Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aeroflex Holding Corp. (NYSE:ARX)

F2Q13 (Qtr End 12/31/2012) Earnings Call

February 6, 2013 4:30 PM ET

Executives

Andrew Kaminsky - Senior Vice President, Corporate Development, Investor Relations and Human Resources

Len Borow - President, Chief Executive Officer and Director

John Adamovich - Senior Vice President, Chief Financial Officer and Secretary

John Buyko - Executive Vice President, President of AMS and Director

Analysts

James Covello - Goldman Sachs

Mark Moskowitz - JPMorgan

Operator

Good afternoon, and welcome to the Aeroflex Holding Corp. webcast and conference call, where management will discuss the company's financial results for the second quarter of fiscal year 2013, which ended December 31, 2012. If you do not have a copy of the earnings press release, you may access it through the Investor Relation section of the company's website at aeroflex.com. This call is being recorded for future playback, and will be available later today in the events tab of the Investor Relations section on the company's website.

I would now like to turn the call over to Mr. Andrew Kaminsky, Senior Vice President of Corporate Development and Investor Relations for opening remarks.

Andrew Kaminsky

Good afternoon, and thank you for joining us. With me on the call today is Len Borow, Aeroflex's Chief Executive Officer; John Adamovich, Aeroflex's Chief Financial Officer; and John Buyko, Aeroflex's Executive Vice President and President of AMS.

Please note that during this conference call, we may make forward-looking statements regarding future events or financial performance and outlook that are based on information currently available to management. You are cautioned that any forward-looking statements are not a guarantee of future performance and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected.

For a more detailed description of these uncertainties and factors, please see Aeroflex's filings with the Securities and Exchange Commission. Aeroflex undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.

Also note that all dollar figures and percentages are approximations, and that the detailed reconciliations of GAAP to non-GAAP results can be found in the press release we issued this afternoon that is posted on our website. After we review the results of the second quarter, we will open the lines for questions.

At this time, I'd like to turn the conference call over to, Len.

Len Borow

Thank you, Andrew. Good afternoon and thank you for joining us today. Despite the difficult environment, we have once again been able to exceed expectations this quarter. We saw combined improvement in both AMS and ATS, and had exceptional bookings led by our high performance, high reliability products in AMS, and our commercial wireless products in ATS.

Even with the unresolved budgetary issues in Washington, we are seeing meaningful opportunities in the aerospace, defense and government end-markets. Our unique intellectual property and sole source or primary supplier status for many of our products and communications and defense applications keeps us well positioned in our end-markets.

The very strong book-to-bill of over one-to-one this quarter was primarily driven by AMS. These bookings were across all our end-markets, including medical, industrial, defense, aerospace and satellite.

This quarter we received an order for $12 million for Battery Electronic Units or BEUs from a leading satellite manufacturer as well as a significant order for our next-generation Mixed-Signal ASICs from a leading medical diagnostics company. We also received a multimillion dollar order from a leading digital X-ray manufacturer for our high performance, high reliability ASICs. Many of these bookings are long-term programs with shipping date over the next six to 36 months.

In ATS, we've continued to capitalize on the operational changes we made in our commercial wireless business last summer. We are continuing to evaluate our operations, and we're making more changes to make us even more efficient and profitable in the future.

Our strategy of focusing aggressively on our core competencies has begun to show signs of success. This quarter we had multimillion dollar orders from global telecom equipment vendors for our market-leading wireless infrastructure products as well as strong PXI orders for wireless handset manufacturing from one of our key customers.

These orders contributed to our solid book-to-bill of over one-to-one in our commercial wireless business this quarter. This team has been reenergized and motivated to keep building upon the successes we've experienced in the first half of the fiscal year. Although, we are encouraged by the strong bookings activity this quarter, we're still cautious as the political and economic issues affecting our end-markets still exist.

I would like to now turn the call over to John Adamovich to discuss our financial results.

John Adamovich

Thanks, Len, and good afternoon. I am going to briefly discuss financial results for the quarter and give a quick update on our balance sheet. I'll then turn the call back to Len, who will discuss our guidance, before opening the lines for questions.

