CPI International, Inc. F1Q09 (Qtr End 01/02/09) Earnings Call Transcript

CPI International, Inc. (CPII)

F1Q09 Earnings Call

February 12, 2009 11:00 am ET

Executives

Joe Caldarelli – Chief Executive Officer and President

Joel Littman – Chief Financial Officer

Robert A. Fickett - Chief Operating Officer

Analysts

Gary Liebowski - Wachovia Capital Markets

Craig Quilty - Raymond James

Andrew Berg - Post Advisory Group

Presentation

Operator

Good day everyone and welcome to the CPI International first quarter 2009 financial results conference call. My name is Dustin and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-session toward the end of this day’s conference. (Operator Instructions).

Before we begin, the company has asked me to read the following statement. Today's presentation includes forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Forward-looking statements provide the company's current expectations, beliefs or forecasts of future events.

Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from the results projected, expected or implied by forward-looking statements.

These factors include, without limitations, competition in the company's end markets; the impact of a general slowdown in the global economy; the company's debt levels; significant changes or reductions in the U.S. Defense budget; currency fluctuations; U.S. government contract laws and regulations; changes in technology; the impact of unexpected costs and inability to obtain raw materials and components.

Further information on these risk factors and additional risks and uncertainties are included in the company's filings with the Securities and Exchange Commission. The computations of EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow, free cash flow per share, free cash flow conversion and adjusted free cash flow that will be discussed on today's call are non-GAAP financial measures under Securities and Exchange Commission rules.

A presentation of the most directly comparable GAAP measures and reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP measures are available in yesterday's press release, which has been posted on the company's website.

Interested parties can access the press release by going to www.cpii.com and opening the press release entitled CPI International Announces First Quarter 2009 Financial Results.

And now at this time, I would like to turn the presentation over to your host for today's conference, Mr. Joe Caldarelli, Chief Executive Officer of CPI International. Please go ahead, sir.

Joe Caldarelli

Thank you. Good morning and welcome to CPI’s first quarter 2009 call. The agenda for this morning’s call is as follows: First I’ll provide an overview of our sales and orders results in the first quarter and discuss the impact of the current economy in our business.

Then Joel Littman, our Chief Financial Officer will walk us through some of our key financial metrics for the quarter. I’ll wrap up by discussing our expectations for the rest of the year. Bob Fickett, our Chief Operating Officer will join us when we open up the call for your questions.

We had a challenging first quarter. The impact of continuing delays in defense orders coupled with the downturn in the worldwide economy reduced our orders and sales levels for the quarter to levels below last year’s comparable period.

These are unusual and challenging times for companies and markets around the world and we are continuing to focus our energies on those factors that are within our control to ensure that CPI remains a profitable stable company which is well-positioned with all of our partners and customers.

In Q1 of ’09, our sales fell to 77.1 million. Sales were essentially flat in our medical and industrial markets and decreased in our defense, communications and scientific markets. We booked orders totaling 67 million in Q1. All these decrease develop our end markets as our customers grappled with the ramifications of weakening economies around the globe.

In our commercial markets, medical programs in which we participate are reliant on our customers upgrading their current equipment or expanding their infrastructures. But the global macroeconomic situation is becoming more challenging, many of our commercial customers have delayed, reduced or canceled their upgrades or expansion plans, delaying of investments in new or spare products until their own outlook improved or stabilized. As a result, orders for our product that support commercial application decreased in Q1.

Let me discuss our performance in each of our markets in turn. I’ll begin with our sales and orders in our defense markets which consist of our radar and electronic warfare markets. As we discussed in previous calls, during March of fiscal ’08 and now into Q1 of 09, it took longer for defense customers to issue RFQ’s and to place and finalize orders that has historically been the case.

As a result of these delays in the placement of finalization of orders, we have experienced corresponding delays in the shipment of products for the impacted defense programs, negatively affecting our sales in the defense market. It appears that this trend which we’re increasingly hearing is impacting certain other defense companies will continue for the foreseeable future.

In Q1 ’09, defense sales of 28 million was 5.9 million lower than in Q1 ’08. This decrease was due in part to the delays in the placement of orders that I mentioned a moment ago. Also contributing to this decrease are sales of products to support the Aegis weapons systems were $2.1 million lower in the most recent quarter and of the year ago quarter.

