Park Aerospace Corp (PKE) 2007 Q3 法說會逐字稿

Thank you for standing by. Good day and welcome to the third-quarter 2007 results conference call for Park Electrochemical Corporation. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Brian Shore. Please go ahead, sir.

Thank you, operator. This is Brian Shore. Welcome, everybody, to our third-quarter conference call. I have with me Jim Kelly as usual. Jim is Vice President Taxes and Planning. And also Jim Zerby, who is the Vice President and CFO. And we will start with some comments from Jim Kelly. From the financial perspective, I will offer a couple of comments as well, and then we will go right into the Q&A portion of the call. Go ahead, Jim.

Thank you, Brian. Good morning, everyone.

Jim Kelly.

Certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent annual report on Form 10-K for the fiscal year ended February 26, 2006 various factors that could affect future results. These factors are found in Item 1A and after Item 7 on our Form 10-K. Any forward-looking statements we may make are subject to those factors.

In this discussion I will describe results of operations based on non-GAAP financial measures, as well as financial results determined in accordance with GAAP. We believe that the disclosure of non-GAAP operating results as a supplement to GAAP financial results will assist the listener in assessing the Company's performance and prospects.

I would first like to summarize the financial information included in the news release for the third quarter and nine-month period ended November 26, 2006 of Park's 2007 fiscal year ending February 25, 2007.

Net sales for the 2007 fiscal year third quarter ended November 26, 2006 were $68.2 million compared to net sales of $57.2 million for the prior fiscal year's third quarter. Park sales for the first nine months were $197.6 million compared to sales of $165.3 million for last year's first nine months. Net earnings for the 2007 fiscal year third quarter ended November 26, 2006 were $9.5 million compared to net earnings before special items of $8.2 million for last year's third quarter ended November 27, 2005. During the last year's third quarter, the Company recognized a tax benefit of $1.5 million related to the elimination of certain valuation allowances previously established relating to deferred tax assets in the United States.

Accordingly, net earnings were $9.5 million for the third quarter ended November 26, 2006 compared to net earnings of $9.7 million for last year's third quarter ended November 27, 2005. Net earnings before special items for the 2007 fiscal year first nine months were $26.9 million compared to net earnings of $20.7 million for the prior year's first nine months. During the 2007 fiscal year second quarter, the Company recorded a pretax charge of $1.3 million in connection with the termination of an insurance arrangement and recognized a tax benefit of $.5 million relating to the insurance termination charge, a tax benefit of $3.5 million relating to the elimination of valuation allowances and a tax benefit of $1.4 million relating to the elimination of reserves no longer required as a result of a completion of a tax audit.

Last year's nine-month period included in after-tax charge of $1.1 million for employment termination benefits relating to the reduction in workforce of the Company's Neltec Europe SAS subsidiary in Mirebeau, France, which the Company recorded in the first quarter ended May 29, 2005 and a tax benefit of $1.5 million relating to the elimination of certain valuation allowances. Accordingly, net earnings for the 2007 fiscal year first nine months were $31 million compared to net earnings of $21.1 million for the prior year's first nine months. Diluted earnings per share for the 2007 fiscal year third quarter were $0.47 compared to diluted earnings per share before special items of $0.41 for the prior year's third quarter and diluted earnings per share after the special items of $0.48 for the prior year's third quarter.

For the nine-month period ended November 26, 2006, Park reported diluted earnings per share before special items of $1.32 compared to diluted earnings per share before special items of $.103 for the first nine months of last year. Diluted earnings per share after special items were $1.52 for the nine months ended November 26, 2006 compared to $1.05 for last year's comparable period.

Now I would like to review some of the significant items in our third-quarter P&L. Comparing the current fiscal year third-quarter sales to last year's third-quarter sales, Park sales volumes increased 16% in North America, 3% in Europe and 36% in Asia during the fiscal year 2007 third quarter. During the fiscal 2007 third quarter, North American sales were 56% of total sales, European sales were 13% of total sales and Asian sales were 31% of total sales compared to 57%, 16% and 27% respectively for last year's third quarter. Sales of high-temperature laminate and prepreg materials comprise 97% of total laminate and prepreg sales during the third quarter of fiscal 2007 compared to 95% during the prior year's third quarter. Fiscal 2007 first three quarters' sales of high-temperature laminate and prepreg material comprise 97% of total laminate and prepreg sales compared to 96% for last year's first three quarters. Sales of Park's high-performance non-FR-4 printed circuit materials, which are a subset of high-temperature printed circuit materials, were 41% of total laminate and prepreg material sales in the third quarter of fiscal 2007 compared to 40% in the third quarter of the prior year. For the first three quarters, fiscal 2007 sales of high-performance printed circuit materials were 41% of total laminate and prepreg materials sales compared to 38% for last year's the first three quarters.