For purposes of this call, my statement of operations related comments will focus on our non-GAAP metrics. These non-GAAP metrics eliminate certain non-recurring charges and non-cash charges. As Andrew mentioned at the outset of the call, the detailed reconciliation of our GAAP to non-GAAP results can be found in the press release we issued this afternoon.

The net sales exceeded the guidance we provided. Our net sales for the second quarter decreased year-over-year to $156 million. The sales split by segment was $79 million from AMS and $78 million from ATS.

Gross margin for the quarter was 50.7%, up 180 basis points sequentially from 48.9% in the first quarter of fiscal 2013. The increase was driven by the performance of the commercial wireless business in ATS.

On a consolidated basis, SG&A was $35.6 million, flat from the second quarter of fiscal 2012. As we have previously discussed, as certain R&D projects included, we reduced the number of contract engineers in our wireless ATS business. R&D for the quarter was $21.1 million, down from $22.4 million in fiscal 2012.

As a percentage of sales, R&D was 13.5% this quarter compared to 13.1% in the second quarter of fiscal 2012. With R&D leading the path to our future, we continue to focus on core engineering projects that will contribute to our growth across both businesses. Due to the cost saving initiatives and headcount reductions we have executed, we have been able to reduce SG&A and R&D by a combined 5.5% compared to the first six months of fiscal 2012.

For the second quarter, we generated non-GAAP operating income of $22.5 million and adjusted EBITDA of $27.6 million. Non-GAAP net income for the quarter was $8.7 million or $0.10 per share.

Our customer diversity has remained strong. For the quarter, no customer accounted for more than 10% of net sales. Also for the quarter, 23% of net sales were in APAC, 19% in Europe and 53% in the U.S. Net sales for the U.S. government or to prime defense contractor or subcontractors of U.S. government dropped to approximately 26% for the quarter from 39% for the same quarter in fiscal 2012.

Our geographic mix of non-GAAP pre-tax income for the quarter resulted in a non-GAAP effective tax rate of 33%. We continually review our operations for additional efficiency and are not hesitant to take the actions to improve our profitability and position us for the future.

Our low CapEx needs continue to allow us to use our excess cash flow to repay debt. This quarter we prepaid an additional $10 million. Fiscal year-to-date, we prepaid $35 million of debt, bringing our gross debt balance down for $606.4 million and our net debt to $564.7 million at December 31.

Finally, at December 31, our leverage ratio under the one financial covenant in our credit agreement was 4.99 times compared to the permitted ratio of 5.75 times.

I will now turn the call back to Len for some closing remarks. Len?

Len Borow

Thanks, John. Before I even start my closing remarks, I just want to reiterate something that John said so that you can make sure you understand it. And that the biggest part of our increase in sales in wireless was APAC, which is where it's really happening. Of course, with the drop in U.S. sales, we made up for it in APAC. And additionally, we went from 39% to 26% from U.S. government. So even with the sequestration looming over our head, we're feeling good about our core businesses.

While we remain cautious in the short-term due to the uncertain economic conditions, in particular the government imposed economic conditions, I am confident about our long-term market position and ability to execute and our desire to succeed.

The fiscal third quarter ending March 31, 2013, we expect net sales to be between $154 million and $162 million, adjusted EBITDA to be between $26 million and $29 million, and non-GAAP net income per share to be between $0.09 and $0.12. The range of accepted non-GAAP net income per share for the third quarter was calculated using effective tax rate of 28%.

I'd like to turn the call back to the operator to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Covello, Goldman Sachs.

James Covello - Goldman Sachs

So I guess, first question, some of the other companies, particularly companies that have exposure to defense and aerospace, I think there was a comment from one of the companies last week that said our customers are behaving like sequestration already took over. And you've commented a little about this in the prepared remarks, but obviously you're not seeing that kind of impact on your business and/or some of the things you're doing from the mix or share gain perspective, you're kind of overcoming that.

I mean, how should we think about those comments from other people who were tangentially involved in aerospace and the difference in that and the more bullish view that you guys have? By the way not just bullish view, I meant bullish results as well.

