for the quarter and 7 million for the year. Most recently, resin prices have been weaker and we believe that over fiscal 2007 prices will be flat to slightly favorable. Needless to say, we are disappointed in the results of the plastic film segment, but we are working hard on a number of fronts to improve results in fiscal 2007.

Consolidated operating cash flow for the year was 16 million, and we continue to support the growth of our business with capital expenditures for the year of 42 million, including the fourth quarter purchase of the facility for our garage door segment.

Our balance sheet at September 30 remains strong, with working capital of 309 million and total indebtedness of 35% of capital. We continued to fund our common stock purchase program, using 2.6 million in the quarter to acquire approximately 111,000 shares. For fiscal 2006, we have acquired approximately 814,000 shares of stock for 19.8 million.

At this time, we would like to take questions.

Thank you. (Operator Instructions.) Our first question is coming from Bob Labick of CJS Securities.

Good afternoon.

Hi, Bob.

Hi. I wanted to start off with films--try to get a better understanding of the impact in the quarter. First, I guess, on resin. 4 million is a much bigger impact than you've felt in any other quarter in the last couple of years. Has there been a change in your contract or your pass through with your largest customers, or what could be the cause of such a dramatic change in the quarter?

No, there hasn't been a change in contract pass through terms or the like. But what you have to consider is that in June, the month prior to the beginning of that quarter, resin went up about 10%, $0.06 a pound. And then, in August, another $0.05--or $0.07--7%. When you put that together and apply it to the volumes and the way the whole lag works, and it gives rise to a large number. And you're right, this is--I can remember prior quarters where we've said 2 to 3 million. It's been a while where it's been 4 million in one quarter.

And then, just could you help us understand better the start-up expenses I guess accounting for the majority of the other--the rest of the shortfall in operating profit? How were the start-up expenses in Q4 different? What start-up expenses were there in Q4 different than Q3 or Q2? And how long should we expect them to be ongoing?

We--again, a good observation. They clearly were more problematic in the fourth quarter than they were in the third or the three months ago we spoke about them, both in terms of how it impacted the third quarter and projected that it would impact the fourth quarter. The--what we're seeing or what's taking place is an acceleration of the efforts to expand our customer base. Revenue did go up. Volume did go up.

And that means we're dealing with more customers in different types of products - thinner films and the like - and quite honestly, have not been as successful initially as we expect to be going forward in getting our production yields where we'd like them to be. You probably know this is a product where it comes off the line, it's not saleable, it's largely salvageable and can be used again. But we really make money - good money - when we have minimal scrap, as opposed to some of the levels that have been generated most recently.

Just then, a sense--just sticking with films here--for next--the opportunity next year. Just even speaking about it in broader terms. How long it will take to get operating margins to the expected ranges. Is it a range for the--for '07 in top line and in margins--however you want to talk about it. But just give us some way to frame it for next year.

All right. It's a little--you realize in asking the question, it's difficult for us to answer given our practice is not giving specific guidance. But there are several things I can say. First, we are not going to literally solve this in this current quarter. And actually, if I said we were, there'd be a negative signal there because I'd be implying that we're not going to be bringing on other new business as the year goes by. I mean, however, we are learning, we are getting better. And so, in bringing on new business later on in the year, we would not expect to have the level of difficulty that quite honestly we've encountered in most recent months.

In addition, we have our new product coming on and we're planning and hoping to bring it on smoothly. But it will ramp up in the course of the year. It hopefully gets to higher levels by the end of the year. And we're not anticipating efficiency levels equivalent to some of the stuff that we've been making year in and year out. But on the other hand, we're also not expecting it to be somewhere below yields that we've most recently experienced.

I guess just finishing up film before I move on to another one, what's the opportunity and the timeframe until that reaches mass and profitability, et cetera?

The new product?

Yes.

Well, the--in prior calls, we've talked about the new product having a $50 million annual sales potential. And I believe we've probably also said that ultimately it could be a lot more than that but [inaudible]. If things go according to plan, or maybe even a little better than plan, we should start to get towards an annual run rate near that number by the end of the year. That would involve sales to a number of customers, both in North America and in Europe.

