Sypris Solutions Inc (SYPR) 2007 Q4 法說會逐字稿

Welcome to the Sypris Solutions, Inc.

conference call.

Today's call is being recorded.

At this time for opening remarks I'd like to turn the call over to the President and Chief Executive Officer, Mr.

Jeffrey Gill.

Please go ahead, sir.

Thank you, Tom, and good morning.

Scott Hatton and I would like to welcome you to this call, the purpose of which is to review the trends reflected in the Company's financial results for the fourth-quarter and full-year 2007.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide one now.

We always begin these calls with a note that some of what we might discuss here today may include projections and other forward-looking statements.

No assurance can be given that these projections and statements will be achieved, and actual results could differ materially from those projected as a result of several factors.

These factors are included in the Company's financial filings with the Securities and Exchange Commission, including our most recently filed Form 10-K and Form 8-K filed earlier today.

And in compliance with Regulation G, you can access our website at sypris.com to review the definitions of any non-GAAP financial measures that may be discussed during this call.

With these qualifications in mind, we would now like to proceed with the business discussion.

Please advance to slide two.

I will lead you through the first half of our presentation this morning, starting with a brief overview of 2007, to be followed by a look at several of our key markets and a review of our strategic direction, before concluding with a brief wrap-up.

Scott will then provide you with a more detailed review of our financial results and the outlook for 2008.

As we entered 2007, we were fully aware of the challenges ahead and recognized that the precipitous drop in commercial vehicle production was going to weigh heavily on the Company's financial results.

The commercial vehicle market offered few positive surprises during the year, including a notable softening of demand during the fourth quarter.

However, given this, our Electronics Group posted important growth in orders and revenue during the year, setting the stage for continued double-digit expansion during 2008 and beyond.

Turning to the next page, earnings per share were in line with our guidance, while revenue was slightly stronger than our latest outlook.

Revenue in our Electronics Group increased 55% to $44.8 million for the quarter, driven by a 73% increase in Aerospace & Defense, and a 24% increase in Test & Measurement.

Revenue in our Industrial Group declined 27%, to $58.9 million during the quarter, reflecting the downturn in the commercial vehicle market.

Orders in our Electronics Group increased 29% over the prior year, driven by strength in our Aerospace & Defense and Test & Measurement segments.

As many of you may recall, a key goal for our corporation is to increase the contribution of our Electronics Group to the consolidated results of Sypris.

During the quarter, increased shipments resulted in a 17-point expansion to 43% of portfolio revenue, up from 26% for the prior year, which we believe to be a very important development.

Overall, the quarter was in line with expectations, with important progress made in our Electronics Group.

For the full year, let's advance to slide four.

Revenue, gross profit, and net income were down year over year, led by a decline of 23% in our Industrial Group, which was the result of a 44% reduction in commercial vehicle production to roughly 212,000 units for the year, versus 378,000 units for 2006.

In our Electronics Group, revenue increased 18% to $156.8 million for the year, driven by a 19% increase in Aerospace & Defense and a 15% increase in Test & Measurement.

Orders in our Electronics Group increased 25% on the year, driven by a 31% increase in bookings from our Aerospace & Defense segment, setting the stage for a strong 2008.

On the year, our Electronics Group revenue increased to 36% of total portfolio revenue, up from 27% in 2006, while our calibration and screening business continued to grow.

And finally, as we've talked to many times in recent months, the Dana settlement and its subsequent successful reorganization were significant events for Sypris, and very important to the future of our company.

All in, when we look at 2007, it was a difficult year, as expected, but significant progress was made and important groundwork was laid for a recovery in the second half of 2008.

Now let's take a look at our markets and the related outlook.

On slide five you will note that the outlook for the production of heavy-duty commercial vehicles is expected to be up roughly 6% over that of 2007, which reflects roughly a 4% increase from our December forecast.

When we look at 2009 in the heavy vehicle segment, the forecast is for production to rebound by roughly 46%, which would represent 327,000 units of production, versus 224,000 units of production for 2008.

And this will be driven by demand from fleets that are expected to place orders ahead of the 2010 emissions mandate.

When we look at the medium-duty vehicle segment, our February forecast is actually down 2% for the year, compared with that in December, and now reflects a 2% overall reduction year over year to 202,000 units for 2008, versus 206,000 units of production for 2007.