This decrease was expected and we have discussed it in our previous calls. As you may recall, we provide products for new ships that utilize the Aegis weapons system as well as spare and repair products for existing previously fielded of ships. This provides us with very long term and stable revenue streams for spares and repairs but is also resulting from variability related to the rate of new ship builds.

For the last several years, we have supported sizeable new ship builds resulting in significantly increased orders of build levels for the Aegis program. However, we have now completed our shipments to support the funded new ships. As a result, the near-term demand for our products to support the Aegis system will be primarily for spare and repair products leading to decreased net year term sales for this system.

We expect our fiscal '09 sales for the Aegis program to be approximately $10 million or roughly half of our fiscal '08 sales. Once the funded new ships are commissioned and deployed, they will eventually require spare and repair products and therefore we expect demand for our products to spark the Aegis to increase again in several years.

In addition, there has been recent talk of building several new destroyers incorporated in the Aegis system. If these new ships are built, we will provide products for them [ph 0:02:10] starting with equipment for new ship builds and then moving to spare and repair products once those ships are deployed.

Let's move on now to the medical market. In comparison to a year ago, our medical orders decreased 11% of Q1 to $10.4 million. This decrease was primarily due to a drop in orders from original equipment manufacturers for x-ray imaging products.

The weakening of global economies has had enough unexpected and unprecedented impact on hospitals and health clinics. As a result, many hospitals and clinics are reconsidering on postponing making additional investment in their facilities and equipment, which have led to a reduced demand worldwide for products for x-ray imaging applications.

Sales in our medical market were flat at $15.6 million in Q1 '09. This decrease in demand for x-ray imaging applications had a negative impact on the medical sales in the quarter. However, our sales to support radiation therapy applications increased during Q1 offsetting the decrease in sales for x-ray imaging. Hospitals and clinics do appear to be selectively investing in equipment that can generate incremental revenues and so market for radiation therapy applications has remained strong.

In the communications market, our orders decreased 42% to 17.4 million in Q1 '09 as compared to Q1 '08. This decrease was primarily the result of two factors. First, our orders for products to support telemetry programs were lowered during the quarter.

Our Malibu division was expecting a number of large orders in Q1 that were delayed and pushed out of the quarter. We have every expectation that most of these orders will be received in fiscal '09 but the exact timing of those orders is still a little harder to predict.

Second, our sat com and broadcast communications orders were negatively impacted by the softening economies. Orders to support commercial communications applications including such traditional mainstays of satellite news gathering and direct-to-home fell during the quarter as some of our commercial customers have adopted a wait-and-see attitude regarding their own financial outlook and the state of the economy before committing to new or expansion projects.

We were not entirely surprised by this turn of events. As you may recall on recent conference calls, we have mentioned that our commercial communications business felt unusually strong given the current economic environment. It now appears that the economic deterioration may have caught up to the market.

Offsetting this decrease in our commercial communications orders, our military communications orders continue to grow in Q1 '09. As a result, our military communications business is becoming a larger portion of our overall communications segment. We expect our participation in milt com applications to continue to grow.

In fact, in January, we received an approximately $13-million follow-on order for continued work on the US Army's Warfighter Information Network - Tactical or WIN-T program which we announced last week. We began production shipments for the WIN-T program in last year's second quarter.

In Q1 '09, our communications sales which totaled $26.2 million were affected by the same factors that impacted orders for the quarter. The economic conditions resulted in decreases in sales to support certain commercial communications programs including North American international direct-to-home broadcast applications. These decreases were partially offset by an increase in sales of military communications products.

In summary, Q1 was marked by order delays in our defense and commercial markets and it downturned our commercial markets due to the challenges of the global economy. We expect that our Q1 orders and sales level will be the lowest of the year as many of the orders that were delayed out of the first quarter are expected to be received in subsequent quarters.

As a matter of fact, we have already received a number of notable large orders in the first few weeks of the second quarter including $13-million WIN-T follow-on order I mentioned a moment ago and an approximately $4-million from a foreign customer to support our radar program.