Terrific. Moving from film, in garage doors, margins were down year-over-year on essentially flat sales, despite the price increases you've incurred throughout the year and--.

--Bob, I'm sorry. You went in and out there. So I missed--.

--Oh, sure. Sorry. Garage door margins were down year-over-year on essentially flat sales, despite prices increases in a "stable" steel market. What's the driver there and the outlook for margins and how would you improve them next year? What caused the margins to fall and why will it get better?

Well, I'm not sure at this point. I can take a little closer look whether it's the number one thing - I think it is. And that is that we did pass along some of the steel price increases that were experienced earlier in the year, but we did not pass them all along. And that's probably the primary thing relative to margins.

We also spent a good amount on advertising and marketing beyond what we did in the prior year. And then, finally, our logistics - trucking and shipping costs - went up as a result of fuel. We're hopeful that over time into the next--this new year and subsequent years that we can see some significant increase in margins--margin improvement driven by--and Harvey mentioned this earlier, by two things.

One, our new facility is going to give us the opportunity to lay out production runs in a substantially more efficient manner. And then, second, it will allow us to enhance our--enhance the introduction or expansion of our product line. And that would be emphasizing products that tend to be more on the high end--higher selling price, and therefore, a higher growth margin. So, we would hope to see some good improvement over the next several years because of that.

And when does the new facility kind of come online or when do you expect it--should we see any of these benefits in '07?

Well, the facility is a large facility and our plan always was to take a good number of years to fully utilize it. We were able, fortunately, to start using it literally day one from closing because we were able to get access prior to close. But that's not to suggest that was for the better part of the facility. It was only a portion of it. I think it will have an impact in this new year that we just started. I don't think it will be a dramatic impact.

Great. I'll get back in queue. Thank you very much.

Thank you. Our next question is coming from [Marty Pollack] of NWQ Investment Management.

Yes. If I may, I just would like to focus still on specialty film products. As it relates to the competitive landscape with P&G as one of your big customers, is anything different there in terms of the amount of business you're getting from them, as well as the pricing dynamic there--as a first point.

And the other one is just wondering whether structurally the way--since you've seen the kind of volatility you have, you've experienced. Is there anything structurally on costs that need to be done? I mean, in terms of a sort of a cost reduction action. Or is what's really going on is that's sort of the volatility that you got [caught in] here because of the start-up and obviously the pricing mechanism turning negative on this quarter?

I'll take the second part first, and then come back with the first part. And that was structurally should we be doing something. The answer is, yes, and we did do it. That's the reduction in force that Harvey referenced earlier. We--we've been investing a lot in this business. Not just capital, but also people, expanding our R&D capability in marketing and support and systems and the like.

And we were doing it in a model mindset - or however you want to call it - of very, very excellent results in '02, '03, '04--'05 was a step back, and then, obviously, '06 a further step back. As a result of that, we along with the management of the segment, determined that we needed to resize all of those support areas because we have not continued to grow from the 2003 and 2004 base.

So as a result, in the August and September timeframe, we eliminated about 25% - maybe even a little bit more - of our nondirect labor positions. And for this new year, that will--should save us about $5 million. And in the fourth quarter, in the form of severance, it cost us about $1.5 million.

The first part of the question relates--related to our primary customer. And you were asking if fundamental things have changed. I guess if you talk about pricing, one thing that has changed, which is obvious to us and our competitors, is that resin costs are on average twice as much today as it did three or four years ago. And so, there has been tremendous pressure on I'll say everybody in the system to keep the costs down.

And the redesign you've heard us talk about in the last year or two, one would suggest was driven by the need to keep the costs down. The move towards thinner products from all of our customers, again, is a move towards keeping the price down. So, that type of change is definitely out there.