The gross profit percentage for the third quarter of fiscal 2007 was 25.3% compared to 26.8% for last year's comparable period. The reduction in gross profit percentage was attributable in part to the higher cost of copper. Selling, general and administrative expenses were 9.9% of sales for the current year third quarter compared to 10.7% for the prior year's comparable period, largely due to higher sales volumes achieved in the current year. Despite this relative decrease in selling, general and administrative expenses, the current year's third quarter included $350,000 in stock option expense which the Company recorded pursuant to statement of financial accounting standards 123R.

In addition to the current quarter charge, the Company previously recorded stock option expense of $295,000 in the first quarter and $288,000 in the second quarter of the current fiscal year. Based on currently available information, the Company estimates its fourth-quarter stock option expense to be approximately $350,000. Investment income for the third quarter was $1.9 million or 2.7% of net sales compared to $1.6 million, or 2.7% of net sales for the third quarter of 2006. The increase in investment income was attributable to an increase in prevailing interest rates. We continue to invest the available funds on a conservative basis and highly rated fixed-income securities and money market funds. As a result of all of the above, pretax operating profit was $12.4 million or 18.1% of net sales for the 2007 third quarter compared to $10.8 million or 18.8% of net sales for the prior year's third quarter. The effective tax rate was 23% in the 2007 third quarter compared to 23% in the 2007 second quarter before adjusting for the tax benefit from the insurance termination charge, the elimination of certain valuation allowances in the US and the elimination of certain tax reserves no longer required.

Turning to Park balance sheet, cash and marketable securities decreased to $196.8 million at November 26, 2006 from $199.7 million at February 26, 2006, the end of the prior fiscal year. During the nine-month period, Park paid $25 million of dividends, including a special dividend of $1.00 per share in the second quarter. Working capital was $224.9 million at the end of the 2007 third quarter compared to $214.9 million at the end of the prior fiscal year.

During the current year's first nine months, the Company had capital expenditures of $3 million and depreciation of $6.7 million. Stockholders equity was $255.6 million at November 26, 2006 compared to $245.4 million at the end of the prior fiscal year.

Finally, stockholders equity per share increased to $12.66 at November 26, 2006 compared to $12.20 at the end of the prior fiscal year.

Thank you, Jim. This is Brian again. And by the way, the script of Jim's comments is on our website. It was posted there a couple of hours ago. I know there is a lot of detail in Jim's comments, but you can go ahead and look it up on our website whenever you want. And like I said, I think it has been there for a couple of hours.

Okay. Let me give you a couple of comments and thoughts. First of all, I noted that in some of the morning's news items about our quarter there is a comment about our third quarter being off as compared to last year's third quarter. And then in the headline rather that was a comment. And then buried in the article somewhere there is this little fine print about, oh yeah, last year had a $1.5 million special item, which was a positive, it was a valuation allowance, and it seems like a funny way to report it to me. But I just want to make sure that none of you are fooled by those headlines and read the whole story.

Anyway let's talk about Q2 to Q3, which is probably more relevant anyway -- Q2 of this year and Q3 of this year. It is really very straightforward. I think if you remember when we did our second-quarter conference call, we have been talking a lot about the copper foil costs and what we have been doing about them. I think we indicated that we were adjusting our prices effective at the beginning of the quarter, more or less the beginning of the quarter, which would have somewhere around a $1.5 million positive impact quarter to quarter, Q2 to Q3. And if you look at the top line as well as the gross profit, you would see about that kind of difference in both the top line and the gross profit number. Obviously that would affect the top line, not only the bottom line.

So I think Q2 to Q3 it is a pretty simple straightforward story, and understanding the differences, obviously there are other items that go up and down and minor items, but I think that would be the major expectation in terms of the difference in Q2 and Q3. The market continued to be relatively strong in Q3.