In addition, our Malibu division is finalizing a few significant contracts which are expected to be booked by the end of the quarter. These contracts include an approximately $2-million order for Tactical Common Data Link or TCDL program which we believe have significant follow-on potential and an approximately $2.6-million order for our telemetry program for a foreign government.

With these and other orders, we expect to have a strong Q2 orders level with all this projected at well over $100 million for the quarter.

I'll discuss our expectations for the remainder of fiscal '09 later in the call but first, Joel will discuss our financial results for Q1.

Joel Littman

Thanks, Joe. During our financial discussion this morning, I will cover CPI's EBITDA, adjusted EBITDA, net income, cash, cash flow, cash flow per share, and free cash flow conversion results for the first quarter of fiscal 2009. The definitions and reconciliations of our non-GAAP metrics can be found in the financial tables of the press release we issued yesterday afternoon.

I'll start with EBITDA. In the first quarter of fiscal 2009, CPI-generated EBITDA totaling $9.5 million or approximately 12% of sales which was a decrease from the $11.9 million or approximately 14% of sales we generated on the first quarter of fiscal 2008.

Our adjusted EBITDA in the first quarter totaled $10.1 million or approximately 13% of sales, a decrease from the $12.3 million or approximately 14% of sales in the same quarter of fiscal 2008. The difference between our EBITDA and adjusted EBITDA results is the exclusion of stock-based compensation expense from our adjusted EBITDA results.

The period over period decreases in our EBITDA and adjusted EBITDA results were primarily the result of the negative impact of our lower sales volume on our gross profit in the most recent quarter. This negative impact was partially offset by decreased spending for administrative and research and development expenses as we undertook cost-reduction initiatives in light of the currently challenging economy. Our administrative expenses also benefited from the strengthening of the US dollar as we recorded foreign currency translation gains in the first quarter of fiscal 2009.

In the first quarter of fiscal 2009, we generated $7.7 million in net income or $0.44 per share on a diluted basis. This is an increase from the $2.5 million or $0.14 per share on a diluted basis we generated in the same quarter of fiscal 2008. However, our net income results in the most recent quarter included $5.7 million or $0.33 per share on a diluted basis with non-recurring income tax benefits related to our Canadian income taxes.

These benefits consisted of two items. The first item is a $5.1-million non-recurring income tax benefit related to an outstanding audit by the Canadian Revenue Agency or CRA in connection with the valuation of the sale of our sat com business from our American operating company through our Canadian subsidiary in the 2001-2002 time frame. We have Canadian tax reserves related to this outstanding CRA audit.

In mid-December the Treasury Department announced the new US-Canada income tax treaty, which mandates arbitration to resolve double taxation disputes not settled through the competent authority process. As a result of this new treaty, our tax position related to the outstanding CRA audit has become more favorable and we recorded an income tax benefit of $5.1 million. The second item contributing to our $5.7 million income tax benefit was the reduction of approximately $600,000 in our Canadian deferred tax accounts to reflect lower corporate tax rates in Canada.

If we exclude these two nonrecurring tax benefits from our results, our net income in the first quarter of fiscal 2009 equaled $2 million or $0.11 per share on a diluted basis which is a decrease from the $2.5 million in net income or $0.14 per share on a diluted basis in the same quarter of the previous year.

This decrease was primarily the result of the negative impact of our lowered sales volume on our gross profit during the most recent quarter. Our effective income tax rate in the first quarter of fiscal 2009 was skewed due to the $5.7 million in nonrecurring tax benefits I just described. We expect our effective income tax rate for the remainder of fiscal 2009 to be approximately 36 to 37%.

Next, I’d like to discuss the changes in our cash and cash flow during the past 12 months. As we have discussed extensively on previous calls, we consider CPI’s ability to reliably generate positive cash flows on a continuing basis to be a key strength of our business especially given the current economic environment in which we are operating. Despite the sales and order shortfalls in the first quarter, we continued to generate positive cash flow.