Volumes? In some sense it's hard to answer because we buy--we sell, I should say, to our primary customers lots of different things in different markets around the world. But generally speaking, we're happy with the activity that we have with them, both the current activity, the plans for the future. We'd like more--certainly, we'd always like more. But the actual volume itself has held up reasonably well over the last 18 months or so.

Yes. If I may, Eric, if we're talking about the business has gotten a little bit tougher, but that's structurally the higher costs, is margin opportunity still--is this still a 10%-plus business on a secular basis? Clearly, beyond this next couple of quarters, but looking into the future, if you think it's--has that changed at all?

The answer is, I'm not sure. When we've talked about the margin on this business, what I've been saying is that a normal range is 8 to 13%. And the business for us, at least over the last five years - even longer - has tended to come in cycles, the cycles driven by how many new products we're working on that are in the early stage in their lifecycle versus the later stages.

And in 2004, we were in a good part of the cycle and we were as high as 13. And in looking at how the business is put together, it seemed to me that if we were collectively more in the late stages, we could be as low as 8. And now, having said that and putting that range, I think we all realize that at any point in time it's possible for something highly unusual to happen that could drive the 13 higher. And in tough times, 8--we could go lower.

So, I don't know. I--this is more art than science. So maybe given some of the pressure in the system, I might be inclined to say maybe it's more like 7 to 12 is the normal. And you could take a midpoint of that and call that whatever that is - 9.5. It's certainly the dynamics here that are making it more and more difficult than it had been.

Yes. One last question. On Telephonics, with significant momentum into--through next year. Can you look into 2008? It seems like you would need to replace some of those sales. But notwithstanding that, is there a sense of there's some secular growth rate from--that you expect to continue to grow at beyond that period? Perhaps there would be a fall back to a lower base. But after that, what kind of growth rate do you think the Company could experience on an ongoing basis?

Well, a couple of thoughts there. One way to look at that business is to look at the historical growth rate and just apply that going forward. Another way to look at it is to say that over the last five or six years, in addition to what one might call the core business, the standard programs we're working on, Management has been successful in landing--call them quick hit, large contracts. The Air Force radar contract back about two years ago is one example. And now, most importantly, the Warlock contract with Syracuse Research.

Those don't happen by accident. It's not something that just falls in our lap. Our people work hard in identifying them. And so, another way to look at it is to say that that could be something that we regularly do in the future, and we take a look at the amount of business we're doing now in the--with--in the Warlock program. And first and foremost, hope - at least from the Company's perspective - that it will continue. And all I'm referencing there is we certainly like the idea of being able to provide a product that protects our troops. We don't like the idea that they are where they are fighting.

So the first point is, maybe that will continue. And it's more of a question of at what levels it will continue. And second, we have, again, as Harvey talked about, the MH60-R program moving up as we would expect to 100 million a year. And that was 30 million last year and 50 million-plus or so this year. So, that should move along.

And then, finally, we have a lot of good things going in our Marine radar area. The projects are not ones that we would expect would be supplying $100 million a year of revenue, but certainly in the aggregate have the potential to make a big difference.

So I guess I would call all of that some color. I realize I didn't give you a number. I'm not really capable of doing that. We would--we would not consider it a shock if we can continue to operate at these higher revenue levels, even given the significant jump that we've made between '05 and '06.

Thank you, Eric.

Thank you. Our next question comes from Rob Norfleet of Davenport and Company.

My questions have been answered. Thank you though.

Thank you. Our next question is coming from [Sahid Zadeeki] of Gabelli.

Good afternoon, gentlemen. A couple of questions. First one, I wanted to go back to the 4 million resin impact. That seems quite high to me. I was looking at your transcript for Q1 that ended in December after I guess the Hurricane Katrina. And at that time, resins prices went up 60%. And the impact then was about 4 million. And with 6 or 7% resin prices--in fact, this quarter is up 4 million. And we have about the same volume in both scenarios. How do you reconcile that?

Sahid, the 60% was over five months. My recollection--I could be rough here--was it was like from June to November. And keep in mind, after a certain number of months, in some instances, 90 days, some 120 days, you start to pass along those increases. So it wasn't 60% in one hit.