If you want to go back to the gross margin number in Q3 of last year compared to Q3 of this year, as Jim commented, the gross margin percentage -- not the number -- the percentage is a little down. And that would be explained very largely as Jim Kelly said already by the very, very significant increases we've had year-over-year in our copper foil cost, which amount to over $20 million annualized.

Now think about the math here. Even if we had passed through all of that -- and we have not passed through all of it, we passed through the large majority of it -- it still would depress the gross profit percentage because what we're doing is we're adding -- we will be adding the same number to the top line and the cost of goods sold line so that even though the absolute number would remain the same in the period, if you understand what I'm saying, the percentage would go down. But that number is real. That is over $20 million year to year of additional cost, a large majority of which, like I said, has been passed through. I also think we have commented numerous times that there has been a lag effect between when we see the increased costs and when we adjust our pricing with our customers. We don't do those kind of things precipitously, and they are always based upon intimate one-on-one discussions with customers and explanations, etc.

Let's see, there also has been another copper adder, we call it, which we put into place effectively just in the last few weeks. And that really starts to deal with our advanced product line. And just to refresh your memory, all the copper adders that we have put into place recently -- when I say copper adders, those are adjustments to our selling price of copper-clad laminates related to what we call the F-4 productline. We are just now starting to deal with the advanced product productline, and that just started in the last few weeks. Probably not a very significant difference if you break that out Q3 to Q4. Maybe a plus of $500,000, and again it is going to take awhile to lag in and everything else, and to some extent, we are using -- there is old inventory that is being used. But going forward, that probably would have a $1 million impact quarter to quarter or a $4 million impact on an annual basis. But probably only about a $500,000 Q3 to Q4 impact, so it is not significant.

I just wanted you to know about it basically because the copper story has been a really huge story, and we have been talking about it for the last three quarters. I just wanted to make sure everybody is aware as to what is going on.

People ask me, what is the future for copper? And you are asking really the wrong guy. I don't know. That is not -- I know what people say, I know what all the pundits say, but we're just playing it by ear, and we'll see what happens.

I think it is really my opinion copper foil is a specialty item made with a commodity, which is the raw copper. And to some extent, the price of copper foil driven by the market for the copper foil, not just the commodity pricing on the coal mix or the LME. So what I'm saying is that the market for circuit boards and laminates could affect the pricing as well.

Well, let's see, just going back to some more review of Q3 items, a couple of events that I just want to touch on. We finally, finally, finally closed on the plant that we bought in Singapore and now put that past since we bought the plant in Singapore. This is a plant where we are going to be producing the advanced composite prepreg productline.

Now we bought the plant, but we need to do a lot of modification work and we are just beginning that now. It took quite awhile. There were a number of hoops we had to jump through. I won't go into those in detail, but I think we just closed on that within the last month. So it is probably three or four months late, which is disappointing. But at least we closed on it, so now we can go forward with the construction project to reconfigure and upgrade that plant so we can produce the advanced deposit prepreg productline here.

I think during the quarter we announced two new products. One is N4000-13 EP. -13 EP is a follow-on to -13. It does not replace -13. That should be clear. -13 is still a product and a very for us anyway as far as we're concerned a successful product. The -13 EP, EP stands for enhanced performance. The main thrust of EP is to take the -13 product and enhance its leadfree performance. The electricals are basically the same as -13. It's a high-speed low loss product, but it does have enhanced performance -- at least, that is our perspective -- with respect to leadfree or leadfree processing, and I just want to report that it is really early now. It has only been out for a little while, but you know we are encouraged because we are getting a lot of -- frankly, a lot of very positive feedback from customers and OEMs. So that is good news. Glad to report that.

We also introduced a product called N8000Q. That is a highly specialized product that will never be a value product. But it is interesting because it fits right in with our strategy of being an advanced material company because it is actually taking from both the advanced composite productline, the circuit board productline and what is being done with this is it would be military only. This is very elegant and not hyper and high volume with good margin, of course. Actually using the same material for an aircraft structure and a circuit board at the same time. Maybe like a radome, but the circuit board will actually be in the structure itself, rather than behind it, which is -- that is the way it has been done for as long as they have had radomes. I don't know about that, but a long, long, long time.