Our cash and cash equivalents as of the end of the first quarter totaled $28 million as compared $28.7 million as of the end of the previous quarter. For the 12 month period ending January 2, 2009, we generated $28.9 million in cash flow from operating activities or $1.64 per share on a diluted basis. During the same 12 month period, our free cash flow totaled $25.4 million and our adjusted free cash flow totaled $25.6 million.

Our adjusted free cash flow results were in line with our expectations of adjusted free cash flow of more than $20 million during fiscal 2009. On a diluted basis, our free cash flow for the 12 months ended January 2 equated to a $1.45 per share.

In the first quarter we used our free cash flow to retire debt by making payments of $4.75 million on our senior term loan. We remain committed to continuing to strengthening CPI’s balance sheet by paying down and retiring our outstanding debt.

In January after the first quarter ended, we repurchased 3 million of our 8% senior subordinated notes which are due in 2012. We were able to secure an 8.5% discount to par value on this repayment. We made no stock repurchases in the first quarter as we felt that retiring debt was a better use of our cash in this period. We will continue to evaluate the best use of cash in future quarters.

For the recent 12 month period, our free cash flow totaled $25.4 million and our net income totaled $25.6 million resulting in a free cash flow conversion of 99%. The exclusion of the large nonrecurring tax benefits of $5.7 million in the first quarter would result in net income of $19.9 million for the 12 month period and free cash flow conversion of a 128%. In other words, excluding the nonrecurring tax benefit from net income, we turned 128% of our net income into free cash flow during the 12 month period.

We continue to believe that this is an important financial metric that demonstrates the strength of our positive cash flow generating capabilities. With that, I’d like to turn the call back over to Joe to discuss our expectations for the rest of the year.

Joe Caldarelli

Thanks, Joel. On last quarter’s call, I stated that our visibility into fiscal 2009 was poor because of the uncertainties our customers are facing due to the state of the economy which has made the timing of their programs and therefore orders for our products more indefinite than we have seen in recent years. This situation has not changed.

We continue to feel that we do not have enough credible information to provide detailed guidance within meaningful ranges for fiscal ’09. The good news is that although orders were delayed out of Q1, we expect some improvements starting in Q2 to impart to orders that had been expected this quarter now hitting the second quarter. We expect our Q2 orders level to be well above normal totaling more than $100 million.

The strength of our expected Q2 orders will likely offset much of the weakness of our Q1 orders level. Nevertheless, our financial performance in the second quarter will be weaker than in last year’s second quarter.

We are currently expecting the second half of the year to be stronger than the first half. This is due in part to the start of shipments for some of the programs that had orders delayed out of Q1 and into Q2, coupled with several of our customers and government’s expectations of some degree of economic recovery in the second half of the year.

We are continuing to manage our business and our expectations in a responsible and prude manner. Our internal focus for fiscal ’09 take in to account the current macroeconomic climate and allow for some change in either direction. However, if conditions change significantly in either direction, we will need to revisit our expectation for the second half of the year.

In light of the challenging conditions, we have undertaken a number of cost cutting initiatives including mandating extra time off, shutting down our facilities for longer periods around holidays, and reducing our headcount by approximately 70 people since the start of our fiscal year. This reduction in our headcount was achieved through a combination of natural attrition and tightly focused reductions in force.

We are diligently balancing our cost reduction efforts with our need to keep our factories poised to respond quickly to the changing needs of our customers. Although these are challenging times, we believe we are taking the necessary steps to help CPI remain an industry leader and successfully weather the current economic storm.

Consequently, we expect to remain a profitable and positive cash generating company in fiscal ’09 and beyond and we remain confident that we will continue to generate more than $20 million in free cash flow annually.

We appreciate your time and attention this morning. Let’s begin the question and answer portion of today’s call.

Question and Answer Session

Operator

Thank you, sir. The question and answer session will be conducted electronically. (Operator Instructions) We’ll go first to Gary Liebowitz with Wachovia.

Gary Liebowitz - Wachovia

Good morning Joe and Joel.

Joe Caldarelli

Good morning Gary.

Gary Liebowski - Wachovia Capital Markets

Joe, you didn’t give too much on the ’09 outlook but on a sequential basis or a quarterly should the sales pattern follow historical patterns? Or because of the uncertainty you’re not even willing - you can’t affirm that historical pattern?