Okay. So that was more spread out over five months.

Sure. Correct.

And the second question is, could you break down that 10 million--I guess last year you were at 10 million profitability. And this year you are at zero. So that 10 million differential, could you break that down by volume, pricing, inefficiencies, mix, anything else?

Yes. I mean, I'm not going to attempt to hone in on it exactly because it's a big business and there is any number of pieces. And three different people could look at some analysis and say, you have to add these pieces to come up with this or that. Having said that, I'm certainly going to give you the flavor for it. One, you heard the $4 million in the resin, the $1.5 million for the reduction in force, the production inefficiencies were probably as high as 3 million.

Okay. And what's the positive impact from volumes roughly?

At least $1 million.

Okay. That was very helpful. And just a last question. When you say production inefficiencies, is that all related to the new elastic product? Or does that also relate to the somewhat I guess idle capacity, the final capacity that you have--unutilized capacity. Is it a combination of that and the new product, or is that just the new product start-up inefficiencies?

It's actually neither one of the things you both--you said. The--on the new product, we confirmed that we did kick it off and start producing in September at minimal quantities. So maybe there was some inefficiency there, but nothing of significance. And also, because our volume is starting to move up, we're not thinking about idle capacity. Rather, it is a lot of work with new customers and thinner films and not getting yields initially with that work at what we're--traditionally have achieved, and frankly, what we ought to and will achieve in the future.

Okay. Thanks a lot, Eric.

All right.

Thank you. Our next question is coming from [David Rosen] of [DR Analytics.

Hey, guys. I'm going to ask the same question I ask every quarter. A hodgepodge of businesses. Are you ever going to split these up?

Well, first--well, David, I think that with respect to the IED business that we've had conversations about before, I think that conversation has been satisfied, don't you think?

Yes.

Okay. With respect to the splitting up of the businesses, we are reviewing now what we want to do with the various companies. One of the problems, as you know, is the leakage of taxes in trying to sell off. So we are looking at some other alternatives, such as adding on and maybe doing something with the military business.

So, we are studying that. The plastic business downturn has been troubling. And we're looking to see what we can do to improve that business and the margins there and bring them back to where they have been. And we're working very, very hard on that. But to split up the businesses is difficult.

What kind of things have you been thinking about on the defense business?

We're looking for acquisitions that can amplify what we're doing and make it a bigger company, so that maybe we can look at it from an IPO point of view--a larger size company, and things like that.

Okay. You did talk a great deal about the specialty plastics business and the decline that we're seeing. I think to most of us it was a little bit of a surprise, the order of magnitude. You give a range of 7 to 12 or 8 to 13% of what the margins in theory can be. Where--now that you have this data point and we're now in the new fiscal year, can you give us some clarity as to what the margins on that business for next year will be or could be?

And a range would be fine, but I mean, this year, the range--the margins were well below 7%. I think it comes out to 4%. And granted, you have to make an assumption of where resin prices are. But are we back into that 7 to 12 range at least? Or--yes, or 7 to 13 range?

No. I had said a little earlier, to be up on that 13 side we have to be in the good part of the cycle.

I'm not saying--I'm saying just within, meaning the bottom half of that range. So within 7 to 13, so it could be 7. I'm just trying to understand the order of magnitude change from this year to next year.

The--I thought you were asking for a range for the current year and I was going to give you a conceptual answer saying I don't think the 12 or 13 or maybe even 11 is realistic for this current year because of where we are in the cycle. But certainly from the low end to 10 and 11 is possible. I think we all understand how significant resin can be. I think we're further emphasizing the yield question is not inconsequential. We're working really hard on it. We're making progress on it. It's a question of just how well we do with it.

And then, there are other things like how quickly we move along in our opportunity in Brazil. And also, the elastic products, and does it ramp up as quickly as we hope and expect. So, a goodly number of variables.