This is pretty elegant and maybe for military anyway could be next generation technology, very expensive to do this, but -- and I doubt it ever will have a civilian application. It is just not needed for civilian type radomes in my opinion.

Okay. And the other news that is important that you should know about is that over the last, let's say, four or five weeks our business has been off quite a bit, maybe about 20% in terms of our bookings. And I'm sure people want to know what does that mean and I don't know what it means. I would comment that this is a funny time of year, and often there is a lack of continuity between December and January. December is often not indicative of what will happen starting January 1 when the industry regroups and tries to figure out what it is doing. But, as usual, we are just reporting to you the facts we know. In the last four or five weeks, our bookings anyway have been off considerably. They were off across the board all regions. It is clearly not anything to do with market share. I sense that the market has gotten a little bit ahead of itself. The market for -- and I'm talking about the market for our advanced printed circuit material productline, not the advanced composite productline. My sense is that it has been pretty robust for awhile in what may be a little bit too robust. After everything we have been through in this world, we don't normally trust good news very much. We're always suspicious of hearing about how good things are.

So maybe you wound up being right. I don't know -- right in our suspicion that the market got ahead of itself. We don't know that, and all we can do is tell you what the facts are. The facts are the facts, and those just relate to our bookings. We do talk to everybody, and there is a pretty good consensus out there that the market is off for the last month. If you ask people what it means for the future, that is where you might as well just pull somebody aside on the street corner and ask him because you're probably getting at least as good information from that guy as you would from all the market pundits.

I really don't have much else I can help you with on that. Again, we always tell the facts. You know good, bad or indifferent. And you guys can, along with us, try to figure out what it means.

I think that covers it by way of introductory remarks. So, operator, can we go to the questions now?

(OPERATOR INSTRUCTIONS). Rich Kugele, Needham & Co.

Just a couple of questions if I could. First, in terms of the market commentary on the four to five weeks bookings being a little bit soft, just in terms of inventory, do you think that there is a mix problem potentially in what people have on their balance sheets that they are kind of working things down before the end of the year? Has that happened to you in the past in December quarters or in November quarters?

The answer is we have heard that, and you probably have as well because you're out there talking to all the usual suspects. But no, hearing things and knowing things are not the same.

Has it happened before? Yes. At this time of year, we would have to go back and look at history, but this is a quirky time of year. My recollection is last year was very strong in November/December. I am not looking at specific numbers in front of me, but that is my recollection. But certainly we have had many years over the history that we have been around where we have had December -- correction, November and December being slow months. And then that could lead into a continuation after January 1 or as I said before a complete disconnect where there is no continuity, and after January 1 the market would resume. So we can tell you what we know, and then we can tell you what we can speculate as I guess as well as the next guy can.

But you would not go and extrapolate anything out that perhaps customers are balking at your price increases?

Okay. I'm glad you asked that question. I would tell you with a pretty good degree of confidence that that is not what this is about.

Okay. And then just lastly here on Tycho, Tyco had obviously been a customer of yours in the past. Now post the TTM acquisition, has there been any changes to that relationship? Do you anticipate any changes, and what might those be?

Well, that has been no changes -- there have no changes to date. We did not do a -- we have not done a lot of business with TTM, but fortunately we have a very good relationship with the people of TTM. We have known them well for a long time. Most of our business with that Company has been more in the high-tech area, and what happens in the future is really up for grabs.

I don't know. I have personally spoken to key people and a person, of course, at both companies, and the indications are positive. I think it would -- my opinion, just my opinion in case you're interested -- be a mistake for them to underline the relationship because I think it has been a pretty good win-win for both sides. That is their choice. That would be up to them, but I have not received any indications that there will be any dramatic change.

And just one other thing on the margins, normally the February quarter is down slightly, and your margins have kind of been all over the map. Given the changes you have made in your business over the past 12, 18 months and your ability to pass along some extra or some copper costs retroactively here, do you think you can keep your gross margins where they are today?

Yes. I think that as consistent with the introductory comments, the large majority of that 20 million plus is now reflected in our pricing, and there may be a little fine-tuning that we will [leg] in in the fourth quarter, not significant. So I think that the big question of gross margins will be what the business levels will be. Because obviously with a manufacturing business such as us with fixed costs, the top line is going to have a significant impact upon the gross margins. And you know, we don't adjust our cost structure based upon two or three months of business levels. We just would not do that. That would be too reactive.