Joe Caldarelli

Yeah, I think if we look at - we do it - a certainly detailed internal forecast and you know, talk to our customers and so on the basis of the forecasts as best we’re able to see right now, we would expect actually to have sequential improvement in sales each quarter this year.

So the background work should be there. You know the caution, as I mentioned, is that things are changing mighty quickly so one never knows but on the base of all the information we have today, we would expect sequential improvements in sales during the year.

Gary Liebowski - Wachovia Capital Markets

Okay and you just mentioned that you expect to generate at least $20 million of free cash flow annually. I mean that would suggest some pretty good working capital improvements. Where are the biggest opportunities there? Is it inventory or receivables or where do you see that?

Joe Caldarelli

Well, we’ll just continue on to be prudent as we have been. We don’t have particularly bloated inventories or receivables but we believe that with aggressive management of both we can continue to watch those carefully and make sure that they come down consistent with the current business levels in that we don’t let our customers abuse us on receivables, you know?

So we don’t have to do anything dramatic. We just have to make sure that we stay on top of both of those.

Gary Liebowski - Wachovia Capital Markets

Just one last one back to the ’09 outlook. You know you didn’t give us sales guidance but is it fair to assume that sales decline in ’09 should look on a percent basis should be at least consistent with the headcount reduction that you’ve announced?

Joe Caldarelli

We haven’t done the calculation that way because what we - I think what we’re trying to say is that rather than impact our permanent headcount to any dramatic degree. What we’re trying to do is to spread the pain sort of speak and remain responsive by taking a number of days off. So natural fact we’re taking more cost out of the organization than you would conclude from simply taking the headcount reduction.

In fact, our main weapon, if you like, for cost reduction if we’re staying consistent with the sales level is the time off vehicle rather than you know layoffs. So I haven’t done the calculation the way you’re suggesting but if you wanted to look at that way, you should look at the input as being proportional to sort of the number of hours we’re going to work this year and we’re not publishing the specific time off that we’re taking but it’s meaningful.

Gary Liebowski - Wachovia Capital Markets

Okay, all right. Thanks, I’ll get back in the queue.

Joe Caldarelli

Okay, thank you.

Operator

Go next to Chris Quilty with Raymond James.

Craig Quilty - Raymond James

Morning gentlemen.

Joe Caldarelli

Morning.

Craig Quilty - Raymond James

Question for you on the communications segment, I mean that segment than other scientific which tends to be spotty showed the biggest sequential in year over year drop in orders. Was there anything specific happening that particular end market that you think caused such a sharp drop off? Do you think that’s something will hold through the balance of the year or you’ll see a little bit of a return to a normal order level?

Joe Caldarelli

A good deal of it was timing. We did book a $13 million order right after the end of the quarter. So had the fallen into Q1, of course, it would’ve looked perfectly fine but beyond that, as we mentioned in our news release, we have seen - I mean we’ve been, as you know, concerned for some time that the commercial communications market seemed to be holding up uncharacteristically well given what was going on worldwide.

It is our feeling now that in fact the commercial communications market is seeing some sign of softening of the consumer in the same and we saw that - we think we saw that manifested with lower spending on things like direct to home expansions and some of the satellite news gathering business that had been holding up pretty well.

So, our assumption going forward is that the commercial side of the communications business will continue to be, you know, a little bit soft and that the defense side will continue to strengthen. So that an aggregate, our internal forecast indicate that the communications total business in aggregate will be comfortable to last year and remain reasonably solid overall but the shift is more towards the defense side.

Craig Quilty - Raymond James

Okay. Now my perception was that at least on the direct to home side, a lot of that stuff demand seemed pretty resilient just due to the migration to Ka-band and the high definition content being a fairly resilient driver that, at least from the macros statistics doesn’t seem to have slowed.

Joe Caldarelli

I think you’re right. However, recall that we tend to get involved in significant infrastructure growth and today there is no significant infrastructure addition taking place by any major player. There’s modest amounts going on around the world in certain other countries but there’s no major ones going on right now. So some of that you can call timing.

Craig Quilty - Raymond James

Okay and with regard to the scientific part of the market admittedly small. Have you been able to call out anything in the stimulus package that might potential help in that area?

