Sypris Solutions Inc (SYPR) 2009 Q1 法說會逐字稿

Good day and welcome to the Sypris Solutions, Inc.

conference call.

Today's call is being recorded.

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

Jeffrey Gill.

Please go ahead, sir.

Thank you, Camille, and good morning, everyone.

Brian Lutes, Tony Allen, 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 first quarter of 2009.

For those of you who have access to our PowerPoint presentation this morning, please advance to slide two 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 filings with the Securities and Exchange Commission.

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 three.

I will lead you through the first half of our presentation this morning starting with a brief overview of the quarter to be followed by an update of our strategic restructuring initiatives and some perspective on each of our three business segments.

Brian will then provide you with a more detailed review of our financial results for the quarter.

Now let's turn to the next page.

The first quarter was certainly a very challenging period especially for our Industrial Group where the rapid contraction of the economy impacted truck and automotive sectors.

Revenue for our Industrial Group declined 46% year-over-year and 21% sequentially to $37.5 million from $69.8 million for the prior year period and $47.3 million from the fourth quarter of 2008 respectively.

The good news is that our management team in the Industrial Group was able to reduce inventory by 26% sequentially, therefore outpacing the decline in revenue on a sequential basis or $5.3 million in the quarter, thereby maintaining inventory turns in excess of 10 times, which in our view is a very difficult thing to do during a period of declining top line.

Our management team in this segment of our business also reduced headcount by 19% when you look at the change from December through April, reflecting the unfortunate but necessary need to keep the workforce in balance with revenue.

As we step back and look at the order board and the forecast, it appears that we are nearing the trough in this part of our business but our sense is that continued inventory balancing by our customers and economic uncertainty in general may hold down any recovery as we look forward but we will see as time goes by.

In our Electronics Group, the story is quite different.

Our Electronics Group helped to offset the effects of the decline in our Industrial Group.

Our Aerospace & Defense revenue increased 29% during the quarter to $30.2 million from $23.4 million for the prior period.

Our Test & Measurement segment continued to grow with sales increasing in excess of 7% during the quarter, rising to $14 million from $13 million during the first quarter of 2008.

And perhaps even more importantly as we look at this, the results of the continued growth of our Electronics Group as well as the contraction of our Industrial Group has resulted in the electronics piece of our business now exceeding 50% of total Company revenue.

This is a very important milestone and worth pausing for a moment because as we look to the future and as the economy continues to look, let's just say difficult at best with a lot of people looking for how is it going to climb back out of the current state?

The Electronics Group has not been suffering the impacts of this and we wouldn't expect it to in the near term.

And so now fully 50% of Sypris is I would say better positioned, if you will, to deal successfully with the economy going forward.

Our restructuring activities were accelerated during the quarter and they are showing positive variances to plan both in terms of budget and in timing.

And perhaps even more importantly, the results are already having a very real impact on our financial results, as Brian will discuss with you shortly.

In summary, the first quarter was certainly challenging but in line with expectations and one in which much progress continued to be made.

For those of you who are new to our call, we developed a series of initiatives during 2008 to eliminate unnecessary waste, reduce fixed overhead, accelerate where possible integration efficiencies, and eliminate roadblocks to consolidation savings.

These items are listed on slide five, the key components of which included the consolidation of three facilities into existing Sypris locations, the use of Lean tools to drive operating efficiencies, the cost reduction of certain high-volume products, and a focus on quality to greatly reduce scrap and rework.

The expected outcome was significant with $25 million of annual savings once completed and also included an expectation that our earnings volatility and risk would be in a much tighter band and therefore more reliable.

The good news as we mentioned a moment ago, we are ahead of schedule and under budget and the results are already having a positive impact on the Company's financial results, as you will see shortly.

On slide six, we have updated our status chart to give you a better sense of our progress with each of these initiatives.

With regard to facilities closing, we now believe that we are 75% or more complete.

We are no longer producing product at two plants and the third is scheduled for closure by the end of Q2.

This should make a meaningful contribution for us going forward into the second half of the year as we have been able to -- our management team in this business has been able to accelerate the closing of part of this by one quarter and the final piece by two quarters.

So we are very, very happy with that.