So I think the story that you want to be focused on and unfortunately I cannot help you other than what I have already told you for Q4 will be the top line story.

(OPERATOR INSTRUCTIONS). Jiwon Lee, Sidoti.

Some of my questions have been answered, but just one more clarification. Last year about this time I think Asia was unseasonably strong. And tagging along to Brian's comments about sort of across the board sort of a softness in booking trends, what do you think is the difference, especially in Asia when you compare last year versus this year?

So I think it really for us is -- we would look at it more holistically. Just remember that whether we are selling product -- and again we are talking about our printed circuit material product line -- in Asia or elsewhere, it often is going into the same programs. It is often going to the same end market. Often we are talking the same Western big OEMs who may be sourcing quite a bit in Asia. So the drivers are going to be essentially the same. We have not commented on this yet, but the softness in our bookings is not regional. It is in -- Asia is included in that.

So I guess what I would say is that Asia would be the same -- the answer to the question would be the same for Asia as it would be for the regions that last year at this time the market was robust, and that was based upon a lot of different factors that you all probably could reason out even better than we could. Right now it is not robust, and the prior caller asked a question about inventory adjustment. We have heard discussion about that. We don't have industry numbers that can back it up in a way that we feel would be comfortable in terms of establishing as a factual proposition. But we have heard from a number of different people we've talked to, many customers and OEMs, that there may be a little bit of inventory in there, and the market may have gotten ahead of itself.

Okay. And Brian or Jim -- and by the way, welcome aboard to the new Jim -- sort of a laundry list of five customers and the proportion of five and 10 customers, please?

Jim Kelly, do you want to help everybody out with that?

Yes, sure. For this quarter if you want to have in here.

And what we're doing from now on is we're combining TTM and Tyco. We are not going to report them separately. Is that right, Jim?

That is correct. That is correct. Our top five customers were Sanmina, Tyco, TTM, Pegasys, Multek and [Tasco].

Okay. And the percentage, please?

The percentage? As it stands, Sanmina is our only over 10% customer, but the top five make up 52% of sales, the top 10, 71% of sales, and top 20 is 82% of sales.

Jim, just want to -- I'm not sure -- was that for the quarter or the first --?

That is for the quarter, Brian.

Okay.

Great. And finally, you continue to grow your cash positions and you do get a respectable amount of interest income out of that. But is there sort of a little more plans or anything that you could comment on how you plan to use cash? I mean you have a lot more than what you need, even if you want to grow the composite side in Singapore.

I agree with that observation and comment in terms of organic growth and investment. We have a lot of cash. We are building a plant in Singapore as we have said. I think we have also commented that we're working on a plan with one of the very large Aerospace OEMs in Europe, which hopefully will lead us to build a plant -- it will be a smaller plant, a smaller investment -- in Europe. And we are also probably about a month away from finalizing our plans to do a major investment in Arizona with respect to advanced composite production that could be over 6 or $7 million in Arizona alone.

But you're absolutely right. We have good cash flow even with those three items, and plus there's other things that we're doing in Singapore that we have reviewed before. We are not going to use up our cash based upon our internal investment plans and based upon our organic growth plans.

So the answer is that we are still looking at other ways to grow our business, and some of these ways -- obviously we are talking acquisitions and major investments -- could use up a lot of cash very quickly and in some cases more than everything we have, where we would have to go on to the market and raise money.

So it is difficult to have this discussion I know because we needed to say these things, and nevertheless we have not done that acquisition, a large acquisition at this point. We think it is right for us to be looking at these things. We also think it is right for us to do -- to be intelligent about them and not to start buying stuff just for the heck of it. I sense that there is a little bit of frenzy in the US in particular, and bad investments are being made, foolish investments are being made because there's just so much money out there. And fine, everybody can do whatever they want. If it is their money, that is their choice. But we want to make sure we are being intelligent, so we have looked at things that don't make sense. It is not -- at the end of the day, maybe strategically they did not make the right sense, or maybe the pricing expectations were not right. But we still want that to be a major part of our strategy and we are not giving up. We are making inquiries. We are talking to people. We are knocking on the doors we should be knocking on I guess is the best way to describe that.

