LaBarge Inc. Q2 2009 Earnings Call Transcript

LaBarge Inc. (LB)

Q2 2009 Earnings Call

February 6, 2009 11:00 am ET

Executives

Craig LaBarge – President, Chief Executive Officer

Donald Nonnenkamp – Chief Financial Officer

Analysts

Fred Buonocore – CJS Securities

Mark Jordan – Noble Financial

Paul Mammola – Sidoti & Co.

Tom Spiro – Spiro Capital Management

[Charles Neuhauser – HSC]

Presentation

Operator

Welcome to the LaBarge Inc. fiscal 2009 second quarter 2009 earnings conference call. (Operator Instructions) Before we begin the company would like to remind you that during this call, the speakers will be making certain forward-looking statements. The company's actual results may differ significantly from those results in or suggested by these forward-looking statements. The company's actual results are subject to a number of risks including but not limited to those described in its filings with the Securities and Exchange Commission.

I would now like to turn the conference over to Mr. Craig LaBarge, President and CEO.

Craig LaBarge

Good morning everyone. Thanks for joining us today for a discussion of LaBarge's financial results for our fiscal 2009 second quarter and first half which ended on December 28. With me today is Don Nonnenkamp, Chief Financial Officer. As is our practice, we'll begin with some prepared remarks and then open up the call for questions.

I'd like to begin by saying that LaBarge had a strong second quarter despite worsening conditions in the overall economy and certain of our key markets. In addition, during the second quarter, we took another important step in supporting our diverse market strategy and advancing our growth prospects by acquiring Wisconsin based Pensar Electronic Solutions in late December.

We're going to talk more about the Pensar acquisition in just a few minutes, but first let's address the quarter's financial results and the factors that affected them. If you read this morning's press release you know that we wrote off our full exposure related to Eclipse Aviation and its Chapter 11 bankruptcy reorganization.

The impact to the second quarter earnings is a non recurring net charge of about $3.7 million or $0.23 per diluted share. This comprises the following; pre-tax charges, a $4.2 million charge to cost of sales reflecting the write down of the inventory, and a $1.9 million charge to SG&A reflecting the write off of $3.7 million in Eclipse accounts receivable, offset by a reduction of $1.8 million in our accrued incentive compensation.

A little later in the call we'll talk about the factors that led up to our decision to write off the full exposure. However, excluding the write off, LaBarge had a very strong second quarter with earnings growing 17% from last year's second quarter, an increase from 9% from the current year first quarter.

I will note that there is a reconciliation of the GAAP and non GAAP financial measures that are mentioned during this call in today's press release which is available on the company's web site if you don't already have it.

I'm going to turn the call over to Don now for a review of the company's second quarter results.

Donald Nonnenkamp

Good morning everyone. Fiscal 2009 second quarter results were as follows. Second quarter net sales were $68.2 million up 2% from $67 million in the fiscal 2008 quarter. The newly acquired Pensar operation which was acquired on December 22, accounted for less than $200,000 of sales in the current year second quarter.

Fiscal 2009 second quarter cost of sales, SG&A, net earnings, profit margins and backlog were all negatively impacted by the Eclipse related charges mentioned earlier.

Second quarter net earnings were $249,000 or $0.02 per diluted share in the current year compared with $3.4 million or $0.21 per diluted share in the last year's second quarter. Excluding the Eclipse related charge; fiscal 2009 second quarter net earnings increased 17% to $3.9 million or $0.25 per share.

Second quarter gross margin was 15% in the current year second quarter versus 19.9% in the year ago second quarter and 20.9% in the current year first quarter. Again excluding the Eclipse related charge, this year's second quarter gross margin was 21.2%, and increase of 130 basis points from the fiscal 2008 second quarter due to improved operating efficiencies and favorable product mix.

SG&A as a percentage of sales was 14.1% in the current year second quarter compared to 11.1% in the fiscal 2008 second quarter. In actual dollars fiscal 2009 second quarter increased 29% from the previous year's second quarter. Excluding the Eclipse related charge, fiscal 2009 second quarter SG&A was 11.4% of sales and actual SG&A expense increased 4% from the previous year's second quarter on higher compensation costs.

As a percentage of sales, operating income was 0.9% versus 8.8% in the same period a year earlier. Excluding the Eclipse impact, operating in the current year second quarter was 9.9%.

Interest expense declined to $145,000 compared to $387,000 in the fiscal 2008 second quarter on lower average debt levels and lower average interest rates.