When we look at 2009, ACT is forecasting a 20% increase in production to 242,000 units.

This also reflects the buy-ahead by the fleets for the -- to beat the emissions mandate.

But what's important to note, in both of these cases, the forecasted demand for 2009 is even at 327,000 units for the Class 8, which are heavy-duty market, and 242,000 units for Class five through seven, or medium-duty markets.

This is still well below the highs that were recorded during 2006, which gives us comfort that the capacity that we have in place will be sufficient to handle this demand on an efficient basis.

I think it's also worthy to note that these latest industry productions are consistent with our 2008 outlook.

As we look at the next slide, I think it will be very beneficial to take a look at how the quarterly sequence of this plays out, rather than just looking at the annual numbers.

On the top half of this chart, you'll see that in the blue this represents the quarterly sequence for 2007, and the red 2008.

And you can see that the first quarter of 2008 will be down 37% below that of the first quarter of 2007, but roughly equal on a sequential basis with the fourth quarter of 2007.

ACT is forecasting a progressive sequential recovery during the year, subject to the economy of course, increasing on a sequential basis 12% in Q2, and 8% in Q3, before stepping up 20% in Q4, as the pre-buy begins.

I think what's also worth noting in this quarterly view is when you look at any risk inherent to the outlook for 2008, it's heavily weighted to this 20% sequential increase in Q4 of 2008.

When we look at the medium-duty market it tells a bit of a different story.

Medium-duty market will be down in the first and second quarters relative to that of last year, but is expected to rise sequentially throughout the year at a rate of roughly 3% per quarter.

So when we look at the relative markets year over year, 2008 versus 2007, the heavy-duty market in particular reflects more of a mirror image of 2007, meaning that 2007 had a high first quarter and a low fourth quarter, while 2008 is expected to have a high fourth quarter, but is starting with a low first quarter.

If you'll turn to page seven, you'll see that the outlook for the production of trailers continues to weaken, with 2008 volume now expected to decline 16% from 2007 levels, whereas back in December ACT was forecasting a 12% decline.

On the light-vehicle side, production of sport utility vehicles and light trucks is forecast to climb year over year, with recovery slated for 2009.

Having said this, and despite the headwinds in these two sectors, the gradual recovery in commercial vehicles, when combined with new program starts and higher material pass-throughs, expected to result in a 9% top line growth compared to 2007.

In our Electronics Group, Aerospace & Defense is expected to show continued strong double-digit growth during 2008, driven by the increased shipment of new secure communications programs.

As many of you may recall, we have been working quite some time to complete the certification testing of a new secure communications product, and this testing and the certification process has gone on perhaps as long as 18 months longer than we had expected.

Well, this morning the good news is that this program received certification in January, and that deliveries commenced in February.

And from a Sypris standpoint, this represents a very important milestone for the Company, for this program is expected to make a material contribution to the Company's financial results for years to come.

Our markets for intelligence, missile defense, and secure communications are expected to remain positive for years, which should be a plus for Sypris.

Our expanded R&D budget is expected to feed demand for additional new products in this segment in 2009, and we expect to maintain strong momentum in our calibration services.

In summary then, we are expecting a gradual recovery on the Industrial side, and continued double-digit expansion in our Electronics Group.

So a key question, I guess, is how does all this play out?

And before I turn the balance of our presentation this morning over to Scott, our sense is that it would be valuable to step back, if only briefly, to see where we are headed with the business strategically during the coming months and years.

On page eight, you will notice that we expect our Electronics Group to play an increasingly larger role in our overall portfolio.

Our internal target is to have this important group be 50% or more of our consolidated results over the long term, and we believe that if we are successful in achieving this in an appropriate fashion, that this will drive margin expansion for our company as a whole, as well as balance our customer and industry exposure, thereby mitigating the cycles of the commercial vehicle market.

Our emphasis within this group will be on expanding the product mix within our Aerospace & Defense segment, and continuing to grow our Calibration Services within the Test & Measurement segment.

We plan to drive volume through our existing footprint, while expanding R&D to grow our product lines.

We'll continue to focus on those niche markets where we have unique certifications that serve to differentiate Sypris from most of the other competitors.