Sometimes you want it -- it wouldn't be just kind of an outright acquisition. It might be a major joint venture. We would build a plant to do something related to what we're doing now that could be significant, a significant investment.

[Leonard Cooper], private investor.

I was just wondering what the cost on a per-share basis is for the stock options? Those numbers went by pretty quickly there.

Remember you had the 123R expense for the quarter. Could you repeat that, please?

How about for the year?

(multiple speakers)

Yes, it was $350,000 for the third quarter. That was the expense.

For the year so far?

For the year so far, it is a little over 900,000 for the year.

I think Jim also was saying he is expecting about 350 for Q4 also, right?

That is correct.

So it is about $0.05 per share for the year?

Yes, about $1.2 million.

Those are pretax expenses.

Yes.

So if you figure in the tax rate, it might be a little bit less than that.

Okay.

That is probably about right. I think that is -- (multiple speakers).

Yes.

I read --

That is for the year though, not for the quarter.

Correct.

Okay, good.

Okay. I read that the small aircraft market is booming. Is that of influence on parts positioned in that market?

Yes, I mean we are all over that. We are putting a lot of energy and effort into trying to develop that part of the business. Some of that stuff is somewhat emerging. There is a lot -- just now new airplanes are being introduced. There is more utilization of advanced composite structures as compared to metal structures, so we are trying to get with the right people, get plugged in with the right people as they are introducing these airplanes. Some of these things you are reading about they have not resulted in volume yet. There is still -- it is more than talk -- but a lot of the stuff is plans. And some of these companies have, I think in my opinion, inflated plans and maybe even inflated opinions of themselves, and they talk about how many of these airplanes will sell. But okay, so we have to be a little bit skeptical about these things.

But nevertheless, we do believe that it's a big opportunity for the Company, and for advanced composite product line for aircraft, we think that is a bigger opportunity than Boeing or Airbus. Not that we're not -- not that we are ignoring Boeing and Airbus, but those companies are so conservative, and we're the new kid on the block, and it could take many, many, many years for them to even talk to us seriously. Some of these other companies, they are not little companies where you are talking (inaudible), Bombardier, Raytheon, Gulfstream, Falcon, those are big companies in their own right. We think those are the more appropriate targets for our Company to be working with.

By the way, the comment I made earlier did not relate to those companies. It related to some of these startups that are getting a lot of press in the Wall Street Journal, etc. that have not sold any airplanes yet. So so far a lot of good talk, but we will have to see what they can do.

I gather from your statements you feel the third quarter was quite good and I tend to agree. The market disagrees. Do we have any open stock purchase plan at the moment?

Yes. I cannot tell you -- I don't remember off the top of my head what the authorization is, but it is probably at least a couple of million shares, 2 million shares. Yes, we have that, and that has been an ongoing thing. That every now and then I think we remind you about it. I think also it may have been reported in some of our documents, 10-Qs, whatever. So the answer to the question is yes, we do have an authorization.

Okay. You are out looking for other companies. Is anyone looking to buy Park or invest in Park?

Hopefully there are people looking to invest in Park, you know, but maybe I am being facetious about that because I don't think that is what you really meant like just buying stock.

As far as the companies buying Park, well, first of all, it would be inappropriate for us to discuss that I would think. But since you did ask, the answer is no. There is nobody looking to buy Park to my knowledge, and certainly Park is not looking to sell either.

Well, I just have one other comment. You mentioned that market that was small and lucrative but small and primarily for the military. I remember about 40 years ago reading an article about Texas Instruments where they thought it might be a good company, although transistors were very expensive and only the military could afford them, but in the future there might possibly be some civilian applications for transistors. So you never know. The thing is to keep plugging on these markets, the markets that --

I agree with that. Everything you do is not going to be a homerun. I think this application for N8000Q is really a nice one for us. It is the area where we want to play. It is highly technical. It is elegant. We are partnered with huge aerospace military contractors. Military is not usually a volume situation, but nevertheless it is a situation where if you have the right technology and you know what you're doing, the opportunities are good for margin.

Right. The markets do develop where you don't expect them.

Yes, like I said earlier, I don't know if I see this developing into a civilian application, but you're right. What do I know? I'm not -- I don't see everything that is going to happen. Often these kind of things do start as military and then they converted to civilian after they become more cost-effective and practical.

