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Spectrum Control Inc. (NASDAQ:SPEC)

F3Q2010 Earnings Call Transcript

September 23, 2010 4:45 pm ET

Executives

Dick Southworth – President & CEO

Jack Freeman – SVP & CFO

Analysts

Fred Buonocore – CJS Securities

Ted Kundtz – Needham & Company

Operator

Greetings and welcome to Spectrum Control Inc. 2010 third quarter conference call. Representing the Company today, we have Mr. Dick Southworth, President and Chief Executive Officer and Mr. Jack Freeman, Senior Vice President and Chief Financial Officer.

A discussion of the Company’s operating performance for the third quarter ended August 31st, 2010 should take about 20 minutes. They will then try to answer as many questions as reasonably possible. We expect to conclude this conference call at approximately 5.30 P.M. Eastern Time.

As a reminder, the following discussion will include certain forward-looking statements, which reflects management’s current views with respect to future market conditions and operating performance. These forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results or those anticipated. These risks and uncertainties are described in detail in the Company’s most recent quarterly and annual SEC filings.

The words “believe,” “expect,” “anticipate,” and similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this call.

I would now like to introduce Mr. Dick Southworth, President and Chief Executive Officer of Spectrum Control.

Dick Southworth

Thank you, Manny [ph] and we would like to welcome to Spectrum Control’s 2010 third quarter conference call. I will briefly review some key operating and financial highlights for the period after which Jack Freeman will review our financial performance in more detail. We will be happy then to take any questions that you may have.

For the third quarter of 2010 we reported net income of $3.9 million or $0.30 per share on sales of $43.6 million. Now, for the comparable period 2009 we had net income of $2 million or $0.16 per share on sales of $31.5 million.

And for the first nine months of 2010, we generated a net income of $9.6 million or $0.73 per share on sales of $121.2 million. And for the same period last year, we had a net income of $6.4 million or $0.50 per share on sales of $98.2 million.

We are very pleased to report that our Company achieved record financial performance in the current quarter, and exceeding our previous guidance. During the third quarter of, total customer orders received amounted to $42.3 million, an increase of $9.9 million or 30% from the comparable quarter of last year. With this current quarter performance, our year-to-date customer orders reached $123.2 million, up 23% from the same period last year, and reflecting a positive current year book-to-bill ratio of 1.02 to 1.00. This significant increase in our customer order rate reflects the continued strength of our military and defense business, combined with a partial rebound of our commercial business as general economic conditions have improved. With this strong customer order rate, we achieved record revenues of $43.6 million in the current quarter, with all four of our major businesses generating increased shipments compared to a year ago.

Just as importantly, our operating margins continued to improve during the current quarter, as we leveraged our fixed manufacturing costs over greater sales volume and continued to successfully integrate and consolidate our recent business acquisitions. As a result, our quarterly earnings grew to a record $0.30 per share, an increase of 88% from the same period last year and up 20% from the second quarter of this year.

Now, these are just some of the highlights and accomplishments for this quarter and at this point I would like to introduce Jack Freeman, our Chief Financial Officer and ask Jack to review our third quarter results in greater detail. When he has completed his presentation, I will conclude with some final comments and we will open the floor to any questions you may have. Jack?

Jack Freeman

Thanks, Dick. In June of this year, we acquired substantially all of the assets and assumed certain liabilities of Sage Laboratories, Inc. Sage Labs, based in Hudson, New Hampshire, designs and manufactures custom RF and microwave products including filters, diplexers, multiplexers, hybrids, and digital frequency discriminators. A majority of Sage Labs' components and subsystems are used in defense and aerospace applications, including radar systems, military aircraft, and missile defense systems.

We believe that Sage Labs’ product offerings and Suspended Substrate Stripline technology are natural complements to our Microwave Components and Systems business.

During the current quarter, we successfully integrated the acquired operations with our existing microwave business, with Sage Labs generating $2.7 million of product sales. In addition to the impact of Sage Labs, our microwave sales in the current quarter included $2.9 million of Micro Networks product sales, another strategic acquisition that we consummated late last fiscal year.

In the third quarter of fiscal 2010, our consolidated sales were $43.6 million, that’s an increase of $12.1 million or 39% from the same period last year. In addition to the $5.6 million aggregate impact of our acquisitions of Sage Labs and Micro Networks, sales of our products used in commercial applications grew $4.2 million compared to a year ago and our military and defense product sales increased $2.3 million. This organic sales growth reflects, we think, the improvement in general economic conditions, as well as the overall strength of our particular military and defense markets.