In our Industrial Group we'll continue to focus on the realignment of our manufacturing footprint, systems, and processes, with the intent to balance production among our plants and increase production from low-cost countries.

We plan to expand our presence into India, China, and Eastern Europe and we'll do so in a very pragmatic fashion by partnering with established players, to balance our risk and preserve our capital.

When successful in completing this initiative, we believe that we will diversify our markets further, our customers, and put us in a position to participate in local growth.

We expect these efforts to enhance our margins, reduce cyclicality, and balance risk more effectively.

In closing, please turn to slide nine.

The fourth quarter concluded a year that was expected to be difficult and was.

But despite the obvious issues and disappointments, the Dana contract resolution and double-digit growth in Aerospace & Defense and Test & Measurements segments served as notable positives.

For 2008, we expect this to be a better year, with continued double-digit growth in Electronics, and the commencement of a recovery in Industrial.

Volume, mix, and productivity are expected to drive results in the second half of the year, with the economy remaining as the wildcard.

Our managerial focus during 2008 will continue with the realignment of our Industrial Group, and laying the groundwork for additional growth in Electronics for 2009 and beyond.

Our target, of course, is to achieve margin expansion, portfolio balance, and customer market and industry risk diversification.

We believe that 2008 will serve as an important building block, paving the way for a strong 2009.

It is now my pleasure to introduce Scott Hatton to you.

He will lead you through the balance of our presentation.

Thank you, Jeff, and good morning, everyone.

If you'll advance two slides forward to slide 11, we can begin discussing the fourth-quarter performance.

Revenue was $104 million in the fourth quarter.

This was $8 million higher than the midpoint of our guidance of 93 to $98 million.

Better-than-expected truck volumes late in the quarter in the Industrial Group, combined with stronger product shipments in the Electronics Group, delivered the upside in revenue.

Our top five customers represented 66% of our total revenue in the quarter, which included Dana at 31% of revenue, U.S.

government and related agencies at 15%, ArvinMeritor at 11%, Ford at 5%, and Honeywell at 4%.

Robust orders growth of 29% year over year in our Electronics Group was even higher than expectation, as orders for our next-generation link encryption product, which was recently certified in January, started to attract orders from customers, and we saw strong order activity in our manufacturing service area.

Our fourth quarter performance in profit before tax was a loss of $3.2 million, and a net loss -- our net loss was $2.2 million, leading us to post a $0.12 loss per share.

This was within our guidance for the quarter, as our previous guidance on EPS was a range of $0.10 to $0.12 loss per share.

Industrial Group gross profit was $3.8 million, or 6.5%, and was in line with our expectations, while Electronics Group gross profit was $5.8 million, or 13%, as the stronger volume served to offset higher program costs and negative sales mix.

SG&A and R&D spend were in line with expectations during the quarter.

From a cash flow perspective, our free cash flow was a usage of $12 million, or $4 million outside the midpoint of our guidance range of 5 to $10 million provided in our December outlook.

This was driven by collection timing in our Electronics Group that will be largely recovered in first quarter of 2008.

Also of note was our improved performance in inventory turns.

Our turns increased by 0.6 turns to 5.2 turns in fourth quarter.

CapEx spend was 5% of revenue in the quarter, as we increased our restructuring realignment activities on the Industrial side and realized deferred expenditures from earlier quarters.

By advancing to slide 12, we can now discuss the total year performance of 2007, as compared to 2006.

Versus last year, 2007 full-year revenue of $436 million was down 12% from the 2006 revenue of $498 million, driven mainly by the anticipated truck market decline.

Industrial Group revenue was down 23% as truck demand slowed and we saw housings and trailer demand decline, offset somewhat by the Dana settlement and arbitration impact, as well as a series of price improvements.

In the Electronics Group, Aerospace & Defense revenues grew by 19%, as products growth provided the largest source of improvement, stemming from new launches.

Our Test & Measurement segment also posted strong revenue growth of 15% as they saw calibration and test services expand during the year.

These same areas in Aerospace & Defense and Test & Measurement provided strong order activity throughout the year in 2007, as the Electronics Group recorded an up-tick of 25% in orders over 2006 order intake, suggesting continued healthy revenue growth in 2008.