Okay. Thank you very much and have a good year.

Thank you. You have a good year too.

Tim Allen, Wentworth Hauser.

Regarding your comments about the balance sheet and potential acquisitions, etc., I could have taken -- one could have taken your comments and plugged them into an earnings call 10 years ago, 15 years ago, 20 years ago, and you could have had almost the exact same script. We have excess cash. We have strong cash flow. We are looking for potential deals, even potentially big deals, but the prices are too high and we continue to look.

Now the question is, so what is different now? Because in retrospect the Company has carried excess cash for 25 years probably in an inefficient way. So looking forward, what is different in an environment where one could argue it is actually probably more difficult because all of the buyout firms out there, all the excess money that you talked about. Why is it -- given that having that cash really has not been a good idea for the last 20 years, why is it going to be a good idea going forward?

I'm not agreeing with that conclusion, but nevertheless let me respond to your question. The big difference here is that we are focused in a new market, in a new area which we consider to be a growth market (technical difficulty)-- advanced composites for aerospace, and that is really a pretty new development. Previously we were looking at acquisitions in electronics and you know what happened. In our opinion the electronics market and industry is that it became a fairly mature nongrowth industry. So it is not the type of industry that you would want to spend a lot of time doing acquisitions, and obviously if you do them, you have to be very careful and very disciplined of okay, what is really going on here? Because if you do an acquisition scenario, whatever they call -- the investment bankers call based upon growth expectations, you are probably kidding yourself. So it took us a few years to figure it out.

Well, maybe not that long. We had to figure it out pretty quickly. But we're talking five or six years ago when the market collapsed for electronics, not only did it collapse, but it became a different market in my opinion. It went from a growth industry to a nongrowth industry. And at that point, it really became a much different kind of scenario.

Now, first of all, we had big problems in our Company because we were set up to serve as a growth industry, so we had to really focus on our business so we could survive. We were not the right business for the new market, and we had to fix that, and we had to become the right business for the new market so we could compete and make money in a different kind of market, which is a nongrowth market, and it's a much more difficult market to make money in. And you don't believe me, talk to other people in our industry and ask how they are doing.

So that was really what we had to focus on. Now I don't know maybe years a little more ago, we realized okay, fine, not that we're done and not that it is easy, we kind of made the adjustments and not only -- you have to understand. It is not just people -- I will lay people off to close plants. It is adjustments or attitudes that really were the difficult -- that was the difficult adjustment. Okay, we did that. Now what do we do now?

So now we're moving to another area, which is part of our advanced materials strategy, and that is just advanced composite product line for aircraft. Now we believe that is a market, a growth market, and particularly in Asia. Also, we are talking to people about doing things with them where they would be very reluctant to sell off to a financial company because these guys usually don't have, frankly -- well, you know, I don't care what people think about my comments. I'm going to tell you what I think. They don't give a damn about the business. They are just looking to make a quick buck.

Now if you need to sell something and you don't care about it fine, but if you want to sell part of your business and you need to depend on it as a supplier, that may be a very different story.

So I understand that it is difficult competing against these guys who are throwing money around, in my opinion foolishly, but if you are a big company and you are maybe looking to sell off part of your company but you still need to depend on that part of the company for the future, you would be smart to be nervous about the fast-talking financial guys, I think anyway.

So I'm not totally giving up here or totally pessimistic, I just throw that out as an issue. If we're competing against the financial buyers and the seller does not really care who buys it, they are just looking for the highest dollar and the biggest bucks, we are going to lose most likely, right? Just like what you said, there is just so much money out there. If it is more of a strategic situation, and I still think there's some of those things out there, and the buyer is intelligent about it being strategic, they are going to be highly skeptical about the financial buyers as they should be because of their track record. They can say whatever they want, but look at their track record what they do with businesses. So you probably weren't asking for that, but you --

Well, in some sense, I kind of was because the real issue is, how is the world today different than it was during the previous history when there was a seemingly fruitless maintenance of a cash position in pursuit of acquisitions that make the company grow? So you are essentially saying that the environment today is such that the opportunities may be bigger because of the nature of the markets in which you guys are looking at and because there might be this strategic angle, there might actually be acquisitions that would make use of the degree of cash that you guys have. Or as I said historically, the Company talked about finding things that never happened. It may have been a good thing because it may have been a bad idea. So I was actually asking for what you gave.