Net cash flow from operations increased to $6 million compared with $97,000 in the fiscal 2008 second quarter. Total debt at December 28 was $51.4 million compared with $15.6 million at June 29 and $24 million at the end of last year's second quarter. The increase in debt is a result of the financing for the Pensar acquisition.

Stockholders equity at December 28 was $96.4 million up 5% from $91.5 million at June 29. And finally, backlog at December 28 was $200.7 million compared with $245.5 million a year earlier and $218.4 million at the end of the current year first quarter.

Backlog at December 28 includes the addition of $28 million in orders from the newly acquired Pensar operation and a reduction of $39.6 million due to the removal of Eclipse orders. Approximately 90% of the backlog at December 28 is scheduled to ship in the following 12 months.

And now the call goes back to Craig.

Craig LaBarge

Shipments to defense customers comprised the largest portion of our fiscal 2009 second quarter net sales at 49% compared with 35% in this fiscal 2008 second quarter. Actual sales dollars from the defense market sector increased 42% in the fiscal 2009 second quarter versus the year ago period. Fiscal 2009 first half net sales to defense customers grew 38% from the comparable period a year earlier and reflects shipments on a wide variety of defense programs.

Shipments to natural resources customers represented about 20% of fiscal 2009 second quarter net sales versus 28% in the fiscal 2008 second quarter. Actual sales dollars from this market sector declined 27% in the 2009 second quarter and first half versus the comparable periods a year earlier, primarily due to lower shipments to mining customers, but also due to a small reduction in sales to oil and gas customers in the current period.

Our shipments to industrial customers were 18% of our fiscal 2009 second quarter sales compared with 17% in the 2008 second quarter. Actual sales dollars from the industrial market sector were up about 7% in fiscal 2009 versus a year earlier. Fiscal first half net sales to industrial customers grew 28% from the comparable period a year earlier due to current higher current shipments of equipments used in glass container manufacturing systems and primarily driven by the ramp that was occurring over this period compared to the first half of last year on the newer Windsor Illinois contract on the high end of mechanical assemblies.

Shipments to medical customers represented 6% of fiscal 2009 second quarter net sales versus 7% in the fiscal 2008 second quarter. Actual sales dollars from the medical market sector declined about 4% in the second quarter versus a year earlier; however in the first half sales to medical customers grew about 19% from the comparable period.

Shipments to commercial aerospace customers were about 3% of our fiscal 2009 second quarter revenues compared with 8% in the fiscal 2008 second quarter. Fiscal 2009 sales from the commercial aerospace market declined 63% in the second fiscal quarter and 41% in the first half versus the comparable periods a year earlier due to the cessation of shipments to Eclipse Aviation early in the second quarter.

I'd like to take a few minutes now to discuss the Pensar acquisition. Over the last couple of years we've screened perhaps a 100 or more acquisition candidates, tossing out any companies that were lacking a record of growth and profitability. Late last year, Pensar came onto our radar screen as a very good candidate and we were able to close that acquisition on December 22.

Like LaBarge, Pensar belongs to the Electronics Manufacturing Services industry. It designs, engineers and manufactures low to medium volume, high mix complete circuit card assemblies and higher level electronic assemblies for a variety of end markets.

The operation focuses on complex products where high reliability and quality are critical and offers a variety of other value added services including engineering support, prototyping and comprehensive testing.

Pensar does business in a variety of commercial markets and has established relationships with a number of well known companies including Smith's Medical, Cardinal Health Care and Thermal Fissure. Approximately 85% of Pensar's $52.4 million in calendar 2008 revenues came from providing circuit card assemblies and higher level electrical product assemblies for various industrial, medical and transportation applications.

As such, the addition of Pensar further diversifies LeBarge's mix of business within commercial land industrial market sectors. We're also excited about the business synergies between LaBarge and Pensar. We believe that LaBarge's broader capabilities will provide opportunities to further penetrate Pensar's customer base as well as grow that customer base.

With a benefit from cost savings as we find ways to implement best practices across the company, we see benefits there as well. Pensar is now operating under the LaBarge name at our Appleton, Wisconsin operation.

In December, we reported our expectations that the Pensar acquisition would be modestly accretive to LaBarge's earnings in the second half of our fiscal year. At this time, it looks like Pensar's contribution to second half earnings will be slightly diluted in the third quarter and accretive in the fourth quarter.

And now, I'll turn it back over to Don to review the financing for the Pensar acquisition and provide some further commentary on the Eclipse write off as well.

Donald Nonnenkamp

LaBarge acquired the assets of Pensar for $45.3 million subject to certain estimated working capital adjustments to be finalized in the current quarter, in our third quarter this year. We financed the acquisition with senior bank debt using a combination of a new three year $35 million term loan, cash on hand and a draw down under a $30 million revolving credit agreement. Currently, approximately $28 million remains available under this revolving credit agreement.

Interest on the $35 million term loan has been fixed through an interest rate swap at approximately 4.18%. The remainder of our debt floats with LIBOR. Fiscal payments will begin in September 2009 at $2 million per quarter.

Now to the issue of the Eclipse write off and the circumstances leading to us writing off our full exposure of approximately $7.9 million. On January 20, the U.S. Bankruptcy court approved the sale of Eclipse Aviation's assets to Eclipse Jet Aviation International which is an affiliate of a major shareholder of Eclipse named E-Turk Aviation.

Eclipse Jet has indicated to us that it intends to resume production of the Eclipse E-500 aircraft and would like us to continue as a supplier. We expect to being negotiations in the current quarter with Eclipse Jet on a new contract to resume production of cable assemblies for the aircraft.

It's possible that the negotiations may include a payment of some portion of the Eclipse Accounts Receivable, the old company's accounts receivable. However, no such offer has been received and Eclipse Jet is not obligated to make any payments since they did not assume the receivables in the asset purchase agreement.

Eclipse Jet has shared with us a production plan that would allow consumption of the raw materials and cable assemblies that we currently have on hand. However, as of today, the company does not have a contract in place, nor have there been negotiations regarding any such contract.

Given the uncertainty surrounding the Eclipse Jet plans, and the company's future role in the production of the E-500 aircraft if any, we have written down the inventory to a level we believe we can recover through use on other programs or through the sale of the raw materials.

Since as of this moment we have no contract with Eclipse Jet nor any firm offer from them, we feel the most prudent thing to do is to take this charge.

I think this is a good place to mention that except for this Eclipse exposure, our accounts receivable portfolio is well diversified and of good quality. Now back to Craig.

Craig LaBarge

I'd like to make a few comments about our outlook for the balance of this year. Despite the relative strength in our defense market, which is our largest market sector, we anticipate that fiscal 2009 second half results will be negatively impacted by declines in current year industrial and natural resources orders and of course the absence of Eclipse shipments which amounted to approximately $8 million in last year's second half.

Specifically, we expect that fiscal 2009 shipments to industrial and natural resources customers will weaken further in the fiscal 2009 second half. Based on the visibility we have today, we expect that fiscal 2009 second half sales excluding revenues from the Pensar acquisition will be down a little more than 20% from last year's second half. Including revenue from the Pensar acquisition, we expect fiscal 2009 second half revenues will be down about 5% from last year's second half levels.

We anticipate that fiscal 2009's second half earnings will also be down due to the lower pre-acquisition sales volume and low gross margin on shipments of Pensar finished goods and work in process that was required to be stepped up in the case of the finished good to near full selling price at closing.

Management's positive long term outlook for the business remains the same based on the company's strong pipeline of mid term and longer term opportunities. We believe that execution of a clearly defined growth strategy combined with a strong underlying financial base that we have, presents LaBarge with real opportunities to emerge in an even stronger position when this economy begins to recover.

At this time Don and I will be happy to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Fred Buonocore – CJS Securities.

Fred Buonocore – CJS Securities

I wanted to get a sense if you could quantify the impact of the lower volumes in your core business as well as the Pensar inventory step up on gross margins at least relative to the rate we've been running at the last few quarters.

Craig LaBarge

I can tell you that in the natural resources area and the industrial area we think revenues will be down more than 30% in the second half compared to last year. As you know, the comparables get a little more challenging in the second half, certainly considerably more challenging in the second half than they were in the first half, but that said, in the industrial area, the numbers I just gave you are pre-acquisition.

So if we set the acquisition aside just for the moment, but in the core, I'll call it vintage business, those revenues will be down significantly from last year.

Defense in continuing to be relatively strong but growth again from last year is more challenging comparables. We'll be showing growth but not nearly the kind of growth that we were able to show due to the favorable comps in the first half of the year.

Fred Buonocore – CJS Securities

In addition though you mentioned there would be an impact to gross margin.