Profit before tax was down $1.1 million to a $4.5 million loss, compared to a full-year loss of $3.5 million in 2006.

This profit-before-tax performance equated to a $0.12 loss per share for the full year 2007, as compared to an $0.08 loss per share in 2006.

Included in these results was $12 million of positive profit-before-tax impact, and $0.41 earnings per share impact from the Dana settlement.

Without this impact, profit before tax for 2007 would have been a $13.1 million loss, and earnings per share would have been a $0.53 loss per share.

Looking closer at the group performances, Industrial gross profit was flat to prior year, as price increases and the Dana settlement and arbitration impacts offset the impact of declining volumes and increased labor costs, while the Electronics Group gross profit decreased by $1.2 million over prior year as increased program support costs and negative sales mix more than offset the benefit of increased volumes.

Free cash flow in 2007 was a $21 million usage, compared to a generation of $42 million in 2006, a significant portion of the 2007 usage being either recoverable, as is the case with the $14 million inventory build in Electronics for new product ramp-ups, or was nonrecurring usage related to the normalization of terms and impacts from the Dana settlement that were felt in 2007.

Turning towards the upcoming year, please advance to slide 13 to review our outlook for first quarter.

Guidance for first quarter 2008 revenue ranges from 102 to $107 million, similar to the previous guidance given in our December outlook.

This represents a $7 million, or 6% increase over 2007 at the midpoint of the guidance.

With the truck market expected to continue to be soft as compared to a prior-year period that was continuing to feel the overhang impact of a record year in 2006, Industrial Group revenue is expected to decline by 12% in first quarter, whereas our Electronics Group revenue is expected to continue to post double-digit gains over the previous year, growing at 15% on the strength of Aerospace & Defense product sales.

Profit before tax for first quarter will be up $400,000, and earnings per share up $0.01 over same time last year.

This means we expect our profit before tax, as well as our earnings per share, to be breakeven in the quarter.

This is in line with previous guidance.

Improvements in both groups will be posted as the Dana settlement impact will offset volume declines in Industrial, and gross profit begins expanding in Aerospace & Defense as volume grows.

As we are investing in R&D and infrastructure for future growth, we do expect some increase in SG&A and R&D to a combined total increase of $800,000 over the prior year, while interest expense will also be $600,000 higher, due to a higher debt balance.

Cash flow is expected to be a usage of 8 to $10 million for first quarter, which has improved $2 million over previous guidance, which was 10 to $12 million of usage in December outlook.

This forecast includes a $10 million tax payment on our Dana settlement that is due in March, but excluding this payment we are expecting positive operating cash flow of $8 million for the quarter, offset by $7 million of capital expenditures, primarily to support further restructuring realignment efforts in the Industrial Group.

Continued improvement in inventory turns is also expected during the quarter, as we improve another 0.6 turns to 5.8 turns.

For total year 2008, we reconfirm our previous guidance of 460 to $480 million in revenue, and an earnings-per-share range of $0.05 to $0.10 positive.

Free cash flow, we do expect to be up from our last guidance.

Our last guidance was $0.00.

With additional collections expected, we do now forecast that to be somewhere between $0.00 and $5 million positive for the year.

That concludes my comments on the financials.

By advancing to the next slide, slide 14, I would like to quickly review critical areas that we will be focused on during 2008 to execute our operating plan.

Although there are many improvements we are working on in 2008, there are three important aspects of our improvement plan that I believe are critical to creating growth in margin as well as revenue, and will prepare us for a strong 2009.

First is the completion of our phase one of Industrial restructuring, as well as preparing for the market upturn that Jeff discussed earlier.

Our new business transfers that we've been working on are on track, as well as exiting certain non-core lines of business, also are on schedule.

Relocation of certain operations to low-cost locations is largely on track.

We have experienced a month or two delay here or there, but for the most part they are on track.

Emphasis on lean and standard operations, as well as managing our benefit costs moving forward, will be additional areas that we will focus beyond the phase one restructuring to improve our margins in this important segment.

Second, achieving double-digit Electronics growth, expansion both in revenue and profits.

You heard earlier our next generation of link encryption product has been certified and has commenced shipping.

This is an important step towards that growth, for both revenue and profits for this segment.