Joe Caldarelli

We have Bob, are you able to comment on that or -

Craig Quilty - Raymond James

Or are you the only company in America who didn’t get something?

Joe Caldarelli

No, we think there should be something there.

Robert A. Fickett

There are line items for some accelerated upgrades which are aimed at some of the national labs that’s due and would have a direct, very positive impact on us. We have to make sure they get through the hurdles but they are in the stimulus package and they are targeted for programs where we would be on.

Craig Quilty - Raymond James

Great.

Joe Caldarelli

Then beyond that, they’re sure the general impact that is - in fact if people view this stimulus positively and that has a general positive impact overall, of course we’ll see benefit from that.

Craig Quilty - Raymond James

Right. In terms of looking at your debt maturities, really nothing big coming until 2012. Any thoughts on other than prepayments, what makes sense?

Robert A. Fickett

Yeah, we’re just going to stay the course. Basically we’re going to use what we consider to be (inaudible) to continue to take down our debt and as you’ve noticed, we’ve changed a little bit of which debt we’re addressing somewhat opportunistically but there’s nothing that we are required to do. Clearly under the current environment, it would be foolish for us to entertain doing something that wasn’t required. So we think we’re just going to stay the course and hang in there.

I think our strategy, first of all that come 2012 we think that our debt level will be dramatically reduced anyways and b, overall conditions might be better by that time. So we’re feeling pretty good about that.

Craig Quilty - Raymond James

Okay. It looks like you’ve finally got some good traction coming out of Malibu. Can you give us an update there?

Joe Caldarelli

Yeah, in their case Q1 was relatively soft on orders but it was really orders timing. So they have a couple of - as you know or as you may remember, one of the key areas they’ve been investing is the tactical data common language (TCDL) and their products are becoming more used by more players in that arena. We’re seeing either orders that are beginning to be placed on us or on the verge of being placed or at least we’re being considered for more and more. So I would think that we should have, you know, useful additional announcements over the next six months in that area.

Craig Quilty - Raymond James

Great. Keep plugging away.

Joe Caldarelli

Thank you.

Operator

(Operator Instructions) We’ll go next to Andrew Berg with Post Advisory Group.

Andrew Berg - Post Advisory Group

Hey guys. If we can just revisit the headcount issue for a moment, you talked about 70 people. Maybe I just missed it here but can you talk about what do you think that will save you in terms of labor dollars as well as comment on any severance costs that you’re going to have payout to get those savings?

Joe Caldarelli

Well, the - it’s been done already and the severance costs were very modest. So they’re sort of inconsequential.

Andrew Berg - Post Advisory Group

Okay.

Joe Caldarelli

Because some of it was through attrition and so on. The savings, Joel, I’m not sure we have a headline savings number that we’ve calculated. Do you have one handy?

Joel Littman

It’s probably in the neighborhood of $5 million, Joe, on an annual basis.

Joe Caldarelli

Okay. Okay, so.

Andrew Berg - Post Advisory Group

Okay and we’ll start seeing that show up in the next quarter?

Joe Caldarelli

Yes, starting now basically.

Andrew Berg - Post Advisory Group

Okay.

Joe Caldarelli

All this happened in January or prior to that.

Andrew Berg - Post Advisory Group

Okay. With respect to your comment, Joe, about the orders on a go forward basis in the second quarter. I think you said we should expect to see $100 million in orders. That’s not sales, we’re just talking order levels, correct?

Joe Caldarelli

That’s correct, yes.

Andrew Berg - Post Advisory Group

Okay. I need both of you to translate that order number in to a sales number for us, ballpark?

Joe Caldarelli

Not really because there’s a fair lag depending on what market it’s from. The medical market and to some extent the communication market turn around fairly quickly, a matter of weeks to a month or two. In the defense market, it takes three to six months before they become revenues but as I mentioned earlier, we do expect our sales to improve sequentially assuming there isn’t some other shoe that drops later on with respect to the global economic situation or government spending.

On the base of everything that we see right now, the orders that were delayed out of Q1 are a good number than what we booked in Q2. Hence, by the end of Q2 we think we’ll be roughly where we thought would’ve been in the first place, you know relatively even.