Where you look right now, it would not surprise you to do something 7% or greater?

No, that wouldn't surprise us at all.

It would--in fact, you would expect, even with all of these things to do at least 7% next year.

No, I didn't say that. I just said that we wouldn't be surprised of doing it. There's a difference between being surprised with and expect.

I understand. So, I mean, do you--that's what I'm asking. Do you expect your business to be within the historic range that you articulated, which is 7 to 12 or 7 to 13%?

I don't know.

Okay. All right. Thank you.

Your next question is coming from Matt Jones with Catalyst Fund.

My questions have been answered. Actually, if you could just remind me, Harvey, how you guys review your share buyback and what you have outstanding earmarked for share buybacks? And if you are looking at potential acquisitions in the military space, would that mean--or come at the expense of continuing a share buyback program?

No. We would have to--we would finance that separately. We have plenty of financing available to us. As far as the buyback is concerned, we have about 1.5 million shares left on our buyback program. We're probably going to ask the Board to increase that at the next Board Meeting, and we're going to continue to buy back stock.

When's the next Board Meeting?

The next Board Meeting? In February.

February. Okay. Thank you.

Thank you. Our next question is coming from Julian Allen of [150 LLC].

Hi. Good afternoon. I have two quick questions on your cash flow statement. What was your cash flow from operations for the quarter?

I'm checking it out. Why don't you give us your second question while I am.

It's--first comes to the--the first question, which is on CapEx for the quarter.

CapEx for the quarter was almost 20 million to take us to 42. And the cash flow--.

--Minus 3 is my guess.

It would have been negative. 4--minus 4.

Minus 4 for the quarter?

Yes.

Okay. What was the big driver of CapEx in the quarter that you spent about half of your last 12 months in this last quarter?

The building purchase for the garage door business in Troy, Ohio was about 10 million.

Okay. And so--and out of the 43 for the last year, how much was let's call it excess CapEx in the plastic--in the resins business? From your comments earlier, I'm guessing it's about--if your CapEx is--it was--call it 30, and maintenance about 10, then the excess is about 20. Is that fair?

On that historical 30-plus that we've been spending?

Yes.

It's probably pretty good. 10 and 20. Maybe 8 and 22 or 25, something like that.

So maintenance CapEx in that division going forward?

I think would be a little bit less. And--we're thinking overall it shouldn't be too much different, plus or minus, than the 11 that we ran this past year.

Okay, great. Thank you very much.

Thank you. Our next question comes from Steve Wilson of Lappides Management.

Good afternoon, gentlemen.

Hi.

Could we talk a little bit about cash flow and the $80 million that's now locked up in the contract, and how that flows back to the Company from a timing standpoint?

Are you referencing the increase in receivables in the balance sheet relative to SRC?

Yes.

I'm not actually directly familiar with the payment terms.

Well, I'm just wondering--obviously, the cash flow was down considerably this year.

Right.

With the contract, or the backlog that you have under contract expiring or running through in the next three quarters, will the vast bulk of that money show up in cash flow in 2007?

Yes, it will. We're hopeful that the SRC related work will continue at high levels. We don't know if it will, in which case there'll be a "reinvestment." But I think it's more logical that to some degree it's going to wind down once we get beyond the second and third quarter of next year. And at which point that will--those receivables will convert to cash.

And is it safe to assume that the vast majority of that $80 million account is that SRC contract?

When you--we need to talk about what you mean by the 80 million. My--did you mean receivables only?

Well, I'm looking at the cash flow statement where the funding was $80 million for your account receivable balance.

Yes. Okay. So what you have in there is receivables and the contract costs and recognized income not yet billed, which is the equivalent of a receivable on the percentage of completion contract. But together, I guess--let's see--that is the million. A good part of that, more than half of it, is SRC. Another piece of it is the MH60-R, or LAMPS helicopter. And that might not come back, because that's still in the process of ramping. From time to time, depending on how things are negotiated, and have been slow in the delivery and payments and things like that, it could change.