In the current third quarter, compared to the same period a year ago, sales increased for all four of our major businesses. Sales of our Advanced Specialty Products were $13.5 million in the third quarter of fiscal 2010. That reflects an increase of $3.2 million or 31% from the comparable period of last year. Shipments of our Advanced Specialty Products to customers in virtually all of our key commercial and military markets were up from the comparable quarter of last year.

Sales of our Microwave products were $22.2 million in the current period. That’s up $7.7 million or 53% from the same period last year. Excluding the impact of our recent acquisitions, sales of our Microwave products increased $2.1 million or nearly 15% from a year ago. Demand remained strong for our Microwave products which were used in numerous military and defense programs, including electronic surveillance, unmanned aircraft, radar systems, secured communication, and counter measures for improvised explosive devices. Total customer orders for our Microwave products were $21.1 million in the third quarter of fiscal 2010. That’s up $5.9 million or 39% from a year ago.

Sales of our Power Management Products were $2.7 million in the current quarter. That’s an increase of 24% from last year. Shipments for these advances systems continue to be particularly strong in applications for data storage as well as networking systems.

Sales for our Sensors and Controls amounted to $5.2 million in the third quarter of fiscal 2010. That’s up 16% from the same period of a year ago. This increase primarily reflects additional shipments of our Sensors and Controls for use in numerous commercial applications. Total customer orders received in the third quarter of fiscal 2010 were $42.3 million generating a book-to-bill ratio of just under 1.97 to 1.00, very much in line with our historical third quarter ratios.

In addition to the significant increase in demand for our Microwave products that I just mentioned, customer orders for our Sensors and Controls amounted to $5.7 million in the current quarter, an increase of $2.4 million or 72% from the comparable period of a year ago.

In the current quarter, our gross margin was $12.7 million or approximately 29% of sales, compared to 25% of sales for the same quarter last year and just under 28% for the second quarter of this year. The increase – the ongoing increase in our gross margin percentage principally reflects the leveraging of fixed manufacturing costs over higher sales volume, as well as various improved direct labor efficiencies.

At the end of the current period, we have a total workforce of just over 1600 employees. That’s up about 23% from the end of last fiscal year, reflecting our additional sales volume and additional production requirements. As always, we expect to continuously review our organization and cost structure to enhance the efficiencies while still maintaining flexibility for additional production requirements.

During the current quarter, our selling expense amounted to $3.2 million or about 7% of sales compared to $2.8 million or 9% of sales for the same period last year. The reduction in selling expense as a percentage of sales primarily reflects the leveraging of certain fixed cost over greater sales volume. Out aggregate general and administrative expense was $3.3 million in the third quarter versus $1.8 million in the comparable period of fiscal 2009.

The growth in our G&A expense principally reflects three or four items, the – which include legal and professional fees of just over $360,000, which were directly associated with our recent business acquisition of Sage Labs. It also reflects additional personnel cost, including incentive based compensation of about $444,000, up from a year ago.

And amortization expense is also up about $170,000 compared to the third quarter of last year. That primarily relates to the various intangible assets that have been included in our recent business acquisitions. Also, in the third quarter of last year, our G&A expense included a non-recurring gain from certain insurance recoveries of just over $0.5 million.

With lower interest rates and reduced bank borrowings, our interest expense continued to decrease for the first nine months of fiscal 2010 compared to the same period last year. Total interest expense in the first nine months of fiscal 2010 was about $123,000, a decrease of $83,000 from the same period last year.

During the nine month period ended the end of August of this year weighted average borrowings under our domestic line of credit amounted to about $4.9 million with an average interest rate on our borrowings of 1.27%.

During the nine month period ended the end of August of this year our weighted average borrowings under our domestic line of credit were $5 million with an average interest rate 2.02%. That’s for the nine months of last fiscal year, first nine months of last fiscal year.

On Tuesday of this week, we entered into a new domestic line of credit agreement with our principal lending institution, PNC Bank in the aggregate amount of $50 million. Borrowings under the new line of credit will continue to be secured by substantially all of our tangible and intangible personal property and will bear interest at rates below the prevailing primary.