Beyond that, however, there is additional R&D development going on in the next generation of encryption product, and that is currently on schedule, and we would expect to go in production with in 2009.

Markets emerging as well for-- have been emerging on our new intel recorder and receiver offerings that we expect to have impact in the second half of 2008.

As well, calibration business in our Test & Measurement business will continue to work new business opportunities, up to $3 million on the calibration side alone in 2008, which will also serve to support this growth.

And lastly, also an important effort will be the improvement of certain business processes, focused on both the integration and automation of these processes, across our businesses, one of those being factory scheduling.

On the commercial side, more focus on our bid-to-order processing, as well as customer alignment and rationalization through that process.

We will also continue to work to enhance our working capital management, in addition to our commodity management.

As we think about all of the things that we have to work on, I would come back to these and revisit these with you each quarter, as I think these become very important to the overall performance of the year, and are really the keys to success and demonstrating improved operating performance in 2008, and driving towards a more balanced portfolio for the Company.

At this point, that concludes our formal remarks.

And we're available to take any questions.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS.) We'll take our first question from Peter Lisnic with Robert W.

Baird.

Good morning.

It's actually John Haushalter on for Pete.

Good morning, John.

Good morning, John.

When you guys mention that kind of 50% goal for getting the Electronics Group to, is that entirely organic, or is there an acquisition component there?

Because just with what you kind of did in that quarter and with where you're forecasting things, it looks like you could get pretty close to that just on an organic basis.

It's strictly organic, John.

There is no acquisition or inorganic activity assumed.

Okay.

Thank you.

And then, just in terms of the R&D needs that you mentioned on the Electronics Group, I mean, how should we think about that for the next kind of two to three years?

I mean, how much in terms of dollar cost, how much do you have to increase there to get the next generation of products out?

Well, I think you're seeing it in our plan for this year.

I think you're going to see something in the neighborhood of 3 to $4 million of R&D, I think, to continue to support continued pipeline growth for that business.

Okay.

And then just a final one and then I'll get back in queue, but when you guys look at the Test & Measurement business, it's kind of been a kind of nice growth this year.

And just where exactly do you think, especially with kind of $3 million of revenue coming on line next year, where can gross margins go to in that business, and how do you think about that over time?

Well, I think part of it is leveraging the infrastructure you have in this business.

We have a large branch network, and being able to attract more accounts -- new business obviously gives you some ability to grow margins, but the largest costs -- keep in mind it's a service-based business, so the largest component of the cost is labor.

And although I think there can be some expansion over time, I think it's realistic to expect that they're going to be in that 20 to 25 range from a gross margin perspective for a while.

The biggest opportunities for growth for them, of course, are to convert clients that currently do this work in house and provide an important source of growth for us as they look to provide outsource arrangements to key providers like ourselves in that market.

Okay.

Thank you.

I'll get back in queue.

And we'll take our next question from Tom Carpenter with Hilliard Lyons.

Good morning, Jeff.

Good morning, Scott.

Good morning, Tom.

Morning, Tom.

What are your-all's customers mimicking what ACT is saying, or are they more cautious or more aggressive on volumes this year?

Our customers are slightly above ACT.

Okay.

If ACT's at 224, our customers are at 235 type thing.

Okay.

With -- is that more of a back half or is it interspersed throughout the year?

It's throughout the year.

Okay.

Scott, quick question on the balance sheet.

Saw that long-term debt increased $10 million quarter over quarter.

Yes.

Can you walk us through that and your expectations on what that's going to do this year and maybe your plans for the some of the Dana settlement money?

Yes.

Well, as you know, we had uses within the fourth quarter that would have driven the bump up in the long-term debt, but I believe once we get beyond first quarter, which we've guided to, which is really more driven by the tax payment, we do expect to see the balance of the year generating positive free cash flow through those last three quarters, and significant operating cash flow.

I think, with respect to what we will do, or could do, we obviously have the option of liquidating some of our position with Dana shares, but at this point we don't have the need to do that and we probably would not do that given the current price.

Sure.

When is the second -- potential secondary distribution from the Dana settlement/reorganization?

If there is any secondary distributions, it will likely come over the next number of quarters.

I think they re-look at it once a quarter and, depending on any disputed claims that have been resolved, if they've been resolved successfully then there would be a prompting to look at those distributions.