But generally, that probably would not come back. That probably would stay at that elevated level because we're doing more and more.

And is it--?

--And that looks like that's about 25 million of the 80.

The LAMPS program?

Right. Well, the contract costs and recognized income not yet billed was 25, of which the biggest piece would be LAMPS.

Okay.

Driving the increase.

And just on that subject, if the SRC business is going to be winding down in the back half of this year, it looks like LAMPS is going to be ramping up. Does that sort of offset one another, or is that insufficient in terms of the scale up of the LAMPS program to override the decline that's potentially there on the SRC contracts?

Well, we've given you enough to do the math, but I'll do the math. It does override it. I mean, you've got enough there to see how much we have to go on SRC and you can compare that to what we just did and you can see how much it's down. And you can then relate that to what we've said about the ramp and it does pretty much offset it.

And on the LAMPS program, can you share with us your philosophy on book margins as you go into initial production, how you're going to be doing that in terms of whether it's ship sets or lots or full program allocation?

The answer is, I can't tell you off the top of my head. I can tell you that, as it sounds like you do know, there's some very, very defined rules as to what you can or cannot aggregate when a new contract stops, starts, or stops, as opposed to adding it to an old one. And needless to say, we follow those rules, as opposed to picking and choosing the approach.

So, if the lots are clear and distinctive, we might use that. And if they're not, then there might be a breaking it down further or aggregating it. But essentially, we are looking at and updating regularly our estimates to complete the work. And obviously, based on how much input we have, booking the appropriate amount of revenue and margin.

When does that decision have to be made?

On what?

On how you're going to account for it--the program accounting?

Well, when we make it--we're already well into the production. And so, we're making it periodically when something new within the program is starting. And it's not really a new decision. It's applying the same criteria each time.

Okay. Because the way you've described it, it sounded like it was under consideration and I just wanted to be clear.

The--you did pose the question as if it were something in the future, and I kind of answered as if it were the future. But we're already well into it, and so it's something that we're doing on an ongoing business. As we get more funded orders or release of more lots, we apply the same criteria we were applying up until now. Is this new? Do we start fresh? Is that an add-on to something we already have?

Quite honestly though, there's enough stability in the program from a revenue recognition and profit perspective, it's almost not particularly relevant which way we do it, although we are trying to do it the correct way in accordance with GAAP.

That's the answer I was looking for. Thank you.

Thank you. Our next question comes from David Schneider of Hoover Investments.

Hello. For the year just ended, your CapEx exceeded depreciation and amortization. And it seems like given all the efforts you had in the past year, that intuitively your CapEx should at the least stabilize, if not maybe even be lower, for the year we're in now. So, is that something that we can look for and what kind of number can I use?

On the CapEx?

Right.

What we said on the last call, which still holds, is we anticipated an increase in spending in our garage door business. And we've already talked about the decline that we expected in film. And that applies going forward. The other two businesses probably will stay fairly consistent in their capital needs. And so, we ended up with 40 million--40 million-plus this year--42. And I would suspect that next year would be something a bit less than that, mostly because we had the building in there for this year and we won't be buying another building next year.

Right. Okay. That's all for right now.

Okay.

Thank you. Our next question comes from Mark Anderson of Axial Capital.

Yes. A couple of quick questions. The first one is, in the communications segment, what percent--or I guess what was the dollar value of the SRC contract that ran through the top line?

The--I'm hesitating because I'm trying to recall whether we--no, no--at this point you can say it or not. The--to your second question, I'm sure at this point we can say what it is.

Sure. You've given it in the past, at least in your filing.

Well, no, not revenue. We've said [indiscernible] what revenue will be for the year. We didn't actually say--it's about 145 or so.

Of the 151?

No, for the year, 145.

Okay. Thank you. And my other question was about garage doors. And you qualitatively said you're starting to see some slowdown. Can you expand upon that just a little bit to give us a sense of whether it's mostly in new homes that you're starting to see a little bit of a slowdown? At the remodel level? Just sort of qualitatively, what are you feeling?