Craig LaBarge

What we're dealing with there is primarily a result of a less efficient absorption, a less efficient utilization of the relatively fixed part of our overhead that's going to impact margins somewhat as we continue to adjust to the lower volumes.

Fred Buonocore – CJS Securities

In terms of the Pensar contribution, it seems like some of your guidance implies around the $25 million revenue contribution for Pensar for the second half which relative to what they posted in 2008, calendar 2008, it looks like that only implies a low to mid single digit decline. Is there something with their customer base or end markets that has them holding up a little bit better or are they on less difficult comps than LaBarge would be? I'm just trying to get a sense for the trends they're seeing with their customers and end market.

Craig LaBarge

I think we're seeing, they're seeing some of the same things that we're seeing in the rest of the market. They're certainly not immune from the effects of the economy on certain of those end markets, particularly on the industrial side.

But we had kind of factored that in to our thinking and they had factored that into their forecasts when we were in the due diligence process and before the acquisition. I have a lot of new customers so that's helpful and in some respects is offsetting some declines with existing customers.

Donald Nonnenkamp

Pensar does have for a company that size, a nice diversification with its customer base. It's primarily in the medical area and in the industrial area. I believe the medical area will hold up better than the industrial area, but they have a good diversification.

Fred Buonocore – CJS Securities

It looks like, if I have this right that actually in natural resources your sales went up sequentially versus Q1 and I'm just wondering if that's a shipment timing item or maybe not weakening as much as you thought it would. Is there anything to take out of that sequential increase?

Craig LaBarge

No, I wouldn't. I think it's just a timing issue on one or more projects probably. I don't know exactly what that would have been. I didn't really study that sequentially. It was down overall. As we mentioned in the past, the mining business I wouldn't say came to a halt, that would be too much, but the revenues are down 65% to 75% in some cases in the mining area, and that's been the case for a few quarters now already.

Oil and gas has held up quite well until just about the last 60 days, just before the holidays and some of the major oil field services companies have announced layoffs and reductions and cutbacks, and the rest, and we've felt that rather suddenly, although frankly not unexpectedly, but rather suddenly in the last 60 days, and it's going to impact those oil and gas revenues in the second half severely.

Fred Buonocore – CJS Securities

And you oil and gas product is largely related to down hole drilling, right?

Craig LaBarge

Production, yes. Oil and gas production and production enhancement activities as opposed to for instance exploration.

Donald Nonnenkamp

Just one other comment on natural resources certainly is our most volatile market segment in the end markets that we serve.

Operator

Your next question comes from Mark Jordan – Noble Financial.

Mark Jordan – Noble Financial

With the Pensar acquisition that $12 million to $12.5 million that you'll be assimilating here in the March quarter how will this be split between industrial and medical?

Craig LaBarge

I've got some data on that for you if I can just lay my hands on it. I would say of those revenues, I've got second half numbers, these are not quarterly numbers, but in the second half numbers, about somewhere in the neighborhood of 17% or so is industrial, about 40% is medical and then we've got another area I guess we're still trying to figure out where to put it, another 25% that could be either natural resources or industrial depending on how you define it.

And the rest is just miscellaneous in some other markets, transportation, and some engineering services work is spread over a variety of different customers.

Mark Jordan – Noble Financial

Would you put that in other then, that remaining catch all?

Craig LaBarge

Yes I would. That should be about 15% roughly, 14% to 15%.

Mark Jordan – Noble Financial

And getting back to the margin question a little more, in terms of clearly the order of magnitude, are we looking at a third fiscal quarter gross margin in the mid 16% range?

Craig LaBarge

I think that's probably a good estimate. I think it's important to remember that our stated gross margin is impacted pretty dramatically by those Pensar revenues that will basically carry almost no gross margin in the third quarter and have a reduced gross margin in the fourth quarter due to the step up that we took when we bought the business.

So all of the finished goods were written up on the opening balance sheet to basically selling price, a little bit less than selling price and then all the work in process was also written up to depending on where they were in the process, to a value that had on the balance sheet all of the effort that had been made on those raw materials in the manufacturing process.

LaBarge as the buyer here will lose the typical gross margin that this company would enjoy which would be the high teens on the significant majority of the Q3 sales, and that also bleeds a little bit into Q4.

Mark Jordan – Noble Financial

As you burn off that inventory you should expect at least 100 basis point improvement in the fourth quarter just because you've bled off most of that and then finally there shouldn't be any residual zero cost inventory or zero cost gross margin sales as you move into the September quarter.