Okay. Well, thank you and sorry to get on my soapbox a little bit there, but I guess I am entitled to a little bit since people want to know my opinions. But I think your comment is exactly right. I think it is a different situation, and obviously you will be watching. Everybody else will be checking in, and a couple of years from now it is still talk I guess you probably want to ask that question again, maybe a little forcefully.

But I do believe it is a very different landscape now and the type of discussions that we are having are different than the discussions we were having previously. And as I said, just one more time, I think that the aircraft market, the aerospace market is, first of all, a growth market number one and also very dynamic. When you have a mature market as in electronics, people are very conservative, very risk adverse, very reluctant to bring in new technology.

In the aircraft market, someone was commenting about all these new planes. Well, all these new planes have different new technology on them, and a lot of new technology relates to structures. They are going from metal to advanced composites. That kind of stuff does not happen in a market that is, in my opinion, very mature or very risk adverse. So we think it is more of an ultimate playing field, and I just want to repeat one more time, our opinion is to watch Asia because Asia is another wild-card here that can really make the thing dynamic. Dynamic is good because when you are trying to break in, you want dynamic. You don't want to change (indiscernible) into the market. You don't want a market that is very risk adverse.

Rich Kugele, Needham & Co.

Brian, just not to beat a dead horse here, but the softening bookings, the 20 to 25% decline, are you referring to sequential or year-over-year? How much of a bookings level do you normally enter the fiscal fourth quarter with?

Okay, glad you asked. First of all, I did not say 20 to 25; I said 20. I think I said approximately 20, alright? That is what we're sticking with.

Remember their leadtimes are very, very short, so we don't really deal with big backlogs. We deal with small backlogs. But if you look at the average, let's say, bookings per week as an example, during the first eight months of the fiscal year, which would have been the months of March through October, alright? And then you look at the last, let's say, five or six weeks which may be mid-November to now, that is a comparison we're making in terms of weekly bookings, weekly current business levels, and that number is approximately 20%.

Okay. And at what point do you start getting concerned given your leadtimes and the fact that there is not much of a backlog normally?

Concerned in terms of affecting our business levels or our revenues?

Yes.

We were already concerned. I mean to the extent that it is already affecting us in terms of our topline, our revenue levels. (multiple speakers). There is some lag, you know, but it is not long because our backlogs are short. So it does not take more than a few weeks, let's say, to really see it translate into our topline levels.

And the indications from your customers when -- like are they canceling orders, or is it just that orders are not even coming in?

No, I have not heard any instance of any cancellation. I think it is just new orders not coming in. And again, we don't want to -- we deal with pretty short leadtimes, so they don't really need to cancel orders. It is not like they are booked out for four months anyway. It really is not -- that is not necessary. It is just a matter of the pipeline continuing to be filled, and it has not been filled to the extent it was being filled in the first, let's say, eight months of the fiscal year.

And lastly, just in general what is the linearity of the fourth quarter? Is it a front-end loaded quarter or a back-end loaded quarter?

I don't understand what you mean by that.

Well, I mean do you have 50% of your business done in the last month and a half of the fiscal fourth quarter, or is it pretty linear throughout the quarter?

You mean like traditionally, historically?

Yes.

No, it would be -- I think historically it would be hard to say that. We don't -- if the business does not have that kind of dynamic, we don't back in or front-end load the quarters or even months normally. So, you know, often business levels would be fairly consistent during a quarter.

Now that assumes that nothing is going on in terms of the market going up or down generally. But if the market is really stable, you probably see the business levels really stable throughout the quarter.

Now you have to just go back because I want to make sure we're not missing this point that there is a little potential exception in Q4 because of the fact that December is before the end of the year and that January and February is after the end of the year. And, as I said, previously in some cases we have seen some kind of discontinuity between December and then January, February.

At this time we have no other questions. I would like to turn the call back over to Mr. Shore for any additional or closing comments.

Okay. Thank you, operator, and thank you all for listening in. It is always nice to check in with you and view our business. I would like to take this opportunity -- we would like to take this opportunity to wish you all a really happy, happy New Year and lots of success. Hopefully everything you would like to see happen will happen for you. Thank you and have a good day.

And that does conclude today's conference. Again, thank you for your participation, and have a great day.