The newly executed line of credit agreement contains covenants very similar to our previous bank agreement, the most restrictive of which require us to maintain minimum levels of net worth and profitability and impose certain restrictions on us regarding additional indebtedness. The new line of credit agreement is a four-year agreement, which will now expire in September of 2014. And we are very pleased to have this new bank agreement in place, which will support our ongoing business acquisition efforts.

For the first nine months of this year as well as fiscal 2009, our effective income tax rate this year has been 36.2% compared to 35% last year and they compare to a 40% effective Federal and State statutory rate.

Differences between our ongoing effective and the 40% statutory rate primarily continue to arise from various domestic production activity, deductions, state tax provisions as well as various foreign income tax rates. During the third quarter of this year, our net cash provided by operating activities was a record $8.9 million with improved accounts receivable and inventory turnover rates helping to reduce our overall working capital requirements.

For the first nine months of fiscal 2010, our positive operating cash flow as well some existing cash balances and cash reserves have enabled us to repay $6 million under our short term bank borrowings, fund all of our capital expenditures of $4.8 million as well as support the $7.9 million of aggregate purchase price for our recent acquisitions.

At the end of the current third quarter, our ratio of current assets to current liabilities was about 5.0 to 1.0, our total bank borrowings were only $1.5 million. And at the end of the most recent quarter, our total stockholders' equity was a little bit over $124 million, which reflects a book value of about $9.62 per share. We continue to believe that our very strong cash flow and financial position provide a solid foundation for our expected future growth and enhance shareholder value.

So, with that, Dick will now make some concluding comments.

Dick Southworth

Thanks, Jack. Based on our current assessment of business conditions and customer requirements, we presently anticipate our fourth quarter sales to be between $43 to $44 million, with earnings of $0.30 to $0.32 per share. If these operating results are achieved, we would once again have significant year-over-year growth from the comparable period of last year with sales up 26% to 29% and earnings per share up 76% to 88%.

On a longer-term basis, we remain really very optimistic about the future of our Company as overall economic conditions continue to improve, the principal applications for our military/defense solutions continue to be strong, and we continuously develop new and innovative solutions for our customers.

With that, I would like to open the discussion for any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Fred Buonocore with CJS Securities. Please go ahead.

Fred Buonocore – CJS Securities

Yes, good evening, gentleman, very nice quarter.

Dick Southworth

Thanks, Fred.

Jack Freeman

Thanks, Fred.

Fred Buonocore – CJS Securities

Just wanted to start out on margin. You had some pretty tremendous year-over-year and just sequential improvement. I wanted to get a sense where you stand in terms of capacity utilization across your facilities now and opportunities for continued margin improvement going forward.

Dick Southworth

Let me first try to cover the capacity question. In – I would say primarily in the majority of our facilities we are running probably close to 50% of our capacity. And the – we do have some operations that are fully loaded, but we have a lot of room for growth with our existing facilities and equipment for the future. Your second question, Fred was – ?

Jack Freeman

Yes, Fred, I think let me try to answer that in connection with, combined with that our operating margins and what the outlook maybe for them. As you know, we have got a plan in place and had predicted that this year we would make improvements in our operating margins, both our gross margin and our overall operating margins, but that we are going to be driven by a number of factors, mainly the – as our additional – as our revenues increased we would be able to leverage many of the cost and investments that we maintained last year even when the general economic conditions were poor and our commercial business went down, so now we are – that ongoing investment is starting to reap its benefits by creating some very significant leverage for us and very positive incremental margins. That’s combined with a number of cost reduction or cost containment programs, perhaps the most significant of which will be some ongoing consolidation of some of our more recent acquisitions.

So, on the short term, actually for the last quarter, our third quarter, we exceeded our expectations, our previous guidance that – and the margins that were implicit in that. For particularly starting in the first quarter of next year, we would expect those margins to start to continue to improve, the gross margin in particular as we expect revenues to continue to increase and when some of the consolidation and cost reduction efforts will kick in. So, we’ve exceeded our expectations for the third quarter. We think we can hit those again, we are very close to it in our fourth quarter with improved margins kicking in, in the first quarter of next year.

Fred Buonocore – CJS Securities

Thank you. That’s helpful. And then this is my follow-up. Looking at the Q4 guidance, so we are looking at revenues roughly about flattish from Q4 to Q3, kind of want to understand is there some sort of seasonality that typically impacts you in your Q4 and based on the bookings that you are seeing to-date, what we can look at or look towards for as we move into fiscal ’11, the revenue growth trajectory from that? Thank you.