Craig LaBarge

That's correct. That's exactly our expectation.

Mark Jordan – Noble Financial

I noticed that the health sector declined a little bit sequentially and it's fairly well below where you were the second half of fiscal '08. Could you talk a little bit about the dynamics there and what the outlook is against pre Pensar?

Craig LaBarge

In the past we've talked about our efforts in medical and we've made a decision about three years ago or so now to refocus some efforts in medical, and that involves for us going out and identifying new customers and trying to find customers that are a good fit for us in terms of their needs, their technologies and their philosophy of doing business really.

So as I've said before, we've had some important successes there and we've also had some false starts and I think you're seeing in that the effect of a couple of false starts with customers where we just weren't able to develop the kind of relationship that we think is necessary for success, and so some fall out there offset by some continued new customers coming in.

That's one of the things about the Pensar acquisition that we were so pleased about, was that customer make up and having such a significant medical presence with customers that are really good solid companies; companies like Smith's Medical and Cardinal Health Care, just to name a couple of them.

Mark Jordan – Noble Financial

In the second quarter you had obviously the net charge or the impact of the net accounts receivable, with the addition of Pensar's what is a reasonable absolute level to start with? Is it around the $9 million level of G&A in the third quarter here?

Craig LaBarge

Could you ask that again? I'm not sure I followed the question.

Mark Jordan – Noble Financial

I'm trying to get at what the absolute G&A level might be in the third quarter. Obviously the second quarter you had $9.6 million which was significantly impacted by the net impact of the Eclipse recovery, but then moving into the third quarter, you'll obviously have a full quarter of G&A from the Pensar acquisition. With those two moving parts, is $9 million to $9.2 million a reasonable absolute level to assume in that line for the third quarter?

Craig LaBarge

I think that's high. We're not adding a tremendous amount of SG&A with Pensar. The majority of those expenses, certainly the vast majority of those expenses will fall in the cost of goods area, in overhead, manufacturing overheads and the like. So I think that that's a bit high.

Donald Nonnenkamp

I would say it's a bit high for the remainder of this fiscal year.

Craig LaBarge

One of the key things that I want to touch on, we did essentially reverse our variable compensation, our incentive compensation in the first half. This write off of the Eclipse assets, let me just say sort of broke the bag in regard to the incentive program here, and we're strong believers in if you make the goals, you benefit from it. If we don't make the goals then the bonuses are variable just like we believe they should be.

So not only did we reverse about $1.8 million in expense in accrued liability there that was accrued in the first half, that expense won't be there in the second half either barring some miraculous change that puts the company back in the money at some smaller level on the incentive program. So that's all SG&A expense, so that's a big chunk of expense that will not be incurred in the second half.

Mark Jordan – Noble Financial

Obviously, you're clearly not a Wall Street firm because a Wall Street firm would have already paid out those bonuses.

Craig LaBarge

We're not part of the TARP program here we're happy to say.

Operator

Your next question comes from Paul Mammola – Sidoti & Co.

Paul Mammola – Sidoti & Co.

On glass manufacturing, is there a firm sense of what the customer spend will be in '09, because I know before that was kind of up in the air and that had changed in the prior year as you went forward.

Craig LaBarge

I wouldn't say a firm sense. We with all of our customers are operating based on their forecast and their estimates and frankly, they're sometimes accurate and oftentimes not. Based upon what we're hearing, we're expecting that spend to be down. What we saw in our first half was the benefit of a more favorable, and maybe I would say an easier comp because we had a nice big chunk of new business that we had won with Owens Illinois on these complex mechanical assemblies that in the first half, really through the first three quarters last year that volume was still ramping.

A comparison of this year's first half to last year's first half was a bit easier, and the second half of last year had pretty much reached full production volumes. So compared to those levels, we're anticipating that those revenues will be down and frankly anticipating, they're probably not strong enough. We really believe those revenues will be down in the second half of this year compared to the second half of last year.

Paul Mammola – Sidoti & Co.

At this point who do you perceive to be your biggest or who do you see in bidding the most?

Craig LaBarge

It varies tremendously by customer, and even more importantly by market or in a few cases by geographical region. On the defense side there are a variety of companies we compete with, varying by customer but there are companies like Cyprus Systems. They have a part of their business is very similar to our defense electronics business, circuit card assembly, box build, a good company.

Companies like Plexus to some degree we would compete with them, and a lot of other really private companies that we compete with.

Paul Mammola – Sidoti & Co.

A couple of moving parts in backlog, is it fair to assume that defense is still making up 50% of that and most of that is follow on work?

Craig LaBarge

Yes. It's actually more than 50%. The backlog at the end of December, about 58% was defense, and about 6% would have been aerospace. That's after removing the Eclipse backlog from that. In natural resources, about 12% of the backlog, industrial 8%, medical about 14%, and then other.

Paul Mammola – Sidoti & Co.

Would you classify most of that as follow on work? Is that fair?

Craig LaBarge

Yes. I think so. In the defense market what's in the backlog I would say is heavily weighted towards follow on work.

Operator

Your next question comes from Tom Spiro – Spiro Capital Management

Tom Spiro – Spiro Capital Management

With respect to Pensar, I don't want to make too much of this but I was curious, when you announced the Pensar transaction in mid to late December, you thought that Pensar's revenues for '08 would be approximately $55 million and it cam in a little less at $54 million but there was only a week or two left in the year. I was surprised.

Craig LaBarge

I would have to go back and look at exactly what we said, but I think that $55 million number was sort of just to give a sense of the size of the business. I don't know if we held a call. You may very well be right. I may have said, it probably would have been me, may have said that $55 million was their 2008 revenue. It was probably more like their run rate, not necessarily their revenues for the full fiscal year, probably for the full calendar year.

But I don't know that. I wouldn't read too much into that at all. It's just I think I may have misstated that.

Tom Spiro – Spiro Capital Management

Do you happen to know what their revenues were for calendar '078?

Craig LaBarge

Not off the top of my head. We'd be happy to get that for you.

Tom Spiro – Spiro Capital Management

With the heavier weighting of Pensar towards the industrial and the medical and the absence of defense, is it fair to say that Pensar's revenue growth over calendar '09 would be modest?

Craig LaBarge

I think so. We were not counting on huge growth in '09. I think there's still some real opportunities with new customers who are still in the very, very early stages of development. We'll see some growth there even in a weak economy but some of their industrial customers are going to be fighting the same headwinds that most industrial companies are in this climate.

Medical should hold up reasonably well we think. Many of the companies that we talk to when we did our due diligence, they're customers that we talked to when we did our due diligence were saying that business was sort of more flattish and they were all accustomed to growing and now it's kind of flattened out. My sense, my idea would be, that would be a moral victory in this climate.

Tom Spiro – Spiro Capital Management

Continuing with that last thought, some of the challenges that we're facing now in industrial and natural resources, do we have any cost cutting plans in those areas? Is there any way to tighten the belt at all or not?

Craig LaBarge

We are. We're doing that in the normal course. In our business we're accustomed to adjusting our overhead and our capacities in a sense, our cost structure in a sense to the level of business that we have. I mentioned earlier the variable comp which is the biggest single cost that we have that sort of takes care of itself, but is really a major cost reduction for us this year as compared to last.

We're also looking at everything ranging from the simple stuff like travel, entertainment expenses and supplies and all the rest to outside resources, consultants and things like that to personnel and benefits. I think we run a pretty efficient operation in good times or bad and it's just good business and we try to keep things under control, but we're looking at everything right now.

Tom Spiro – Spiro Capital Management

You mentioned briefly that receivables are diversified. You're comfortable with the position of our receivables, the quality of our receivables?

Donald Nonnenkamp

I am.

Operator

Your next question comes from [Charles Neuhauser – HSC]

[Charles Neuhauser – HSC]

You said, or it has been determined that the second half of your fiscal year they should contribute about $25 million in top line revenues, and you said that they would contribute almost nothing in the way of gross margin?

Craig LaBarge

It will be in the single digit margins.

[Charles Neuhauser – HSC]

It would be the high teens otherwise you said.

Craig LaBarge

Yes.

[Charles Neuhauser – HSC]

So let's pretend you mean like 18% and let's say the single digits are 8%, just pulling numbers out of the air. That leaves 10% points of $25 million or $2.5 million that for some accounting reason is not going to be reported as pre-tax income.

Craig LaBarge

Yes.

[Charles Neuhauser – HSC]

So if you tax the $2.5 million at 37% and you divide it by 16 million shares, that's $0.06 a share that in reality you earned, but you're not going to be able to report it because of some screwy accounting rule.

Donald Nonnenkamp

Right. Your characterization of that is pretty accurate I'd say.

[Charles Neuhauser – HSC]

What is the cash flow reality of that situation? Does the $2.5 million of pre-tax income float in somehow as cash flow or is there some tax implication?

Donald Nonnenkamp

Actually the cash flow, what we bill for our invoices on those sales is not different no matter what our cost of goods are. The other thing that's important is that Pensar operation will carry about $780,000 of depreciation and amortization expense, so we expect some strong cash flow from operation.

[Charles Neuhauser – HSC]

So when you roll all that up, it's no small wonder that your second half might be down in relation to last year, but a lot of it is pure accounting.

Craig LaBarge

Certainly the portion that's related to the acquisition. That's why you see I think, so many companies who do a lot of acquisitions, essentially recording earnings, all they talk about is non-GAAP earnings because I think for most business people, most investors, that is in some cases a more meaningful way to look at the business.

We've not done that. Certainly we presented this quarter, we presented the non-GAAP numbers in a way that people could understand what the impact of the Eclipse write off was, and we thought that was important and prudent and necessary to get the full picture but we've kind of resisted going down that road and talking about earnings before expenses.

[Charles Neuhauser – HSC]

You did say earlier it seemed to me that you would expect Pensar's top line to grow somewhat in calendar '09?

Craig LaBarge

Yes.

[Charles Neuhauser – HSC]

The fact that this thing is going to be somewhat diluted in the third fiscal quarter and somewhat additive in the fourth which probably equates to nothing on balance, come July 1, it should be dramatically added as to earnings.

Craig LaBarge

Yes. We certainly expect that it will be accretive. I wouldn't comment on the dramatically but I would certainly expect it to be accretive going forward.

[Charles Neuhauser – HSC]

As far as the Eclipse business goes, it was bought by it's largest shareholder. Do we expect that they're going to build airplanes?

Craig LaBarge

Let me give you a little background there. On January 20 the bankruptcy court approved the sale of the Eclipse assets to this new firm that goes by the name of Eclipse Jet, we'll call it. It's Eclipse Jet International. And they are an affiliate of a firm called E-Turk which is the largest shareholder in the old Eclipse and they have put forth a plan, and by the way, they have been funding, providing the veteran financing for Eclipse to keep it going during this bankruptcy period, so since November 20.

They have put forth a plan to restart the manufacturing and take over the purchase contracts, the commitments to customers and build planes, ship them and grow the business. Now we do not have confirmation, unless something came in in the last few hours, we do not have confirmation that they've actually closed yet on the purchase of those assets.

We expect that it would happen this week and we don't have any confirmation whether that's happened. If it happens, we're anticipating that they will approach the key suppliers; certainly we are one of them, to attempt to negotiate some agreements that would have those suppliers continue to build the products that they were building for the old Eclipse.

The suppliers are already certified, already approved and all ready to begin production presumably immediately. So we've not had that discussion yet officially. We anticipate that that would be happening sometime during this quarter and it may lead to an agreement. But given the uncertainty of all of that, we were kind on in a position where we had to make a decision to go ahead and write those costs off.

[Charles Neuhauser – HSC]

Which is again, an accounting judgment, following the rules type of situation. But if the continue or if they start to make airplanes again, the odds are pretty darn good that you're going to be supplying them stuff.

Craig LaBarge

I would think so. We would have to get comfortable with their capitalization. We'll have to get comfortable with the business plan and we certainly don't want to create another write off for some point in the future.

We're not suggesting that we suspect that, but we just don't know enough yet. So we would hope that we would be able to reach and agreement and we'll be able to get comfortable with their plan and be back in production again.

[Charles Neuhauser – HSC]

If Pensar does $55 million in revenues over the course of '09, I would assume that it's got a 10% gross operating margin minus SG&A, I think that sounds reasonable. Is that fair?

Craig LaBarge

Yes.

[Charles Neuhauser – HSC]

So that's $5.5 million. You're already paying the interest on the debt. You're taxed $5.5 million at 37% and you divide it by 16.2 million shares, that's $0.21 a share which if you earn something in the ball park of $0.90 plus or minus cents this year, that's a 20% of those earnings. So if that acquisition when it's being accounted for properly contributes that kind of incremental profit, I would say that's rather meaningful.

Craig LaBarge

My only comment would be on a non-GAAP basis, I think that sounds reasonable. But with the write up of all the assets we are going to have this additional depreciation and amortization of the intangibles which will for GAAP purposes will be a drag on that.

Operator

Your next question comes from Fred Buonocore – CJS Securities.

Fred Buonocore – CJS Securities

A follow up on acquisitions. Now that you've completed Pensar after you mentioned looking at hundreds of companies, they may have been some other good ones in that pool.

Craig LaBarge

Not many.

Fred Buonocore – CJS Securities

Does this preclude you from doing any additional acquisition say within the next six to twelve months?

Donald Nonnenkamp

I think the answer to that is no, from a financial point of view. On a pro forma basis, our debt to EBITDA which was extremely low prior to this transaction is now about on a pro forma basis including historical Pensar EBITDA is about 1.4 to 1. It's still relatively low I would say even in today's world.

So from a financial point of view, I believe we have some capacity to look at additional acquisitions. The second part of that question is not a financial question, but it's kind a managerial capacity or talent capacity or whatever you want to say.

There is a digestion process that we need to go through with this company in Wisconsin and I don't think it's reasonable for anyone on the call or anyone in the investment community to assume that we will do another acquisition very quickly. This digestion process is very critical for us to make sure that everybody's on board with what our expectations are for this operation and as I think we did very good due diligence, there are still things we need to learn about this company, its customers and how it does business, and there's things they need to learn about us.

So I think the short term answer is no, but in the intermediate term is definitely yes.

Craig LaBarge

If I could expand a little bit on that, we see a lot of opportunities, and I'm not just talking about acquisitions, but we see a lot of opportunities. We continue to believe that given our financial strength and our operating know how, that in this environment, we're going to see opportunities that come to us because of that financial strength and our ability to perform.

We certainly think we will see opportunities because of a certain competitors maybe that are not financially strong and that are going to suffer greatly in this environment and frankly, not even make it. We've got great relationships with our customers.

We've got a proven ability to perform. We've got the financial wherewithal and the operating know how and we just really feel that opportunities are going to surface as a result of the strain that many companies are under in this economy.

Donald Nonnenkamp

And many of those, you would not consider to be an acquisition activity. That's going to be new business.

Fred Buonocore – CJS Securities

It sounds like what you may be hinting at is that these may be nearer term opportunities in the event that some of your less financially able competitors aren't able to supply some customers. You may be able to pick up some incremental work.

Craig LaBarge

I don't want to leave you with the impression that I've got in my back pocket something that we're going to be announcing soon, because that's certainly not the case. There's enough activity going on with customers who are seeking information on the financial strength and viability of their suppliers and just enough stress out there in companies that are highly leverages that I think we're well positioned to take advantage of that.

Fred Buonocore – CJS Securities

This would represent a potential upside to your current outlook for the rest of the year.

Craig LaBarge

Yes, although I don't think given lead times and things like that, I don't think it's going to be, I don't think even if something happened quickly, something surfaced quickly, it certainly isn't going to impact the third quarter.

In theory there could be some new opportunities and new things that could begin to impact a little bit in Q4, but at this point we're not building any of that into our thinking. Certainly if we could make that happen, we're going to do everything we can to do it, but at this point, we're not factoring that into our forecasts.

Operator

Your next question comes from Mark Jordan – Noble Financial.

Mark Jordan – Noble Financial

Relative to the natural resource industrial groups, is there a cycle of inventory liquidation going on at your customer base that might give you a sense of security that the bottom may really be reached here in the second half of the fiscal year, or do you not have a visibility of where the bottom is in those two sectors.

Craig LaBarge

I don't think we really know. We're not seeing, we don't have access to any information that would tell us that they're liquidating inventories or the like. For the most part the products that we supply in the oil and gas area would be consider capital equipment, capital spending product that customers are using to perform their oil field services, so in that area we don't see it.

In the mining area, some of that equipment, the largest percentage, the majority of the work we do in mining would be systems that are then sold on by our customers to the big mines and big mining companies. So it's possible that they certainly have reduced their inventories but we don't see any sign at this point that that's going to pick up any time soon.

Operator

There are no further questions at this time. I'd like to turn the conference back over to management for closing remarks.

Craig LaBarge

I want to thank everyone for joining us today and your continued interest in LaBarge. We hope you'll join us when we announce results for our fiscal 2009 third quarter in late April. If the meantime, if you have any other questions, please feel free to contact Coleen Clemens, our Director of Corporate Communications. Thank you and have a good day.

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