It's a little bit of a number of things. It's repair and renovate through our dealers, with the anecdotal feedback being consumer confidence is lower, and therefore, people aren't fixing up as much as they otherwise would be. Through our retail distribution it's sales seem a little bit off because, once again, repair and renovate is at a lesser level. The implication being the consumer is having to spend incremental money on fuel and gas and therefore is not fixing up.

And then, finally, for some of our dealers that unto themselves do a bit of business in the new home construction area, mostly with smaller builders, they're feeling it a little bit.

Okay. And I guess my follow-up on that question is if the downturn is a little sharper or perhaps more prolonged than we hoped, what flexibility do you have on the cost side in that business to I guess scale down should you have to?

By downturn, you mean new home construction or--?

--Well, new home, and if--maybe if the remodeling even takes more of a hit than we're expecting.

The--we have some flexibility. I mean, we obviously have variable budgets associated with--believe it or not, there's actual R&D in this business. We have marketing programs and the like that we can take a look at. So there is some flexibility. And we have a very talented management team that's on top of it and historically have been very bottom line focused and we'll be able to ferret out the areas to the extent possible.

We don't have things like plants that we can--that would make sense to shut down. We wouldn't quite honestly expect a drop off at a level where that would make sense, so we don't have that. But it's not a small business. It's over a half a billion dollar business and there are certain areas and things that we want, need, and can afford in good times that we can do without when things are tougher.

Great. And if I could ask one last question. It's on installation services. You referenced the dramatic slowdown in permitting in the areas that you're focused, and the lag effect that occurs. How flexible is your cost structure there? Like, do you--let's say [blends] are down 50%, which is sort of what you've referenced. Is your--is it fair to just take prior years earnings and cut them in half, or is there more flexibility or less flexibility in your cost structure to do that?

Well, first of all, let me talk about permitting. Permitting means new homes being constructed and the things that we provide in the house are things at the very end when the house is already up. So we have a fairly large backlog in Phoenix for homes to--that are being built that need to be finished. So to the extent that the permitting is delayed long or longer--ultimately--it might be next year, 2008 and going forward, that we're going to be more affected.

In Vegas, we may be more affected now because of the fact that there's more competition there. And so, we have lost some business, but we have gained back some of the business. So we do have flexibility because there's a lot of people involved and so you can't--and there's not a lot of inventory, so you can lay off people and you can cut back pretty significantly. But we have to see where we go on how it affects us right now, as far as finishing off all of the backlog of houses that are already in-house. And we'll see how the permitting affects that on a go-forward basis. But we certainly will keep our eye on the--our ability to cut back our expenses.

So, if you have a contract right now with a home builder, it's sort of fixed in stone until the contract's complete. And then, when they open a new [swap] of homes, that's when you might be subject to new pricing. Is that the right way to think about it?

Not quite. I wouldn't worry so much about pricing. I would worry about--.

--Just volumes?

That they're going to be opening a new--when do they open up a new section to build a new bunch of homes and start construction. That--the ones that are out there are basically--you're working on and you're completing because they're--the foundations are in the ground, the housing is being completed. It's the new projects.

The builders out in the Southwest have huge amounts of land that they have purchased and they were preparing to open up new sections in new areas. And right now, there's a hold on a lot of permitting because of the abundance of homes that are not sold. So, that's going to take some time. But meanwhile, the ones that are already contracted for are going to be worked on.

Okay, thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. Harvey Blau for any closing remarks.

Thank you very much. This has been, as you can expect, a tough sort of period for us. Fortunately, bottom line overall, we did have a pretty good year, earning $1.65 compared to $1.55. We've kept our debt levels low and we're working hard to try to turn the plastic film business around by getting new business, new customers, and cutting back on costs. And we're watching the housing market very carefully. Some things are out of our control, but there are some things that we can control. So we're going to continue to work as hard as possible to buy back stock and make the Company as valuable as possible.

Thank you very much. Looking forward to talking to you in February.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.