So they could come in installments throughout the balance of '08.

Some could even roll over into 2009.

Okay.

And based on the ACT numbers you guys are talking about and the two programs in the Electronic Group increasing throughout the year, is it fair to say you guys are looking for gradual sequential improvement in top line and bottom line on a quarter-by-quarter basis in '08?

I would say that's reasonable, Tom.

Okay.

And more of a big picture question.

I'm sure you guys are frustrated with the stock price, too, considering it's about a little bit less than half than your-all's book value.

When you guys sit down with the Board, besides focusing on improving the business and execution this year and next year, are there any other ideas that you guys talk about?

I know if you look at industry multiples and comparables and asset values, you could make the argument that the Industrial Group and the Electronic Group are both worth 5 to $6 apiece, which is significantly more than the current stock price.

What are you guys talk about besides execution as far as unlocking value at the firm?

Well, first of all, Tom, you're exactly right.

With revenue $160 million last year in the Electronics Group and with double-digit growth expected for this year, it seems that the Electronics Group alone is worth more than the entire company.

But having said that, you've touched on the key points.

One, we have to execute and we have plans in place to do that.

Secondly, we need to demonstrate that there's recovery in our markets, which should drive some fairly significant revenue and absorption and then, hopefully, margin that will accompany that.

And kind of the Board as well as the management's perspective on this is if we do two or three of these things, then we should see a reflection of that in the stock price.

Okay.

I know it seems like Wall Street has always had a tough time valuing the Company.

There are some synergies from running the businesses together, but they're so different as far as industry multiples it seems like the entire company gets the industry multiple for the Industrial Group.

And that's maybe where the firm as a whole gets penalized.

Yes.

And I think we have some communication that we have to make, and we just have to put together a few quarters before we get out and tell the story.

But I think there's some really positive things going on that, once we get through the short term, if we're successful, should have an impact on the stock price.

Okay.

Well, fair enough.

I know you're a large holder, so you share our issue as well.

Yes, sir.

Okay.

Thanks you.

Guys.

Thank you, Tom.

Thanks.

And we'll take our next question from Jim Ricchiuti with Needham & Company.

Hi.

Good morning.

Good morning, Jim.

Morning.

Question on your gross margins.

I wonder if you'd talk a little bit on how we might see the Electronics Group, particularly the Aerospace & Defense gross margins, as we begin Q1.

I mean, it looks like you're starting to see now the ramp in the link encryption product.

That should help margins.

Can you comment a little bit about that please?

Absolutely, Jim.

Yes, obviously the link encryption product back into the fold will -- it's a new generation for us, third generation, but just like with any new transition there's going to be start-up transition things to work through.

But we think, as we get working through the back half of the year, we would expect improvement on the gross profit side for the Aerospace & Defense segment as A, that particular program gets up and running and all the kinks are worked out.

I think secondly, the second half is historically a stronger half for that segment of the business.

So I think those two things, combined with some other pieces of business that we're looking to bring on line on the manufacturing service side, should lead us to some significant expansion over what 2007's performance was, especially in the third and fourth quarters, probably -- certainly back into the mid-teen, the 15 to 20% range for that segment.

Okay.

And so, Scott, in thinking about Q1 it sounds like there's still going to be some start-up related expense associated with that launch?

Yes.

I mean, there's things that we're working with the customers on to provide incremental enhancements, you know, features.

So there's some things there, incremental work and cost to work through -- but as -- we're into production, but that's just the starting point.

You then start to work on things that can continue to improve your manufacturability of that product.

So those things will likely have impact -- be worked on in the first half, have impact in the second half.

Did you guys -- I'm looking through and may have missed it, but did you provide a backlog number for the Aerospace & Defense business?

We did not.

As we exited the fourth quarter at the end of this year, our backlog was roughly $107 million.

Okay.

And --

And that was slightly down from where we ended third quarter.

We were at $111 million -- close to flat.

Yes.

And that's a meaningful increase in backlog if you look at where we ended '06.

And that backlog -- what percent of it would ship -- that's a 12-month backlog?

Yes.

Okay.

How do you see the risk -- you're forecasting pretty strong growth in the Aerospace & Defense business in '08.

What are some of the big risk factors?