The operational efficiencies, we are on schedule for a Q3 completion.

Product costing, that has already been completed, we reported on that back on March 31.

And on quality, we remain on schedule with an expectation that we will be reaping 100% of those benefits by the end of Q4.

So in short, we are very pleased with the results to date.

The management teams that were tasked for these initiatives have truly done and are doing a wonderful job.

Advancing to slide seven, when we are complete with these initiatives, we expect that we will have eliminated three facilities with a total of 830,000 square feet.

In our Industrial Group, this means that we will have reduced the number of facilities and overhead by 40% and we will have reduced the average cost of our direct labor by 20%.

We expect net headcount reductions on stable volume of close to 200 people which would represent 12.5% of the domestic workforce with no expected loss of market share or top line.

Obviously this is expected to have a significant impact on the cost competitiveness of our business model with our restructuring costs funded substantially by internal cash flow.

And finally, with 75% or more of the benefits to be recognized as early as 2010, we feel very comfortable with this expectation and the fact that our results in first quarter were benefited from these activities gives us even more cause to be optimist that we are on the right path.

Changing topics for a moment, let's advance to slide eight for a brief review of our business segments.

Certainly for our Industrial Group the market conditions are expected to remain very challenging.

We have tried to put together a table here that will give you some sense of perhaps the rate of decline we've been experiencing in this business, but also why we are beginning to sense that there is at least one year of the trough for the cyclical low.

If we look at the bottom half of the table first, according to ACT, and as of the end of March, so we are not including April orders, the Class 8 build plan per for Q2 and Q3 approximated 26,000 units and 29,000 units respectively.

For purposes of this analysis, we have dropped an estimate of 35,000 units into Q4, which brings us to a total of 119,000 Class 8 units for the year.

So if we look at the orders on hand as of the end of March, what it would say is that greater than 60% of the forecasted to build plan is in place for Q2, roughly 39% of the plan is in place for Q3, and according to our estimate of 35,000 units, 45% of the plan was in place already through Q4.

So if we believe those numbers, then we come up to the upper part of the table and what you'll see is the number of units built per day and we had a 32% -- almost 33% decline in the first quarter of this year and ACT is forecasting a 17% decline in the second quarter of this year, to be followed by a 10.3% increase in Q3.

Taking our 35,000 units and dividing by the number of build days in Q4 would indicate a 22%, almost 23% rise in production in Q4.

If we were to simply reduce the number of units built in Q4 to 30,000 units, there would still be a resulting 5% increase in Q4 of this year.

So whether these forecasts turn out to be true or not, we will see as time goes by but it certainly seems to indicate in Class 8 that a, the rate of falloff is declining; and b, there is some reason to believe that at least by the end of Q3 or early Q4 things will start turn the other way.

For Class 5 through 7, the story is a little bit different and perhaps more cloudy.

ACT is forecasting a continued decline in build per day for this part of the business through Q3.

ACT at least in the data that we had did not have an updated forecast for Q4 and so we put in our own estimate of 27,500 units for Q4, which means that total production for Class 5 through 7 in 2009 would come in at less than 96,000 units.

So if we look at it on that basis, it would result in a fairly material increase of almost 31% in Q4 if that forecast is correct.

So in summary on this page, I know there's a lot of information.

What we're trying to say is that based upon existing backlog in the Class 8 market, it looks like there will be strengthening in Q4 since the backlog in Q4 is almost equal to the current backlog as of the end of March in Q2.

Secondly that the annual volume rates appear to be well within the range of forecast at 119,000.

For Class 8, I believe we would be at or at the lower end of most company's or industry's forecasts and at 96,000 units for Class 5 through 7, we are probably beneath most forecasts at this point in time.

Okay, let's advance to the next slide.

So let us summarize for you at least as far as the Industrial Group goes.

As we mentioned before, we have plans in place to manage a difficult 2009.

We expect the balance of the year to remain quite challenging for this part of our group, but I can tell you that our management team is doing an excellent job.

We will have shortly completed the closure of two plants reducing the number of rooftops by 40% in this segment with the Kenton facility already closed and the Marion plant scheduled for closure by the end of June or shortly thereafter.

The team has done a wonderful job in reducing inventory in line with or in excess of the revenue declines.

Therefore, maintaining turns in excess of 10 times despite the 21% sequential drop in revenue and it is doing an excellent job though a very difficult job in managing the workforce to stay in line with the top line.

We were fortunate that the team was also able to renegotiate a collective bargaining agreement during the quarter for additional cost savings and increased flexibility.

As we look forward, our expectation is that there is likely to be a consolidation in the supply base in this part of our business and that belief is supported by the fact that we are seeing a fairly material increase in quoting activity both from [four] components that we haven't produced in the past as well as from companies which are not current customers.

Our focus as we go through this will be to make sure that we stay focused on the long-term rather than short-term opportunities.

We take on additional business, we want to make sure that it's fair to both our customer and to ourselves in terms of pricing and we want to make certain that this just isn't a peak shaving or short-term opportunity that results in a loss of business as the economy recovers.

And again I mentioned it, but it is we're saying twice, our management team is doing a terrific job under very challenging circumstances and we want to recognize that and thank them for it.

Now let's take a quick look at our Electronics Group where the outlook continues to be positive.

On slide 10, you will see that Electronics Group represented 54% of revenue in the first quarter compared to 34% for the prior year period and 41% for all of 2008.

We have mentioned the importance of this.

I don't think it can be overstated.

We had plans for the Electronics Group to become an ever increasingly large part of our portfolio and those plans are still in place.

The Aerospace & Defense segment performed very well during the period.

Revenue increased 29% during the quarter.

We were awarded additional follow-on contracts for the F-16 Fighting Falcon which was announced earlier in the quarter.

Quoting activity for space-related work remains strong with the opportunity to further increase this business in 2009 following a strong 2008.

Our Lean initiatives continued to attack costs and drive improved efficiencies and the development of an important new secure communication product remained on schedule for 2009 certification introduction which will serve as a nice building block for us in 2010.

On slide 11, you will see that our Test & Measurement segment continued to perform exceptionally well.

Kathy Boyd and her team are just doing a magnificent job.

Revenue increased 7.4% during the quarter, which represented the ninth consecutive quarter of comparable period growth.

Perhaps more importantly than the gross piece of the story, gross margin expanded to in excess of 27% in the first quarter from 24% in the fourth quarter in 2008 and we expect further expansion in these margins as we move through 2009.

We also experienced a fairly significant expansion in quoting activity during the quarter.

A normal backlog of quoting activity for us in this segment would be in the $10 million to $12 million range and I believe our team's backlog at the moment is somewhere closer to $30 million in terms of quoting activities.

So in our view, what this represents is an acceleration of the trend towards outsourcing as companies look for additional ways to reduce their costs and increase efficiency.

There can be no guarantee as to our conversion rate on this quoting activity, but I would take it simply as a sign that the opportunities are there for future growth.

In summary, the outlook remains positive for our Electronics Group with expectations for further performance improvements during 2009.

It is now my pleasure to turn the balance of our presentation over to Brian.

Great, thank you, Jeff.

Good morning, everyone.

I would like to discuss with you the highlights of our financial results of Q1.

If you would, please advance to slide 12.

For the quarter, our consolidated revenues were $81.7 million, down 23.1% or $24.6 million from the prior year period as market conditions for the commercial vehicles and trailers remain depressed.

Consolidated revenues by our operating segments were as follows.

For our Industrial Group, segment revenues for Q1 were $37.5 million, down 46% or $32.3 million from last year's Q1.

These Q1 results reflect a $9.8 million or 21% drop from our fourth-quarter results and mark the third sequential quarterly decline in revenue, once again substantiating the depressed market conditions Jeff has spoke to.

In our Electronics Group segment, this comprised of Aerospace & Defense and our Test & Measurement business in Orlando essentially remained immune to the depressed economic conditions and generated Q1 revenues of $44.2 million, up 21% or $7.8 million from last year's Q1, again reflecting just terrific strong growth year over year.

For the A&D segment, the revenue increased $6.8 million or 29% to $30.2 million, reflecting strong year-over-year growth in our next-generation link encryption products, as well as certain data-recording products.

Within Test & Measurement, the segment revenue increased $959,000 for 7.4% to $14 million as a result of increase in volumes of magnetic products as well as continued growth in our strong calibration services business unit.

For the quarter, gross profit was $4.4 million, down $8.7 million or 67%, largely driven by the continued revenue deterioration within the Industrial Group segment.

Let me talk briefly for you the gross profit performance by segment.

In the Industrial Group, gross profit decreased to a loss of $2.7 million, compared to a profit of $6.8 million in the first quarter of 2008.

The significant decrease in sales volume and related loss to fixed overhead absorption resulted in a reduction in gross profit of about $6.4 million.

In addition, the lower revenues from contractual settlements and pricing contributed negatively about $4.3 million to the gross margin, but was partially offset by approximately $1.9 million in productivity improvements.

In Electronics, the gross profit was $7.1 million, up 13.1% or $820,000.

Within this segment, as you know, Electronics is comprised of A&D and Test & Measurement.

Within our Aerospace & Defense business unit, gross profit increased $400,000 primarily due to increased revenues, though as a percentage of revenue, they declined to 11% from 12.4% the prior year.

On the other hand, the Test & Measurement gross profit increased $500,000 due to increased revenues and the gross profit as a percentage of revenues increased to 27.2% from 25.6% in the prior year as a result of higher margin products sales.

At the consolidated level reflecting on SG&A, this remained flat at $10.5 million despite the many actions we have taken to align our costs with the tough market conditions.

Many of the cost savings were largely offset by the non-capitalized legal and professional fees related to the refinancing that we undertook during the quarter.

At the R&D level, this increased slightly $200,000 to $1.2 million from the prior year quarter due to Aerospace & Defense program investments.

Let me now discuss the nonrecurring expenses we've provided you and kept you well abreast of the restructuring activities.

As you will recall during our last call, we discussed the progress of the restructuring, which again includes the closure of the Industrial Group's Kenton and Marian, Ohio facilities, as well as the consolidation of Sypris Electronics and Sypris Data Systems into a single business unit known as Aerospace & Defense.

For the quarter, we recorded $1.9 million of nonrecurring costs related to these initiatives.

Of this amount, or $1.2 million was related to the Industrial Group's restructuring efforts and the balance within the A&D segment.

A detailed summary of all of these related expenses will be contained within Note 5 of our consolidated financial statements and included in our Form 10-Q filing.

At this time, please advance to slide 13.

In many respects, we believe that a review of the sequential financial performance of the Company at this juncture provides important understanding of the material progress that is being made that might not otherwise be evident from the year-over-year comparisons we just completed.

As Jeff discussed earlier, the restructuring actions that we embarked upon during the fourth quarter and continued with during the first quarter are yielding substantial benefits.

In the case of measuring EBITDAR performance for the quarter, you will recognize that despite a 14% decrease in revenue from Q4 which would normally result in a further decrease in income for the Company, the operating loss was actually reduced by 53% as a result of the cost savings that are being -- beginning to be generated by the restructuring plan.

Other conclusions can be drawn as well.

We do expect to recognize additional benefits from restructuring as the year progresses even absent any increase in revenue.

Acceleration of our Marian Plant closure from Q4 to Q2 as Jeff mentioned will drive additional savings during the second half of the year.

Finally, demand will rebound and as we return to normal volume levels, clearly we are not sure when within the Industrial Group results will improve dramatically.

Another important point as Jeff stated with respect to the revenues of the our Electronics Group representing 53% of our Company, it's also important to point out that this segment will also contribute to sequential quarterly improvement as a result of their efforts.

You can expect from us going forward that this performance measurement will be used as another indicator of our progress on this vast array of restructuring initiatives that we have undertaken.

Please advance to slide 14.

Outlined for you on this PowerPoint is the restructuring implementation budget.

With respect to our capital investment and cash expense categories there, you will see that in the first column titled budget that we have updated these earlier communicated forecasts to reflect our current outlook and they are highlighted there in green.

As you see, we are well on track.

Cash expense items are incurred in expenses, such things like severance, the equipment relocations, environmental, etc., and as you can see, the vast majority of these expenses have now been recognized.

Finally we expect non-cash charges related to PP&E to be completed during the second quarter.

Moving forward, if you will, please advance to slide 15 and I would like to focus on the topic of liquidity.

In these challenging times, liquidity has become much more of a topical issue for many companies.

We are pleased to report that we continue to have adequate liquidity to run our business and with the recent amendment to our credit facilities, we fully expect to be in compliance with our covenants.

Net cash used in operating activities totaled $7.9 million and was partially driven by Q4 customer shutdowns and timing of Q1 shipments.

A significant majority of the restructuring expenses have been incurred.

In addition, we expect positive free cash flow before restructuring for the balance of 2009.

Efforts are underway to ensure we have the necessary long-term financing to fund our growth platforms that Jeff spoke to.

All of this booking activity or quoting activity, it is essential that we capitalize on those opportunities to meet the customers' needs.

Lastly, we are prudently managing expenses throughout the Company and to this end we have stress tested multiple downside scenarios and we have already identified and prepared various actions if the market outlook deteriorates further.

Once again, it is our view based on the market conditions, the efforts, and the progress over the past two quarters, the ability to accelerate the restructuring activities, and the variety of stress tests that we have placed on our Industrial Group in particular that we do have adequate liquidity to run our business and support our customers' growth and expectations.

As we begin to bring the call to an end, I would like to summarize with a few things as well by advancing to slide 16.

Jeff and I discussed with you during the last call the many results being driven by the significant focus and effort with numerous Lean and Six Sigma initiatives underway in the Company.

Some of these highlights are outlined on here for you.

As you know, we continued reducing inventory, certainly attributable in part to lower volumes, but also by working much, much closer with our suppliers to optimize production scheduling and optimize runs.

We continue to monitor AR and AP performance in alignment with our customer and supplier expectations, but also keeping a watchful eye on trends that indicate risk with certain customer exposure levels.

During our last call, we indicated that we would reduce headcount by another 10% during 2009.

As a result of the third sequential quarterly revenue decline within our Industrial Group, we accelerated the headcount reductions and frankly achieved an additional 10% from our year-end 2008 number.

So all in all, the Lean efforts and the vast number of projects that are underway across the Company are the cornerstone of our restructuring efforts both in our Industrial Group as well as our Electronics Group.

At this time, if you would advance to slide 17, I would like to summarize a few of the key highlights from our call with you.

Let me take a minute to talk to our investors, our suppliers, our customers, and our Sypris team members that we have completed some extreme extremely challenging but important achievements during the quarter.

This was done despite the continuance of a very, very tough economic and operating environment particularly within the Industrial Group.

And we look forward to a continuation in the improvement of our financial performance as the benefits from these restructuring efforts over the fourth quarter of last year into the first -- the recently completed first quarter and what we are underway with presently.

As a result, we are confident that our strategic restructuring initiatives are ahead of plan and in terms of execution and cost, we expect to be completed this year with 75% perhaps more of those benefits being realized in early 2010.

As a result of this, we have mitigated losses despite the steep revenue declines we've talked about today.

It is also important, as Jeff mentioned earlier, to point out that in these very tough times that despite this economic tsunami, it is not having an impact on over 50% of our revenue and as a result, we would expect that our Electronics segment will continue to drive strong growth and its performance improvements will also contribute largely to our financial results.

In particular this quarter and well in through the remainder of the year.

So in closing, as we discussed during our last call, 2009 is as difficult as we thought it would be but we measure that in terms of accomplishments.

And when we do that, the impact on Sypris going forward, it's clear that we have positioned ourselves to better deal with the prevailing market conditions.

At this time, I would like to turn the call back over to Camille and we would like to answer any questions you might have.

Camille?

(Operator Instructions) Jim Ricchiuti, Needham & Co.

Hello, good morning.

I wonder if you would comment a little bit about -- with the acceleration of the cost reduction effort, can you give us some idea of where the cash breakeven run rate might be on a quarterly basis for the industrial business?

Jim, I think let us -- I think probably the best -- let us make sure we have a chance to research that so that we can give you a clear answer on that.

I think trying to give it to you this morning on the call would be a guess at best.

Okay.

Jeff, you alluded to looking out that you are seeing some increased quote activity in the industrial business, just as a result of a likely consolidation of the supply base.

Is there any way you can give us a sense -- do you see any kind of potentially meaningful revenue stream next year?

Is there anything within sight or is this just your sense of looking at the business right now?

That's a good question, Jim.

With regard to the quoting activity, we are seeing quite a bit of quoting activity, but it would be premature to say that we will be successful in what the conversion rate will be.

With regard to the market in general and whether we had some uplift at next year, I think our expectation is that there will be some uplift.

It will not be anywhere close to where we have been historically.

But we are also kind of watchful in saying it may not be.

So our internal thinking is that there will be some uplift next year.

Based upon our current view of that, it would still leave us below where we have been in prior years for this business.

Sure, okay.

Brian, I don't know -- you may have provided this, but is there any way you can -- if you did -- repeat it, the legal and professional fees, your SG&A expense was up quite a bit and I'm just trying to get a better idea going forward where that might -- how that line might look.

Yes, actually SG&A was essentially flat for the year-over-year period.

Part of that is driven by some of the expenses that we incurred in Q1 related to the amendment we talked about during our last call as well as things like the non-capitalized costs.

And unfortunately they did offset some of the significant gains that we would have expected and that we are seeing in areas like employee healthcare costs as a result of redesigns that we implemented going into 2009.

So is one way to think of it -- I guess I was looking at it versus Q4.

Should we assume that your SG&A comes down modestly from these levels or is it at these -- a new level here?

No, I think it's fair to assume that there would be modest decline.

Okay, thanks.

That's it for me.

Thank you.

(Operator Instructions) Tom Carpenter, Hilliard Lyons.

Good morning, guys.

It sounds like you guys are making a lot of progress on the restructuring.

We believe so -- a lot of progress over the last six months.

Good, with the Electronics Group doing well and a lot of -- there's a lot of changes in the US and the industrial type businesses as well as automotive and you have a very activist government, are there some opportunities for you guys to change the capital structure or separate the business with some of the government initiatives they have going on to make the companies -- or businesses stronger over the next year or two?

Nothing that we have seen at this point, Tom.

That doesn't mean we won't continue to look, but with regard to the government initiatives, we haven't been able to find anything that would -- that we would qualify for in terms of supporting the Industrial Group.

Okay.

Are there --?

So obviously they are giving some to Chrysler and GM.

If they go a step below them -- I saw in early April they talked about doing some sort of supplier base, which I think maybe Arvin Meritor and Dana would be eligible for.

Yes, I believe that it goes to the tier ones, which would include Dana and Arvin Meritor.

Okay.

Can you give us a little bit of an idea of the impact on those two, especially how it would impact Class 5 through 8?

The major impact of the programs for the supply base have to do with guaranteeing the receivables from their customers and I believe that Dana has taken advantage of that.

I don't know if Arvin Meritor has.

So the real impact for these guys I believe is to make their receivables due from the OEMs 100% guaranteed and therefore making it easier for the tier ones to secure better financing.

Can you give us an update --?

I think you guys have -- your debt matures on January 15.

Fortunately that is still a ways out, but talk about the availability of credit out there and if you would like to roll the entire facility or given some of the changes in the business, maybe a smaller footprint.

Let me address the front end of that, Tom.

This is Brian.

As you know and we restated today that the amendment was put in place in 3/31, the majority of the facilities that were seen be put in place have maturities that are at 364 days.

Ours was shy of that.

Based on the performance that we have undertaken or the improvements that are being generated and the fact that our lending group worked closely with us through the amendment, we continue to stay focused on running the business, driving those improvements, as well as exploring what financing activities best support our short- and long-term objectives.

That is certainly paramount.

In terms of looking at a capital structure that varies in serving the segments independent of one another, that could be an option, but at this time it's really been focused that Sypris Solutions comprised of two operating segments and that's the way we continue to stay focused in working with both our existing lender group as well as we explore what the optimum capital structure needs to look like.

And frankly as you know, looking out at the credit markets, they change weekly or they continue to vary.

But we are very confident.

We are well positioned with our existing lender group and they supported us through a smooth amendment process to keep us or to enable us to stay focused on running the Company.

Okay, in the Electronics Group you talked about there's a new secure communication product on schedule for 2009 certification in production.

Can you give us some more detail on the date?

Sometimes in the past when you guys have had transitioned from a generation one to generation two or three of a product, the government gets approval, then they want some additional testing.

There's been some stop and start.

Can you give us some comfort level that this time it might be a bit smoother?

Your memory is good, Tom.

And you know in this case, we feel that we have a good or a better new product introduction process in place.

Our learning experience from past efforts has certainly led to how we are approaching this one.

But probably the biggest change we have made, Tom, is that we are being more conservative in our sense of when we can hit certain milestones and when we can actually deliver in terms of revenue.

And so when we say we view this as being an important building block for 2010, we are very comfortable with that because we are actually trying to do better than that.

Got it, then one final question.

One of the things that you'd mentioned last year and with some of the changes in the business you haven't talked and discussed, are India and China still options for the Industrial Group?

They are certainly options for our Industrial Group, but we've agreed to put those on hold for the moment and both as a practical need for our team to focus on taking care of business here in the US, but also India more so than China has also felt the impact of the downturn in the industrial sector.

And so this will be something that we will probably revisit in 2010.

Okay, great.

Thank you.

A follow-up from Mr.

Ricchiuti, Needham & Co.

Given the backlog that you have in the Electronics business, do you --?

Any sense as to what the growth rate could look like for the full year for that business?

Jim, I think we will see year-over-year growth, but because we had to wind down and exit of several programs at the end of last year that had been replaced with some of the things that we've talked about so far this year, we expect to have year-over-year topline growth, but it will not be double-digit growth in 2009.

Okay, that's helpful.

Jeff, as you I'm sure read the Gates proposals for spending in certain areas, you see any impact at all on the procurement side just based on some of his commentary?

Yes, we believe that we are really well positioned given the initiatives.

We are moving into take advantage of the cyberspace initiative, which the Obama administration has said is one of its critical programs for helping to protect the companies -- the country's infrastructure.

In the area of adopting a biometric solutions to some of our secured communication products, the receptivity that we have had on the part of our customers in this segment has been very, very positive.

When you look at the other things that we do in the Aerospace & Defense side, they are primarily focused on secure communications and intelligence-related areas, both of which are high priorities for the nation going forward.

So?

In the areas of big platforms in terms of planes, in terms of vehicles, in terms of bullets, we don't play in any of that.

Okay, fair enough.

Margins moved up nicely in the Aerospace & Defense business from Q4.

I wonder if you can comment on how you see the margin profile of the business over the next few quarters?

Well I think we -- this is Brian.

I think we would expect to see some continued improvement in light of the restructuring efforts that have been under way, the consolidation of SDS within the electronics, the full closure of course of one of the facilities and as well, the team has just done a terrific job in deploying Lean and Six Sigma.

I think we have well over 50 projects yielding benefits, so we would expect some improvement there.

So if we think about where you ended Q1 and look out to Q4, could we be potentially see a couple of hundred basis point improvement or something more modest in the Aerospace & Defense business?

Yes, again I think we don't have the crystal ball, but based on what we are seeing, I would suspect that we are going to continue to see strong improvement and increasing margin.

Okay, and last question from me.

We haven't discussed much of the prospects for the Test & Measurement business, but only because it's been so consistent.

How does the outlook look for that business going forward?

We think it's positive, Jim.

We think that 2009 will be a record year.

We believe that we will see margin expansion continue throughout the year.

And depending upon our conversion ratio in terms of the quoting activity that we are seeing, it should position us well for 2010.

So --.

Just curious, Jeff, what's driving that?

Just in light of the economy, I assume you guys are taking share.

Well, I think a big part of it is that a number of companies are outsourcing more than they used to do.

And so while there's growth in various segments of this business, the greater number of quoting activities both in terms of volume and dollars is coming in the outsourcing of calibration services.

Okay, thank you.

At this time we have no further questions, so I would like to turn the conference over to Mr.

Gill for closing remarks.

Thank you, Camille.

Brian, Tony, 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.

That does conclude today's conference.

Thank you for your participation.