API Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: API Technologies (ATNY)
by: SA Transcripts

Operator

Good day and welcome to the API Technologies’ Fiscal 2012 Fourth quarter and Full Year Conference Call and webcast. All participants will be in listen-only mode (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to the moderator, Mr. Chris Witty, please go ahead.

Chris Witty

Thank you, good morning everyone and thanks for joining us today. With us from management are Bel Lazar, President and CEO and Phil Rehkemper, EVP and Chief Financial Officer. Before starting the call, I would like to read the Safe Harbor statement. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words anticipates, believes, estimates, expects, intends, may, plans, projects, will, would and similar expressions are all intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are subject to risk and uncertainties, which could cause actual results to differ possibly materially for what the Company now anticipates. Management has outlined risk about the Company’s business in the section titled Risk Factors and managements discussion and analysis of financial conditions and results, operations in the fiscal year report on Form 10-K and quarterly reports on Form 10-Q. These reports are on file with the Securities and Exchange Commission, and they should be reviewed with great care because all forward-looking statements that management makes during the conference call or otherwise should be interpreted in light of the risks comprised in these reports. API Technologies does not under any obligation to update of any guidance or any other statements discussed on this conference call, and investors should not assume that the Company would update any of these statements.

With that, I’ll turn the call over to Phil Rehkemper, who would discuss the Company’s financial results; Bel Lazar will then address API’s end-markets and overall operations. Please go ahead Phil.

Phil Rehkemper

Thanks Chris and good morning everyone. For the quarter-ended November 30 2012, API Technologies reported revenue of $62.7 million versus $68.4 million in the fiscal third quarter of 2012, and $75.1 million in the fiscal quarter ended November 30, 2011. The sequential quarter-over-quarter decline was primarily due to softness in API’s Electronic Manufacturing Services or EMS segment, and the timing of certain program orders in our Secure Systems & Information Assurance or SSIA segment. Bel will review these areas further in a moment.

While quarter-over-quarter revenue declined, our bookings were $76.6 million resulting in a book-to-bill ratio of 1.2 to 1. GAAP gross margin for the fiscal fourth quarter 2012 was 20.2% incurred to 22.3% in the third quarter and 23.7% in the quarter-ended November 30, 2011. Excluding restructuring charges gross margins for the November 2012 quarter was 21.4% compared to 24.9% in the August quarter and 23.9% in the November quarter last year. The sequential quarter-over-quarter GAAP gross margin decline was primarily due to lower revenue, which increased our manufacturing overhead as a percentage of revenue partially offset by lower restructuring cost in the current quarter. The decline in GAAP gross margin in Q4 compared to last year’s quarter ended November 30, was primarily due to lower revenue and higher restructuring cost.

For the current quarter, we recorded total restructuring costs of $3.3 million versus $2.2 million in the August ending quarter, and $1.7 million in the quarter-ended November 30 2011. For the fourth fiscal quarter of 2012, adjusted EBITDA was $8.3 million or 13.2% of revenue compared to adjusted EBITDA of $9.3 million or 13.7% in the third quarter of 2012. Adjusted EBITDA was $11.4 million or 15.2% of revenue for the quarter-ended November 30 2011, excluding the EMS segment adjusted EBITDA for the fiscal fourth quarter of 2012 was 16% of revenue.

Excluding restructuring charges, the Company reported an operating loss of $0.5 million in the quarter-ended November 30, 2012 versus operating income of $2.8 million in the August ending quarter, and $6.1 million of operating income in the quarter-ended November 30, 2011.

For the year-ended November 30, 2012 our effective income tax rate was 2.4% compared to a blended U.S. federal and state statutory income tax rate of about 36%. Primary difference between the effective tax rate and the blended statutory tax rate is due to the fiscal year 2012 goodwill impairment, and other permanent differences as well as the establishment of valuation allowances relating to deferred tax asset including current historical net operating loss incurred by the Company.

We posted a net loss of $12.3 million with the quarter-ended November 30 2012 compared to a net loss of $27.7 million in the August ending quarter and a net loss of $2.5 million in the quarter-ended November 30, 2011.

Moving on to the balance sheet as of November 30, 2012 the Company had $21.2 million of cash and cash equivalents including $700,000 or restricted cash and a $185.4 million of debt obligations, net of $3 million discount on the term loan.

Our cash flow from operating activities was $6 million in the quarter, and our cash capital expenditures for the quarter were $340,000. Our days sales outstanding or DSO in the current quarter was 66 incurred to 65 in the prior quarter. At the end of the fourth fiscal quarter of 2012, we had total inventory of $68 million, an increase of $900,000 of the prior quarter, this increase in inventory to support our current backlog.

On February 6, we announced the repayment of our term loan and entry into two new credit agreements. The term loan for a $165 million and an asset based loan revolver of $50 million upon which we drew $29.4 million at closing.

With that let me turn the call over to Bel. Bel?

Bel Lazar

Thanks Phil. Good morning and thanks everyone for joining us today. We have just completed our six quarters since the launching of the new API Technologies in June 2011. During this time, we have transformed the Company into a dominant provider of high-reliability RF/microwave microelectronics and Secure Technology Solutions that cross a number of fronts in commercial end market.

For the fiscal year ended November 30, 2012 we posted revenue of $280.8 million, and adjusted EBITDA of $39.6 million or 14.1 as a percent of revenue. Even with the defense budget uncertainty and an overall weak macroeconomic environment, we defended and protected EBITDA margin and profitably maintained an EBITDA percentage range of 12% to 15% between 12% or 15% on a quarterly basis in fiscal 2012. We successfully reduced our fixed cost structure and right sized the Company aligning it with a current revenue run rate making it linear and more agile.

In Q4, we had record booking of $76.6 million resulting in a book-to-bill of 1.2 to 1, and a stronger backlog for fiscal year 2013. In spite of defense industry headwinds these strong bookings would speak to the breadth and depth of our portfolio product. While revenue declined quarter-over-quarter from $68.4 million to $62.7 million, the impact on our adjusted EBITDA percentage was minimal; moving from 13.7% in Q3 to 13.2% in Q4 reflecting improved operational efficiencies in cost reduction.

Our adjusted EBITDA performance is not yet where we want it to be, but we are on the right track. For the fiscal year-ended November 30, 2012 our SSC and SSIA segment adjusted EBITDA margins without corporate costs were 19.5% and 21.9% respectively. This performance highlights our strong portfolio of differentiated product and efficiency.

Now let me step back and provide some additional color in our segment results and review the demand trend. Let me start with our SSC segment in our Systems, Subsystems & Components or SSC segment, we posted revenue of $48.7 million for the fourth quarter and $199 million for the year.

Revenues were down from $50.8 million in this fiscal third quarter, the sequential decline quarterly decline was primarily due to general softness in defense end-market. That said our book-to-bill in this segment was positive for the quarter. Adjusted EBITDA was 16.3% in the quarter-ended November 30, 2012 slightly down from 17.1% in the third quarter primarily due to lower revenues.

Overall we’re pleased with the performance of this segment and see good momentum moving forward given our strong backlog, and recent product introductions including AESA Radar module and power end products.

In this segment, we offer a broad portfolio of differentiated product including modules, integrated assemblies, hybrid sensors, electronic components, and have a long-term relationship with key customers in domestic and international market. Given that 90% of our business is either sole source or primary source, we believe this is the competitive advantage and demonstrates the strength of our customer relationship and heritage.

Moving onto our Secure Systems & Information Assurance or SSIA segment, in this segment, we posted revenue of $3.4 million for the November ending quarter and $22.5 million for the year. Revenue declined from $4.7 million in the August ending quarter. adjusted EBITDA was 12.2% in the quarter-ended November 30, 2012, down from 13.8% in the third quarter primarily due to lower revenue related to timing of certain UK programs.

As I’ve said in the past, our SSIA offerings, which includes TEMPEST products, secure communication, ruggedized systems, and cyber security applications. This segment exhibits lumpiness in terms of orders and deliveries. We’ve recently re-ignited our TEMPEST sales efforts in United States. This step along with continued demand for cyber security product positions this segment for growth in FY ‘13.

Moving on to our EMS segment, we posted revenue of $10.7 million for the November ending quarter and $59.3 million for the year. Fourth quarter revenue declined sequentially from $13 million in the August ending quarter primarily due to softness in the defense end market.

EBITDA was relatively flat moving from zero percent in Q3 to negative 0.7% in Q4. However, our EMS Q4 book-to-bill ratio was strong. We booked nearly $23 million, the highest in the last two years resulting in a book-to-bill ratio of 2.1 to 1. We remain committed to the segment’s long-term adjusted EBITDA goal of 10%.

At the end of Q4, our backlog was $155 million strong. We are pleased to see this traction particularly in the defense space given the challenging operating environment imposed by the threat of sequestration. This robust backlog gives us good visibility for FY ‘13.

Now let me provide some further color on our end markets and trends. For the fiscal year ended November 30, 2012, 45% of our total revenue came from defense market, 22% was from commercial and communication market, 22% was from medical industry and commercial aerospace market and 11% was government security.