Len Borow

The latter is the correct answer meaning that we saw the same thing, but our HiRel microelectronics seems to have no real competitors, the customers are really forced to buy it. And John and his group did an outstanding job that had a great, I won't give you the numbers, but a blowout bookings quarter.

And wireless, I mean we made up for it in wireless, in our core point of wireless, our infrastructure side and even PXI was up. And we're meeting or exceeding our goals for the year there.

But what the other people are saying is true. There is really not a lot of visibility. The government is acting as if they have no money, and the customers, now that's going to change, as soon as some things resolved, we think they'll start releasing, but they don't know how much money they're going to have. So we've had a great quarter, despite the uncertainty of the government. And unfortunately a lot of our competitors in certain areas don't have the other thing to pull back on.

James Covello - Goldman Sachs

If I could ask you as a follow-up then, I mean this is the second quarter in a row where you guys really executed well, versus your guidance, and what is still to your point a tough environment. Have you guys kind of philosophically change the way that you're thinking about setting the guidance or is it just so happen that you've seen a turn in your business over the last couple of quarters?

Len Borow

No, we basically changed management, and are running it differently. And we are setting realistic goals and then going out meeting them.

James Covello - Goldman Sachs

And then if I could ask a final question, you've talked a lot on the calls and in other forums about the interest that others have had in various pieces of the business. Where did all those discussions stand at this point?

John Adamovich

We're very happy to run this company. We don't have to sell anything. Everybody is always coming, asking about parts of the business. But with the high tax-rate of 35% plus in the U.S., it's not attractive for us to be selling pieces, unless we get extremely attractive prices.

James Covello - Goldman Sachs

And has your view on that changed all at over the last year?

John Adamovich

No. And don't be surprised if we wind up going out and buying some people now.

Operator

And your next question is from Mark Moskowitz, JPMorgan.

Mark Moskowitz - JPMorgan

I had a question, I know the model clearly is stabilizing, which is a good thing the last couple quarters, from a year-over-year compare perspective, but you're still probably not where you want to be. I just wanted to get a sense, as you look forward are you starting to see potential signs here in some areas of the market where you could see continued follow-through in demand. And what I mean with that is I just want to make sure we're not getting head thick here by some sort of milder or temporal replenishment cycle because things were so bad for so long across the parts of your end-markets?

Len Borow

No, I mean it's the wireless and the HiRel businesses, which are our key businesses and a highest margin businesses are very strong. The military of our business, as you heard from my comments, went from 39% to 26%. Had they've been flat we would have been above last year. So you have an uncertainty, when Congress and the President, the government gets off their you know what, and solve some things and takes out the uncertainty, I think our positioning is great, but something has to happen.

I mean the government does not know how much money they have to spend, that makes it very difficult for us to figure out. We know from the customer's who say, no, we need that. We don't care. We're going to buy that. That's one thing. But all of the stuff that they have, sometime on, they are not buying. But that should change hopefully in March, when this comes to ahead.

Mark Moskowitz - JPMorgan

Just to paraphrase, so if they get their act together, the other parts of your business that are not impacted, and now do you feel good about those businesses continuing to show a good cadence or a rate of improvement that you've been seeing?

Len Borow

Our infrastructure business is up. Our PXI business is up and our HiRel businesses are up.

Mark Moskowitz - JPMorgan

And then you mentioned earlier to Jim's question just around how you've improved the ATS, in particular due to some management refinement or overhaul. What about, just in terms of sprawling the real estate footprint. I know you've done some good job in the past year, having guys around maybe consolidating or just shedding some cost. Where are you in that thought process? And is there still some pretty good headroom to shed cost that can maybe help provide some greater cash flow to drive the future acquisitions?

John Adamovich

Well, we're in the process of completing the major one now, which we talked about last quarter. And after that we'll have basically only two major centers for ATS and three real major centers for AMS.

Operator

Thank you. And now, I'd like to turn the call back over to Len Borow for closing remarks.

Len Borow

Thank you everyone for listening, and we'll speak to you again next quarter.

Operator

Thank you for joining today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aeroflex Holding's CEO Discusses F2Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts