Teledyne Technologies Inc (TDY) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Technologies earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, press 0 then * and an operator will assist you off line. As a reminder, this conference is being recorded. I’d now like to turn the conference over to Mr. Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Director of Corporate Development and Investor Relations at Teledyne. I’d like to welcome everyone to our first quarter earnings release conference call. We released our earnings earlier this morning, before the NYSE opened. Joining me today are Teledyne Technologies’ Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Bob Naglieri; and Senior Vice President and General Counsel and Secretary, John Kuelbs. After remarks by Robert and Bob, we will ask for your questions.

However, before we get started, our attorneys have reminded me to tell all of you that forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in this earnings release and our periodic SEC filings. And of course, actual results may differ materially. Also, in order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay, both by a webcast and dial-in, will be available for about one month. Here’s Robert.

Thank you, Jason, and good morning. Before I elaborate on the details of the quarter, I’d like to make a few introductory comments. Teledyne had a strong first quarter in revenues and earnings, even though the weak economic environment continues to adversely affect some of our commercial products serving the aerospace semiconductor and telecom markets. Year-over-year revenues increased 7.6 percent. Teledyne also continued the positive trend in year-over-year GAAP earnings for the fifth consecutive quarter. GAAP earnings per share were 17 cents, compared to 16 cents in the first quarter of 2002. Earnings per share, excluding non-cash pension income and expense, increased 33 percent.

Teledyne’s excellent performance in this challenging economic environment is due to our commitment to three primary strategic goals. First, to be an agile company with a flat management structure, committed to operational excellence in everything we do. Second, to maintain a stable mix of commercial and government businesses. And third, to focus and invest in our strategic businesses in electronics instrumentation products and government systems engineering.

In the first quarter of 2003, our electronics and communication and system engineering segments collectively attributed approximately 80 percent of our sales and accounted for virtually all of the company’s earnings. We intend to maintain our focus on growing these businesses. In the remainder of my comments I’ll elaborate on the operating performance of our business segment. Bob Naglieri will then discuss more details about our financial performance and comment on our outlook for 2003.

Turning to our business segment. First quarter sales in our electronics and communication segment increased by 14.5 percent, relative to the first quarter of 2002. In addition, excluding the difference in pension income and expense of 1.8 million, operating profit, compared to last year, increased 10.3 percent in the first quarter. As I further discuss our electronics and communication businesses, which have a total annual revenue of approximately $400 million, I’ll break up my comments into three separate market segments; defense electronics, which represents approximately 35 percent; electronic instruments, which represents approximately 25 percent; and avionics and other commercial electronics, which contribute approximately 40 percent to our electronics and communication segment sales.

Let’s start with defense electronics. In our defense electronics products and services, we do the following: provide travelling wave tubes for electronic warfare, satellite communication and radar application. We also make microelectronic modules for a variety of applications, including secure communications. We make rigid-flex printed circuit boards, we make ejection seat sequencers for military aircraft, and we do contract manufacturing of military electronics subassemblies and assembly.

In the first quarter of 2003, sales of defense electronics increased approximately 25 percent, compared to the first quarter of 2002. While first quarter comparisons were especially strong, we continue to expect sales growth of defense electronics throughout 2003. Sales of microelectronic modules that are employed in military aviation and secure communication applications, continue to increase. In addition to deliveries of microelectronic modules for the F22, we recently received an order for the development and production of fiber optics transmitters and receivers for the F35 Joint Strike Fighters, and have also been selected to provide other modules for this new aircraft. In addition, production of microelectronic modules and printed circuit card assemblies for secure communication systems, such as US Army’s enhanced position locating and reporting system, which is a combination of GPS and communication system. These sales continue to be strong in the first quarter. Many of these modules for secure communication employ specialized secure codings that make it difficult to reverse engineer or otherwise tamper with them.

During the first quarter we also received some unanticipated orders for military travelling wave tubes. Orders and sales of spared military radar and electronic warfare systems were especially strong, with demand driven by the build-up for the war in Iraq. Furthermore, we’re currently the sole source supplier of new travelling wave tubes that provide improved performance and reliability for the US Army Firefinder and Sentinel radars that area used on the battlefield to detect weapons, projectiles or aircraft. And we expect volume production for Sentinel to commence in 2004. We also continue to receive strong orders for travelling wave tubes in a variety of military satellite communication systems associated with homeland defense. To date, we’ve delivered over 1,300 travelling wave tubes for this application.

Turning to our instrumentation businesses, we manufacture a range of instruments used in industrial process control, petrochemical manufacturing, semiconductor manufacturing, energy exploration and production, and environmental air quality and emissions monitoring. In the first quarter of 2003, sales of electronic instruments increased by approximately 45 percent, primarily driven by the acquisition of Monitor Labs, Incorporated. Instrument sales on an organic growth basis also increased over 10 percent. While demand for instruments serving the petrochemical and air separation market was relatively flat, sales of air quality monitoring equipment, especially for overseas markets, were strong during the quarter. Growth in our industrial instrumentation businesses, both organically and through acquisition, continues to be one of our key strategic focus areas.

We’re particularly attracted to the instrumentation markets for a number of reasons. One, these markets are highly fragmented. Two, businesses in these markets typically enjoy higher gross margins and the ability for us to increase operating margins should grow as we continue to increase scale in these markets. And three, our focus on instrumentation is driven by the expertise in high precision electronic components.

Finally, in our avionics and other commercial electronics businesses, I’d like to make the following comment. In the avionics market we develop and manufacture data acquisition and communication products for domestic and international airlines, as well as for business aircraft. We also manufacture electronic components including relays and connectors for commercial aviation, telecommunication, data storage and semiconductor test markets. And we provide manufacturing services for subassemblies used in medical instrument and implantable medical devices. In the first quarter of 2003, sales for all of these products, collectively, decline approximately 5 percent from the first quarter of 2002. In the air transport and business jet markets, we experienced some weakness. We expect that new OEM aircraft deliveries will also decline further in 2003.

The business jet market remains weak and various aircraft manufacturers have already reduced their delivery forecasts. Our strategy to keep our business healthy during the current economic aerospace down cycle is three fold; gain market share, introduce new products, and enter new markets. For example, in the market share area, as we mentioned before, we expect that our share of data acquisition systems in new Airbus signalized and long-range aircraft will increase from less than 10 percent in 2000, to 30 percent this year, and up to 50 percent in 2005. In new products, we have already introduced new high-speed internet connection to our telephony on business jets. And in new markets, we’ve been successful in entering our products into the defense sector. In other commercial electronic markets, sales to medical customers increased by approximately 20 percent in the first quarter, driven by demand for printer circuit cards and subassemblies used in medical diagnostic equipment such as MRI, CAT Scan, and positron emission tomography systems. However, sales in relays used in wireless infrastructure and semiconductor test equipment, remains soft and we’re not forecasting any near-term improvement.

Turning to our government systems engineering segment, in the first quarter, in this segment, revenues increased almost 12 percent, compared to last year’s. Sales increased in every major program category, including national missile defense, space programs, such as those related to international space station, and NASA’s Marshall Space Flight Center, as well as in our environmental programs. Finally, first quarter 2003 orders in our systems engineering segment also increased slightly, compared to last year, and were 1.4 times first quarter’s sales.

Although first quarter of 2003, as well as full-year 2002 performance was very strong for our government systems engineering segment, we are being somewhat cautious in our outlook for this segment in the remainder of 2003. First, while we now anticipate receiving slightly greater levels of government award and incentive fees, under certain contracts, there is no assurance that such award and incentive fees will equal the similar fees received in 2002. As you may recall, we participated as a significant subcontractor in the Ground-based Midcourse Defense (GMD) program. And over the last few years, this program has represented an increasingly larger portion of our government services business. Besides the uncertainty associated with success-based award and incentive fees in this program, we’re also cautious regarding the full-year 2003 revenue outlook, due to the shift of emphasis of the program from an R and D mode to deployment. Also DOD funding for overall GMD program is still expected to be lower in 2003, compared to 2002. Nevertheless, given our current national priorities and the intent to begin deployment of missile defense network, we are quite optimistic about the long-range demand of our core capabilities in missile defense systems, engineering, and tech services.

Turning to aerospace engines and components; sales during the first quarter 2003 for our aircraft piston engine business, decreased approximately 4.5 percent, relative to first quarter of last year. Although after-market sales decreased in the first quarter, sales of engines for new OEM piston engine aircraft increased by over 30 percent. Due to strong demand for new composite OEM piston aircraft, for which we are the sole source engine supplier, we continue to increase OEM market share and currently estimate that Teledyne Continental Motors market share in OEM piston aircraft deliveries is at the highest level in several years. Furthermore, as we announced earlier this quarter, we’ve begun a joint visibility study for the next generation piston aviation engine, currently in development by Honda Motor Company. For approximately two years, Teledyne and Honda have been cooperating on testing on those prototype aviation piston engine and over the next few months, this joint study will evaluate potential business opportunities, including marketing and manufacturing of new engines for the general aviation market.

In the turbine engine business, first quarter sales and profits decreased in comparison to first quarter of 2002. Decreased sales of spare parts for training aircraft were partially offset by sales related to low-rate initial production of turbine engines for the JASM cruise missile. We currently expect JASM shipment, as well as deliveries of engines for other tactical missiles and decoys, such as ITALD, to ramp-up throughout 2003. While we continue to explore strategical alternatives for the aerospace engines and component segment, given Teledyne’s already strong balance sheet and free cash flow, we will balance the timing of these alternatives with the very weak market fundamentals in the commercial aerospace industry. However, even though piston engine after market demand is near the bottom of the cycle, and aircraft product liability costs appear to be reaching a cyclical peak, we expect to stay near break-even profitability in 2003 in our aerospace engines and components segment.

Finally, in our last segment, the energy systems segment, revenues in the first quarter decreased by about 16 percent, compared to the first quarter of last year, primarily due to certain government cost-plus fee contracts. As we said in previous calls, our goal is to operate this segment near break-even profitability as we continue to focus on our government contracts and sales of tangible energy technology products, such as fuel cell test station and hydrogen refueling station.

Moving to the present, while we are likely to continue facing economic challenges in our commercial businesses for the rest of 2003, overall, we hope that our strong performance over the last several quarters and our balanced mix of government and commercial businesses, and our focus on electronic instruments and government systems engineering, gives our investors continued confidence in our company. I will now turn the call over to our CFO, Bob Naglieri. Bob?

Good morning. Thanks, Robert. Let me start with some additional financials for the quarter, not covered by Robert, plus some full-year highlights where they’re warranted. Then I’ll discuss two critical business issues that impact 2003 and 2004, and wrap it up and discuss the 2003 outlook. In the quarter, cash used from operating activities totaled 1.8 million, compared with cash provided from operating activities of 8.5 million for the same period of 2002. We continue to be free of debt, with approximately $15 million worth of cash in the bank. The net usage of cash was driven primarily by net inventories, which increased sequentially from 2002, due to specific purchases for long lead-time items for burned backlogged orders in our defense electronics and medical businesses.

As you know, we monitor working capital very carefully, and expect these levels to reverse in the second half of this year. Capital expenditures for the first quarter of 2003 were 2.9 million, compared to 3.5 million for the same period last year. For the full year 2003, we expect total capital expenditures of approximately 20-21 million, slightly below depreciation of approximately 22 million. Remember this year we will be investing approximately 6.5 million for facility expansion for our defense orientated travelling wave tube business in Sacramento, California.

There are two business issues that continue to impact our company; the cost of insurance and the decline in our pension assets. As we noted in previous disclosures, we have been evaluating options renewal of our aircraft product liability insurance coverage, which expires at the end of May. Let me add some clarity and detail to this important issue. Commencing June, 2003, in two months, we had anticipated a 40 percent increase for insurance costs, above the 1.4 million monthly cost we are currently incurring. However, based on recent discussions with several insurance underwriters, we now expect the total monthly cost of our aircraft product liability insurance could increase between approximately 65 percent and 120 percent after May of 2003. We are still evaluating various scenarios and will resolve this issue shortly. Offsetting some of this increase in insurance cost, will be higher reward and incentive fees in our systems engineering business than we had previously expected in 2003. Although I might add, it’s still below the 2002 levels. As well as anticipated cost reduction and price surcharges at the piston engine business.

Before I talk about the 2003 outlook, let me discuss pension and its related impact on our future financial results. In the past few years, declines in the capital market have resulted in the following. In 2003, pension expense will be approximately 7 million, or negative 13 cents earnings per share, compared to pension income of 2.3 million, or positive 4 cents earnings per share in 2002. Looking forward to 2004, pension expense will be in the range of $10-$12 million or negative 18-22 cents per share. In addition, assuming the capital markets do not materially improve throughout this year, 2003, at this time we anticipate making a cash contribution in late 2004, for the 2003 and 2004 periods. The after-tax cash impact is anticipated to be in the mid to high teens. Subsequent to 2004, actually in December of 2004, the company will again be able to charge pension costs to the US government under various government contracts.

Now let’s look at the 2003 outlook. I’ll give you the outlook data with and without pension costs. It’s important to us to analyze and manage the business that we can control. We believe 2003 earnings per share, excluding pension expense, will be in the range of approximately 75-85 cents, compared to 73 cents in 2002. Now, if I include pension – including pension costs and also the insurance costs I talked about and some of the things we’re doing to offset that, we are reaffirming our full year, 2003 guidance of 62 cents to 72 cents earnings per share. For the second quarter of 2003, we are projecting earnings per share to be in the range of 17-19 cents. Our second quarter, 2003 guidance range implies a year-over-year increase in earnings, excluding pension costs, of approximately 10-20 percent. I’ll now pass it back to Robert, so we can take some of your questions.

Thank you, Bob. We’d like to take your questions. Operator, if you’re ready to proceed with the question and answer period, please go ahead.

Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone. You’ll hear a tone indicating you’ve been placed in queue. If you pressed the 1 prior to this announcement, we ask that you please do so again at this time. You may remove yourself from queue at any time by pressing the # key. If you’re using a speakerphone, please pick up your handset before pressing a number. Once again, if you have a question, please press the 1 at this time. And one moment please, for the first question. First question today comes from the line of Mark Jordan, A.G. Edwards. Please go ahead.

Good morning, gentlemen. Question first on the aerospace business. Could you give us a breakdown as to what the revenue components would be in the aircraft engine area? If you assume sort of a flattish year at 160 million in revenues, what would be the breakdown between piston and turbine and on the piston side, what would be OEM, versus after-market and turbine, sort of the trainer, versus JASM?

I would say approximately, Mark, 75 percent of the revenue is in piston and 25 percent is in turbine. Did you ask specifically about JASM?

Yes. I was just wondering what the components of the turbine business, how much of that was JASM, versus trainer parts and other missile engines.

I don’t have that precise breakdown in front of me to address that, but I would say the JASM is in the lower single digit numbers. Because we [are now in] [ph] pre-production phase. But that is expected, obviously, as you know, to increase in 2004 and onward.

Okay. Given the significant increase in insurance costs that will start to impact you in June, to what extent will you be able to pass-through this higher cost? Because I’m sure everyone is facing similar issues. Secondly, given the fact that insurance will be very problematic, especially for fixed-based operators who might do overhaul work, will this tend to drive the after-market business back to the primary manufacturers?

Well, the answer to that is, obviously, that would be very good for us if the latter happened. I don’t know the answer. I do know that there’s insurance pressure on everybody. Let me start with passing some of the cost to our customers. As Bob Naglieri said, we have a two-pronged approach there. We’ve been reducing cost in that business continuously. And as you remember, we have reduced it. The facility that adds over a million square feet and hundreds of machines of our production of engines, to something less than 300,000 square feet, with all automated machines that produce the product at a much lower cost. We had a cost reduction effort already underway for this year. We’ve just begun working on ratcheting that up to make up for some of the increased insurance cost.

So, second point is, obviously, we’re going to try and put some kind of an insurance-related cost increases on our products, but we have to be careful that we do it in a measured way, that we don’t increase our product prices to a level that they become noncompetitive with what’s out there from other manufacturers. So, we’re measuring that and balancing that. But, as a whole, Mark, we believe that for this year we should be okay, between the combination of the two things I mentioned, as well as the fact that we’re going to have better income in our systems engineering, because of award fees. And we expect that with all the emphasis we’re putting on our manufacturing [Exodus] [ph] programs, we’ll have some other savings across the company. So, we’re cautiously optimistic that we’ll hit our numbers, even though this insurance issue has kind of grown beyond what we expected it to be.

Okay. Looking at the Honda opportunity that’s in front of you, could you give a little more definition as to what the target market of the Honda engine would be, and what are the enhanced characteristics and the competitive positioning of that product and when do you think it might impact your P and L strength?

Let me start with the first part. The engine that Honda has developed – and we’ve been working with them for the last two years, is in the 200 horsepower range. It’s a four cylinder engine. It is not where we have our primary products at the present time. Our primary products are in larger engines, in the 300 horsepower range, that service some of the composite aircraft that I mentioned before. So, the Honda TCM engine will be a new market for us, in which our competitors currently have the significant market share. So, that’s a very positive development for us.

From a performance perspective, the engine does really two things. First, it’s environmentally friendly. What I mean by that, is presently a piston engine in the general aviation industry runs essentially on pure, 100 octane gasoline. And as you know, when you have that gasoline, it’s not possible to develop an unleaded version of 100 octane gasoline. The engine they have developed has octane levels that are around 90 – approximately, I would say. And therefore, you can have the unleaded version of that. And as a consequence, it’s less expensive, certainly, and it’s environmentally more friendly.

And finally, the engine with our electronic controls on it, which as you know we’ve developed, will have a much better fuel consumption. In terms of when this engine will come to market, we’re still in the prototype stage. We obviously, have to go through certification, and work through a lot of details with the FAA in introducing this. And of course the visibility study that we’ve undertaken is to look for launch customers for this engine. And we’ll announce the findings of that, hopefully, in the next few months.

Okay. A final question relating to pension costs. You ran your analysis that you mentioned here in the release on the end of March, which if memory serves, the DOW was at about 7950. As we speak, we’re about 8480, so we’re up roughly 5 percent since then. A question I had, given today’s market’s level, if you were to assume, sort of, an annual growth in the overall market of say, 10 percent a year, from this level, when would the maximum drag on earnings occur? Would it be in ’04 or ’05?

Let me start by saying, from your mouth to God’s ears. And I’ll hand it over to Bob.

Mark, you’re right. The market has improved the last two weeks. We have an 8.5 percent rate of return in our assumptions. We’ve made that public a couple of times. The 13 cents that it’s costing us this year and possibly the 18-20, 22 cents range, we talked about. Because we’re on a five-year smoothing, I think you know we’re allowed to do that under the accounting rules – the five-year smoothing, it seems like it wants to push out – even with the 8.5 percent, probably two to three years hence, going down the road. And it’s not going to go up dramatically, but it can go up, depending on where the market. And even with the 8.5 percent increase, because of the smoothing – and we also did take down our discount rate, which tends to then drive up your funding – the gap between your under-funding. It looks like two to three years going forward at this point in time, based upon – and I’m talking about March 31st [passing] [ph] numbers.

Okay. But you would say, again, the gap – the negative swing this year, was 17 cents. The midpoint of the range is a further 7 cent degradation, so we’re hopefully [ascentodically] [ph] approaching the bottom here a couple of years out?

Yes, we hope so. That, Mark, in combination with a very important fact that Bob noted in his discussion, which is we are, by our spin-off agreement, prevented from charging back pension cost to the government, until November of 2004. After that, we’ll be able to recover pension costs from our government, because of our government contract, and that should help the process as well.

Okay, thank you.

You have a question from the line of Chris Quilty, with Raymond James.

Morning, gentlemen. Congratulations on a good quarter. Question for Bob, on the charge-backs that you’ll be able to do on cost accounting standards. I guess in the current quarter, it was about 1.2 or 1.3 million in the electronics side of the business. Can you give us an idea of how much of that ostensibly could be charged back? I know the way they work it is based on cash outlays, it becomes reimbursable. And is whatever reimbursements you’re anticipating, incorporated into the $10-$12 million range you put out for ’04?

10-12 million, yes. Chris, if I understand your question, let me try and ansewr it. I think you’ve got a couple of questions there. The 1.2 million you were talking about, I think, is in the electronics and communication. That’s this year’s pension expense. Let me make sure we have the facts down. This year, pension expense is about $7 million, it was 2.3 income last year. And that’s $7 million, obviously, divided by four quarters throughout our business. Next year, we think based upon – even with an 8.5 percent rate of return, we did lower our discount rate, we think that’s going to be in the range that we gave you of the $10-$12 million. We will not start recovering any of that from the government –and we’re not sure how much that will be, I can give you a broad range, but it’s still two years away, until December or 2004. So, somewhere in the neighborhood of 30, maybe 30, 40 percent of that can be recoverable from the US government.

Okay, but you wouldn’t get the cash benefit of recoveries until somewhere in 2005?

That’s correct.

Okay. And so, to a large degree, starting in 2005, the cash impact – I mean, you’ll have to make, perhaps, a one-time cash contribution, but then you’re going to recover it on a quarterly basis, as you progress throughout the year?

It will not be a one-time. It may take a couple of years, depending on how long the funding takes to get back up. But, that number will be mitigated somewhat, by whatever we can collect back from the US government.

Right. But it will be once a year slug that you’ll put into the pension?

That’s correct.

Okay, good. Enough of that subject. On the inventory, how long should we expect for the inventory levels to work down?

Right now, as I had mentioned, these are firm backlog orders. We like firm backlog orders – long lee time. Right now, the forecast says that they will work down through the – a little bit in the second quarter, but mostly third and fourth quarter.

Okay. So, we should be looking for, generally, same sort of inventory levels in terms of number of days, as we move through the year?

That is our plan. Our plan was to slightly increase the inventory turns. As you know, Robert has really established a manufacturing excellence program. That’s one of the elements of it. But, that is the plan. That can be impacted though, quite frankly, by new orders in the second half and so forth. But it should be – keep in mind, our goal has always been cash flow about equal to net income. So, even if inventories go up and if we get higher sales, I mean, I think you know the equation.

Yes. Can you give us a look back on the instruments acquisition that you’ve done. I mean, maybe Monitor or just in general, of where you think you’ve been able to take the operating performance or sales performances of those businesses, post acquisition?

Let’s start with – our first acquisition was API. That acquisition we did almost a year and a half ago. We anticipate that – in that acquisition, we had anticipated some increases in revenues and year-over-year first quarter, we have enjoyed about a 17 percent increase in revenues. Monitor Labs, we only acquired that last September, so we don’t have a history – year-over-year history. But overall, if you combine the two together, we anticipate approximately $40 million plus in revenue between those two instrument acquisitions.

And you expressed in the past that you continue to think that this is a good area for future acquisitions?

Yes, it is. We are, obviously, actively looking at a number of other acquisitions in that area. And it’s really that the instrument acquisitions have a number of advantages for us. One, as the instrument businesses grow in size, we use a lot of the distribution and service functions commonality between these, which are effective for us, because it reduces costs from a stand-alone company. Second, we also have some cross production of manufacturing operations between our various products and uses. For example, some of the APIs instruments that we were making, now are being used at Monitor Labs, where previously they weren't being used. And finally, this is a truly fragmented market and the gross margins are pretty attractive for us. And because we have such a large – relatively, to a smaller company, large electronics capability and manufacturing capability, we bring that to bear on the various smaller acquisitions that we make and our engineering capability. So, that gives us certain advantages – synergistic advantages. So, we like this area very much.

Okay. On the aircraft engine and component business and the anticipated increase in the insurance cost, obviously, you’ve taken some measure of the range that you’ve provided and put that into your expectations that you’ve given us for the full year. The question is, do you know if your competitors have yet swallowed their pill, in terms of insurance increases? Because obviously, this is a factor that’s hitting the entire industry. And when you talk about price increases, have you seen competitors also eager to pass on some of these costs, so that it becomes more likely that you will see somewhat uniform action across the industry?

We have two or three competitors in this field. We really don’t have any information on our primary competitors in the engine OEM market. As was discussed earlier, there is some insurance pressure that’s going to come on the fixed-base operators and overhaulers. We don’t have a very good read, because the timing of this thing seems to be almost simultaneous. I’m a little reluctant to go too far in this area, partially because, we’re at the very thick of our negotiations for the renewal of our coverage. And the less I discuss that subject at this time, the better.

I understand. How about this; is it fair to assume that there’s a fairly inelastic demand in terms of pricing environment?

There’s always competition. That’s the problem in that if you increase your prices too much, what happens is you have some providers of components equivalent to Napa, in the automobile industry, and you may push your customers down to getting a product that are not really factory certified, but you don’t give them a choice, but to go there. So, you’ve got to balance the two. We know this market pretty well and we’re studying it very carefully. Of course, we won’t do anything that will hurt our business. So, we’ll see how that goes.

For those – we’ll call them gray-market parts, is there a PMA required in order to be able –

Yes. There are PMA requirements on every single engine that goes in any given aircraft.

Okay. And final question, shifting over to the systems engineering side; impact that you’re seeing from shuttle operations, and how should we think about the impact of that event?

First, let me start by saying, our NASA programs are about 25 percent of that overall segment. So far, we have not seen an impact. We have been told by NASA, that they expect the operations to continue on the level that we’ve had. And that’s good for us. And also, there is one other development here. In June of 2002, we were selected as the single prime contractor for the design, development, and operations of Marshall Space [Flight] [ph] Center’s microgravity science payload. And that kind of gave us a bigger potential market of about $500 million over ten years in that area. So, when you couple the two, we don’t see any effect at this time. Of course, if the shuttle flight takes a very, very long time to resume, it’s possible that we’ll see some negative effects. So far, nothing.

Okay. Great, thank you very much, gentlemen.

If there are any additional questions, please press 1 at this time. And Mr. VanWees, there are no further questions in queue. Please continue.

Thank you very much, operator. I will now turn the meeting over to Jason to conclude our conference call.

Thanks, Robert and thanks, everyone, for joining us. Again, feel free to call me at the number listed in the press release if you have any other questions. And again, all the news releases are available on our website, as are the webcast replays. Thanks again. Goodbye.

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