Is it a case of some of your government customers pushing out a bit?

Is it more execution risk on your part for new products?

In terms of converting the backlog?

Yes.

Well, we entered the year very similar to where we have in prior years, with about 30% of our backlog that we would -- 30% of our revenues that were forecasted that we would expect to kind of book within the year and then turn to revenue.

But as I sit here today I can tell you that, given where we are, I feel more comfortable that we've closed that gap even more.

So it will come down to timing of funding on the government customer side.

We believe the demand is there.

It's just the timing of it.

And then I think beyond that, with some of our other tier one customers it's just completing that book-to-turn gap that we started the year with.

But that would largely be something that would affect us in the latter part of the year.

The revenues that we have in the first part are kind of already locked up.

Okay.

And a couple of questions on the Industrial business.

I am trying to get a sense of what your Q4 gross margins look like in that business, excluding the Dana settlement impacting into the pricing improvements that you talked about.

Is there any feel -- can you give us a feel for what that might look like -- have looked like, Scott?

Yes.

You're looking at somewhere between 1.5 and 2%.

Okay.

How should we think about your margins in the business?

I assume they're going to remain at fairly low levels in the first half, and then should ramp up -- we should see the ramp-up in the second half of the year with the volume pick-up?

Yes, that's a fair statement.

So we're not going to have the same significant impact from the settlement running through in the out quarters that we had in first quarter or the last two quarters.

So we won't be dealing with that significant of an adjustment from there.

But I would expect certainly kind of a building towards the back end as volume ramps back up.

We ought to see that gross margin, or gross profit, performance improve.

It's going to be in that seven, eight, nine range, depending on which quarter we're looking at and what the volumes turn out to be.

Okay.

Last question.

I don't know if you can provide some flavor as to the mix of business when we think about the Industrial, heavy versus medium and trailer.

Any sense you can give as to how that business breaks down.

You know, it's a difficult question to answer, because we just don't have insight as to where all of our product goes to from a medium versus heavy split.

Certainly medium and heavy make up the lion's share of what we do on the Industrial segment.

I probably -- probably 75% of our volume, ex the trailers and the light-duty stuff that we do.

So -- but splitting down that 75% or so into something more meaningful between heavy and medium I think is difficult.

Jeff, I don't know if you --

It's -- you know, we don't have the ability to do that.

And Jim, I would say that you can break trailers out into roughly 15 to 20% of the business.

Great.

Fair enough.

Thank you, guys.

(OPERATOR INSTRUCTIONS.) We'll go next to Chris McDonald with Kennedy Capital.

Good morning.

Thanks for taking my questions.

Good morning, Chris.

Just -- I want to understand in a little more detail the margin performance in the Aerospace & Defense group.

Scott, can you just talk, maybe a little color commentary, on what the specific issues were with an 8% margin level in this quarter?

Well, yes, as we've discussed before, Chris, we had one program in particular, new products, completely new design, that we ramped up with throughout the year.

We've had a number of starts and stops with that program as we've been cutting in new improvements and making improvements.

And the inherent delay, with all those starts and stops -- and -- has increased our support costs for that particular program.

So when we look at these programs, we look at them each month and evaluate what's the cost to complete the contract.

And as we looked forward, the delay had stretched out the delivery timeline, and the higher -- the longer you do that, the more support costs you have to put into the program.

Those support costs, as well as increased material usage on the program has required us to have to estimate a higher cost to complete the work that we're doing there.

And so you saw some of those things come through in fourth quarter, as we recognized the increased costs to support the completion of the contract.

So although you had increased volumes providing contributions, you had one program in particular which we certainly had our starts and stops on, recognized that the cost to complete that contract was going to be more.

And so, in addition to that, when you look at it you're also again without the performance of the new link encryption product, which will be in the numbers for 2008.

And you also had some negative sales mix happening, because we had lower sales on our data recorder side, which tends to be a fairly high margin product for us.

So a lot of that had to do with funding availability and such, but it does weigh heavier in the overall Aerospace & Defense margin when they are down relative to the, say, manufacturing service activity, which tends to be a thinner margin segment of that business.

Okay.

So it sounds like the, just the manufacturing services type of business continues to operate in line with your expectation.

You're just wrestling with this one encryption program where you've got the start-up issues that are --

Right.