There’s a bit of a delay in calibrating that sale so I expect Q2 sales to be better than Q1 but not back to normal and then sequentially pick up in Q3 and Q4 assuming that no other nasties happen between now and then.

Andrew Berg - Post Advisory Group

Okay. As you think out over a little bit longer timeframe, I think you know the defense budget for this year and next year is somewhat baked but as you get out to the 2011 timeframe with the change in administration, is there anything you look at in your portfolio of products that you think hey, this may be at risk of getting scaled back or eliminated?

Joe Caldarelli

Not really, no. Fortunately for us, many of the programs we support are the currently fields of products or products that are currently in production rather than some of the really hot new ones. So we’ve heard no talk about any program threats per se. I think the threat for us continues to be the level of that preparedness and sparing that the government chooses to afford.

Every indication is that the reason we’ve been suffering the last year or so with delays and stalls from the government has been because they had been postponing and scaling down some of their spare requirements. We’re seeing not an enormous but we are seeing some cases where all of a sudden, they realize oh my God it’s too low and make an emergency (inaudible).

So I would expect that we’ll reach a plateau sometime in the next little while and I don’t know if that’s a quarter or two or three but we’re going to get down to the level that needs to be sustained and we’ll get back down to a more normal rate of shipments in that respect.

We actually see a couple of opportunities that it’s premature to talk about but there’s a couple of opportunities over the next couple of years that could actually have us pick up a little bit on some of those programs. Some of them have been talked about is the possibility of additional ages and new ships. Most of you have probably seen the news items on that. Not fully decided but pretty strong indications that some number of new ships will be added. That would be positive for us.

There’s a couple of other legacy programs that we’re on where there are opportunities for expanding the use of those instead of some of the newer secular products. So both those kinds of things would be positive for us. So we think that we’re probably reaching the low end if you like and should either plateau or see a slight increase starting later this year.

Andrew Berg - Post Advisory Group

Okay. Just touching base on the ages; you had mentioned that the - your business from new builds has pretty much come to an end but you’ll have the opportunity for replenishment business over time as those new systems age.

What’s - how should I think about that in terms of the timeframe for when you start getting orders? Now that the systems are in, is it a year, two years? When do you start seeing some benefit from the replenishment part of that business?

Joe Caldarelli

Well, we’re seeing that right now. All the business we have today - all the new ships were finished - all the products we are supplying for new ships were finished shipment last year. So everything we’re doing this year is in support of all the ships that have already been fielded which is 50 plus. That order level today is in the neighborhood of $8 to $10 million. That will continue that way for a few years.

The ships that are currently being built and commissioned will take a few years before they get out there and will wear out the product and require spares. So realistically, it’s a few years out. The new ships if they decide to build new ones, I would think that decisions on that will be made later this year and probably our product would be ordered perhaps in the 2010, 2011 timeframe for delivery a year or two later.

So I think that we’re seeing probably - if you put all that together a couple of years of relative flat business supporting existing floating infrastructure and then slightly ramping up after that for the combination of new ships and incremental ships being fielded maybe starting two, three years out.

Andrew Berg - Post Advisory Group

Okay, very good. I appreciate it and applaud you guys for properly managing the balance sheet and taking advantage of the capital markets and reducing debt at a discount. I think that’s probably the best use of your capital right now versus stock buyback. So I would urge you guys to continue to do that.

Joe Caldarelli

Great, thanks very much.

Andrew Berg - Post Advisory Group

Thank you.

Operator

There appear to be no further questions at this time. I’d like to turn the conference back over to Mr. Caldarelli for any additional or closing comments.

Joe Caldarelli

Thank you. Well, thanks very much for listening in this morning. We are, as indicated continue to be acutely aware of our responsibility to you to make sure that we ran business well. We think that we’ve done not too badly in Q1. We’re feeling slightly encouraged going forward but there’s a lot of uncertainty still out there. So we’ll continue to be very prudent. Thank you for listening. We’ll talk to you next quarter.

Operator

That does conclude today’s conference call. Again, we thank you for your participation. You may disconnect at this time.

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