Dick Southworth

Well, I think from the – from a seasonality standpoint the answer to that is no, our fourth quarter is usually a pretty equal to our third quarter and our second half of our year is typically up from the first half of the year when we look at it from a consolidated basis, but the – I am trying to really –

Jack Freeman

The – yes, let me – the – with respect to our third quarter shipments, they actually exceeded the – our previous expectations. And a very normal part of our business as the – I am sure you can appreciate, there are various customers that from time to time based on a number of factors may pull in their original delivery dates or requirement dates may push out some other customers may. And so the net impact we had really in our third quarter was we had in round numbers may be $700,000 or so of shipments that were of various shipments and various customer applications that were pulled into the quarter out of the fourth quarter and we had a little bit totally different customers had some slight delays and some push-outs or rescheduling for items that were originally scheduled to be shipped out of the fourth quarter to the first quarter.

That sort of adjustment of delivery dates is a very, very common items within our business. So all that really has done is shipped a little bit of revenue among the third, fourth and a little bit into the first quarter of next year and we certainly don’t view it as having any fundamental change in the business or the outlook for the business and really going for into next year, we are just as optimistic and think that the additional enhancements we can make to revenue and profitability are still as strong today as what we would have expected two or three months ago. So – and again the – I think the – there is just some normal shifting in and out of quarters that had some modest impact positively in the third quarter and some very modest negative impact on our current outlook for the fourth quarter.

Fred Buonocore – CJS Securities

Were those timing issues more the defense side or the commercial side?

Dick Southworth

Mainly the defense side and it’s, Fred, there are no programs that are lost. It’s only shift in schedules from our customers on their demand needs – the market still look very, very strong (inaudible) in the programs that we are involved in.

Fred Buonocore – CJS Securities

Excellent. I understand. Thank you and I will jump back in queue.

Jack Freeman

All right. Thank you, Fred.

Operator

Thank you. Our next question is from the line of Ted Kundtz with Needham & Company. Please go ahead.

Ted Kundtz – Needham & Company

Yes, good afternoon, Dick and Jack. Getting a little feedback here.

Dick Southworth

Hi, Ted.

Jack Freeman

Hi, Ted.

Ted Kundtz – Needham & Company

Can you comment a bit on the – your view of the military programs, if any activity is running at and there has been some concern out in the markets about military programs slowing and I am wondering if you are seeing any of that affecting you guys and just sort of overall comment on your level of bidding activity in the military side?

Dick Southworth

Well, I would say overall we are – even as we continue to add our technologists for developing the different solutions, we are still in a state of being – I used the term lightly, but almost overwhelmed with the amount of opportunities that we are quoting on, and developing the solutions. So, from that aspect, it’s very strong. We are in – we look at our programs and our focus of our defense markets, whether it be missile defense in the areas like Hellfire and the patriot and PAC-3 and Aegis and Standard Missile, you know the – both 2 and 6 and all the different smart weaponry areas, our C4ISR programs for communications, MMPAC [ph], Southern [ph], FIRECON, JTRS.

We have also our new digital frequency systems for both creating targets and discriminators and seekers and our command post power management systems along with a lot of our satellite communications, our AHS and MT [ph] and LET [ph].

And we couple all that still with all of the UAVs our normal programs there, and they are all – we are quoting like crazy on those and the Joint Strike Fighter. We anticipate next year a downturn in the crew [ph] for domestic requirements but – and some of that is certainly being offset with the crews programs for foreign military sales, which we have won and we are all designed into.

You know, from a commercial side, our data storage and fiber-optic systems continue to be strong in satellite communications win, geothermal, medical, and then overall with just the continued rebound of the recession and we will couple all that with the additions of our new technologies from our acquisitions and what we have been able to develop internally from our high-power, high frequency amplifiers, our new high-speed synthesizers and our digital frequency systems soft [ph] technologies and microelectronics and our – really advancements in our integrated systems. When we put that all together, we certainly believe that if the markets continue to – and the economy continues to be what it is today that we really see double digit organic growth again next year and if we can add to that with strategic acquisitions continue on the same path that we have been on.

Ted Kundtz – Needham & Company

Terrific. There you’ve got – a lot of programs you mentioned there. It sounds like you were bidding on much more activity than you have in the past. Is that a fair statement?

Dick Southworth

Well, we have been – we have bid on an enormous amount and – even in the past, and you know, Ted, in a lot of these programs it takes two years, three years, it’s not – in our defense side it’s not that you bid on it and you get it in six months or three months. And so looking out into the future I think (inaudible) control we get a very bright and – opportunity for growth for us.

Ted Kundtz – Needham & Company

Terrific. So I know it’s hard to predict orders, but you would expect the book-to-bill to kind of move back up over when do you think or is it just so hard to guesstimate at this point in time?

Dick Southworth

No, we certainly – we will have a positive book-to-bill for the year.

Ted Kundtz – Needham & Company

Yes, okay.

Dick Southworth

We certainly believe that and the same thing going forward.

Ted Kundtz – Needham & Company

Okay.

Jack Freeman

And to emphasize, the – couple of points that we made earlier, on a year-to-date basis for the first nine months of this year, even with our additional shipments we do have a positive book-to-bill of 1.02 to 1.00, I think, on a –

Ted Kundtz – Needham & Company

Right the year-to-date.

Jack Freeman

Our third quarter was slightly below 1.00 to 1.00.

Ted Kundtz – Needham & Company

But that’s normal. (Inaudible)

Jack Freeman

Very normal. When we took a look back at historically our third quarters and that 0.97 to 1.00 book-to-bill was very much in line just with historical trends in the third quarter of our fiscal year. So, we continue to be very optimistic about the future demand for our products.

Dick Southworth

You know, actually and we put it into perspective is we would have not have had the pull-ins and would have shipped those shipments in the fourth quarter, we would have been pretty much at a 1.00 to 1.00 book-to-bill.

Ted Kundtz – Needham & Company

Right.

Dick Southworth

And so it’s – I think it’s very positive.

Ted Kundtz – Needham & Company

Great. Terrific. Is the mix still basically two-thirds military, one-third commercial?

Dick Southworth

That’s a little – we are right now at about I think – it was 59%, I believe.

Jack Freeman

I think for the quarter we were 60%. Our year-to-date this year we are 60% military –

Ted Kundtz – Needham & Company

Okay.

Jack Freeman

40% commercial. The third quarter itself was very close to that same –

Ted Kundtz – Needham & Company

Okay.

Jack Freeman

Yes.

Ted Kundtz – Needham & Company

And you mentioned commercial was a little bit mixed. I think you said that, Dick, in your comments. What did you mean by that, what areas were strong, what areas were a bit weaker (inaudible) not recovered yet?

Dick Southworth

I don’t remember saying that, Ted but –

Ted Kundtz – Needham & Company

Okay.

Dick Southworth

– but let me try to just may be again highlight our – the communications is probably – market is probably our most volatile where it’s up and down. And so if there is one area – they are seeing the order in almost like sinusoidal curve and we are expecting that to be strong in the fourth quarter.

Ted Kundtz – Needham & Company

Okay.

Jack Freeman

And just – may be just to quantify that to make sure there is not a misunderstanding in the aggregate when we take a look at our third quarter this year to the third quarter of last year and pull out the impact of acquisitions, our commercial business was up 13% in total this third quarter versus last third quarter and as Dick the communication equipment is a significant part of that there is another broad component, a broad based component that contributed to that 13% growth.

Ted Kundtz – Needham & Company

Okay. So, could you just go back to gross margins for a minute? You are at a new level, I am not sure if this is a record level, but it looks like it to me. And I know your goal is to get into the 30% to 34% range, but do you see the mix going forward leading you to that level, I don’t what (inaudible) timeframe on that goal, but do you see margins continue to move up sequentially?

Jack Freeman

For the most part, yes. The – for the fourth quarter right now when we take a look at the expected mix that – the mix that we expect for the fourth quarter shipments, we would expect our gross margins in the fourth quarter, the gross margin percentage to be very comparable to the third quarter, which, as you said – I don’t think it’s quite a record, but it’s close to it. It’s certainly in excess of 29% gross margin is a level that we’ve been expecting we would hit, but haven’t been at for quite some time.

We kind of expect the fourth quarter margins to be comparable to the third quarter based on that mix, but then going beyond the fourth quarter, when we take a look at mix coupled with some of the ongoing cost reduction and consolidation type efforts, we think we’ll start to once again have incremental improvement in the gross margin.

Ted Kundtz – Needham & Company

Terrific. Okay. Great. And last question just on your tax rate for the year, you are using 36%?