And that program was the largest source of some of the revenue increase within the quarter.

Okay.

Understand.

So effectively, if you've now estimated the cost on that contract correctly going forward, some of the margin headwind that was experienced in the fourth quarter ought to drop off?

Most definitely.

Most definitely.

We think the majority of our issues, if you will, with start-up and so forth, are behind us.

We think we have a sustainable production position and you absolutely should not see that kind of performance going forward.

Taking a step back on the Aerospace & Defense part of the business, what would you as a longer-term type goal or just intuitively looking at that business, what type of gross margin would you think would be achievable there?

I'm sorry.

Chris, can you repeat that question?

I'm just wondering if you have a longer-term goal, or what you would -- how you would characterize the gross margin opportunity that exists in the Aerospace & Defense part of the business, looking at the mix of business that you have?

Well, I think it's fair to look at it as it's somewhere between 15 and 20%.

It depends on the mix of products, but you're always going to have a manufacturing service component.

It is going to be a thinner margin component to the overall Aerospace & Defense industry.

And I think, recognizing that it is a significant component and it will be there, you have to suggest that depending on how much your products can grow will dictate how much you can drive above, say, 20%.

But you tend to vacillate in that 15 to 20% pocket.

But if you have more product mix in the fold in any given quarter or year, you're going to have a likelihood of cresting above the 20%.

Sounds like the emphasis that you're placing for growth is more on product, or proprietary-type products, versus the manufacturing services that I would imagine would put upward pressure on where that margin could go.

Most definitely.

And so when we talk about R&D and where we're spending our money, it's on the product -- expanding the product portfolio.

So we would expect, depending on the success of those development programs, to see that grow over time.

In the -- you mentioned -- just shifting gears a little bit here, you mentioned in the prepared remarks some opportunities related to applying your data recorder expertise to intel markets.

I'm just wondering if you could maybe give an update on your expectations around that market?

Well, as we've always been in the recorder market.

We've had a major presence there.

We're looking to reestablish ourselves on the receiver market side, and there's a number of alliances that we have formed with other companies that are giving us, if you will, access to a broader product portfolio.

So we are working as more of a added-value reseller in those arrangements.

But it provides us more meaningful content, in a portfolio sense, to customers that we serve today.

So we're providing the marketing expertise and access, along with working with those other partners to develop the products that are needed for the market.

And, over time, we may be doing some of that work as well as our partners.

So, I think it's moving along.

I think it's a little slower than we anticipated, but it has certainly the opportunity to provide meaningful growth to our data recorder business, which for the last few years has been exclusively on the recorder side, and certainly grow with other customers as well.

Okay.

One bullet point on your summary slide dealt with commodity management.

It's my understanding that all the major commodities that you might be exposed to, at least on the Industrial Group side, are basically neutral due to the Dana agreement.

Is that correct?

It is correct, but we still have a number of indirect supplies, whether it's chemicals or other items that we procure from suppliers directly.

And then, of course, on the Electronic side you're talking about printed wire boards and various other commodities that we do procure directly.

A lot of emphasis, no question, will be on the Electronics side of that equation, but there's absolutely relevant -- relevancy to it on the Industrial side.

Your steel exposure is on the Industrial side, where I would imagine that's where most of the steel that you buy is basically something that you can pass through?

It's a pass-through, Chris.

It is a pass-through, yes.

That has not changed.

You are correct in that.

Okay.

And then just one last quick one.

The Dana settlement impact, you're expecting another positive impact of about $1 million in Q1.

Does that then drop off to basically nothing in Q2 going forward?

Can you just kind of walk us through how that goes throughout the year?

Well, certainly the impact in Q1 will be significant as we still have certain amortization of non-core lines that were part of that claim.

And so in first quarter we are looking at probably roughly $5.5 million of gross margin impact from the settlement.

But then that drops off to less than $1.5 million as we move forward in the balance of the quarters.

Okay, thanks.

Thank you, Chris.

And there are no further questions at this time so, Mr.

Gill, I'll turn the call back over to you for any closing comments.

Okay.

Thank you, Tom.

Scott and I would like to thank you for joining us on this call.

We welcome your continued interest and, of course, your questions about our business.

Thank you and have a great day.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.