Jack Freeman

Just a shade over that 36.2%, which has increased a little bit for us, especially because of R&D tax credits, which are kind of in limbo right now, so we’ve not been able to anticipate any benefit from the R&D tax credits, which we are still hopefully that will be reinstituted some time here in the near future.

Ted Kundtz – Needham & Company

Okay. And what is the likelihood of another acquisition in the next six months?

Jack Freeman

I will let Dick –

Dick Southworth

You know, Ted, I think about the best way to answer that is we have a very active group of acquisitions opportunities that we are already – always reviewing and we are pursuing them with great vigor.

Ted Kundtz – Needham & Company

Okay.

Dick Southworth

And I don’t think I can give you a better answer.

Ted Kundtz – Needham & Company

And that’s a good answer. Okay. Very nice quarter, guys. Thank you very much.

Jack Freeman

Thank you, Ted.

Operator

(Operator instructions) We have another question from the line of Fred Buonocore. Please go ahead.

Fred Buonocore – CJS Securities

Just wanted to ask about your capital investment requirements going into the next fiscal year. Do you have any areas where you need to add new equipment or expand facilities or anything of that nature? And how should we think about total CapEx relative to this year?

Jack Freeman

At this point of time would not expect anything unusual in terms of CapEx next year. For the first nine months of this year we’ve expended about $4.8 million. We would expect to be somewhere around $6 million for the year, which will be a little bit – it will be close to, but a little bit under our depreciation and amortization for the period for this year. And going – right now as we project out, we would expect our CapEx requirements to be in that $5 million to $6 million range next year.

Fred Buonocore – CJS Securities

Yes, very good. That’s helpful. And what was depreciation and amortization in the quarter?

Jack Freeman

In the quarter it would have been about – between $1.6 million and $1.7 million for the quarter.

Fred Buonocore – CJS Securities

1.7, okay, great. And then just back on the commercial, can you talk a little bit about – I know we talked about we seeing a rebound in the $4 million range for the year relative to last year, the trough levels of last year. Can you talk about actually where you are, where you think that rebound is going to wind up for this year relative to your initial expectations and what you think the primary drivers to that are?

Dick Southworth

The – when we look at it by programs in the commercial side, it looks like we are going to be right on. It’s going to be somewhere around the four, I mean it could be a little bit more to that, but nothing significant to really try to find. And we have got a lot of other growth in the commercial markets because of the new programs that we are working with our customers on and they are evolving at the same time.

Fred Buonocore – CJS Securities

Okay, that’s helpful. And can you give me a sense for exposure to 3G and 4G build out? I guess that impacts a couple of your different segments and will you actually delver to build out of the 4G infrastructure that’s supposed to start over the next few months?

Dick Southworth

You know, actually, Fred, for us it’s a minimal impact to our overall business. So, it’s –

Fred Buonocore – CJS Securities

Got you.

Dick Southworth

We used to – when wireless first started, there was an awful lot of EMI filtering in it and as the years progressed, they took a different route to eliminate any noise and so for the last several years we’ve had just minor amounts of our business are really in the infrastructure equipment for wireless.

Jack Freeman

We think we’ve got, as we’ve talked about, we’ve lots of opportunities for growth in various markets, the wireless infrastructure happens not to be one of them.

Fred Buonocore – CJS Securities

Got it. And really looking at the commercial more broadly, we’ve heard some cautious comments, for instance, from the networking side out of Cisco back in August and the just throughout a bunch of different commercial markets. It sounds like companies are concerned with slowing demand that we’ve seen sort of in inventory restocking and then we are going to see a slowdown in demand. Can you give us a sense for what you are hearing from your clients and what their inventories look like?

Dick Southworth

From our data storage market, the requirements continue to be very strong. And we have had no feedback at all that they have a large inventory of the equipment in the – we don’t really see that having an impact. And the same thing with the fiber optic markets in the power systems that we supply into those markets. It looks to continue to be very strong and will be into 2011.

Fred Buonocore – CJS Securities

Got it. So, you would say you continue to expect based on what you are hearing from your clients and for what you think their inventory levels look like you don’t really expect much of a slowdown in any particular pocket, in other words?

Dick Southworth

Right.

Fred Buonocore – CJS Securities

Okay, very good, thank you.

Operator

We have no further questions in the queue at this time.

Dick Southworth

With no further questions, we would like to thank everyone for joining us today and we will conclude this conference call.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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