Overall, this shows that our end market revenues are well diversified. For the past quarter, our defense revenue was approximately $32.6 million, up from $30.8 million in Q3 and equating to a 52% of revenue as a result of timing of program, particularly within some areas of our SSC segment.

As I’ve shared in the past, API’s program diversity works to our advantage. Today, no program is over 3% of revenue on LTM basis. Should some form of sequestration happen, we have a measure of protection against program cuts and/or cancellation. we are on dozen of critical enduring platforms, which require significant electronic content even in the environment of shrinking budget.

Turning to our government and security end-market, which includes the civilian intelligence and foreign government agencies; revenue was $6.3 million or 10% of sales for the quarter, up slightly from our third quarter results. Within our medical industry and commercial aerospace end market, we posted revenues of $16.2 million, essentially flat with our fiscal third quarter and representing some 26% of sales. We have seen a steady improvement in both our medical and industrial end market.

And lastly, within our communications/consumer end markets, revenue was $7.6 million or 12% of sales for the quarter-ended November 30, 12 versus $16 million or 23% in Q3. Main reason for the decline is weakness in the enterprise and communication end market.

Now let me just briefly highlight our operational accomplishments and goals. As stated during the last quarter’s call, we’ve completed the closure of our Sterling, Virginia location, and consolidation of (inaudible) sites into one facility. During the past year, we have rationalized, streamlined and realigned multiple companies, product lines and bridge several company cultures into a cohesive fold with six technology product groupings while implementing $17.5 million in net annual cost reduction, streamlining and underlining our cost base with the current business environment. We are upbeat about our operating efficiency and are confident we can flex our cost basis with business conditions.

Last year, we generated $9 million in cash from operations in 2012. Our sales funnel expanded to $212 million in Q4 from $205 million in Q3 reflecting new product introduction and the capture of new design wins. As stated previously, we remain committed to reaching and sustaining 20% adjusted EBITDA margin companywide. Today we are one of the largest RF and microwave merchant suppliers. Given our strong product portfolio and engineering capabilities, we are bidding on larger more complex opportunities, and we continue to innovate and meet evolving customer demand including the introduction of 35 new major product families in fiscal ‘12. We expect this focus on delivering superior products will help fuel top line growth and increase our content with customers while growing margins.

As announced in October 2012, API Technologies Board of Directors had retained Jefferies & Company as its financial advisor. Jefferies continues to assist the Board in evaluating the unsolicited interest for one or more of the Company’s business units, as well as a full range of strategic alternatives.

API noted that there can be no assurance that this process will result in any agreement or transaction. API does not intend to discuss or disclose development with respect to the Board’s process unless and until the Board has approved a specific course of action. I’d like to remind you that the purpose of today’s call is to discuss our fourth quarter results and we ask you to limit your questions to these results.

With that we’ll turn the call over to questions. Please go head operator.

Question-and-Answer Session

Operator

We will now begin the question and answer session (Operator Instructions) The first question comes from Mike Crawford of B. Riley. Please go ahead.

Mike Crawford – B. Riley & Co. LLC

Thank you. Bel there has been continued restructuring activities at the Company since you joined, and that’s great and you even taking cost out of business, can you provide some color on, what might remain to be done in 2013, and given such actions, what type of charges, we may expect to see. And then finally with respect to your 20% EBITDA target margin target you may committed to for the business, at what approximate mix in level of revenue, would the Company be zeroing in on something like that. Thank you.

Bel Lazar

Yeah sure, Mike, well let me answer the question on restructure first, I believe we’ve done the majority of necessary restructure or just probably most of the heavy listing as you know we’ve taken out about $35 million, $36 million of annualized net cost reductions over the last several quarters. Last year we took out $17 million, we’ve done a lot of restructure, but I believe we have form the company the way we want it, we’ve taken out the majority of restructure, and I don’t really expect to see significant restructure in the future. However it depends on business conditions, but right now I see little to very little of restructure to be done in the future, but that’s going to depend on business condition.

From an EBITDA targets, our 20% EBITDA what mix rate, if the EMS from a total company revenue standpoint, if the EMS as a percentage of total revenues about 20% to 22%, and we’re able to hit that 10%, then we can get to that 20% number, and probably revenues have to be in the range of about $75 million to $80 million.

Mike Crawford – B. Riley & Co. LLC

Quarterly revenues?

Bel Lazar

Yes. Yes.

Mike Crawford – B. Riley & Co. LLC

Right so okay.

Bel Lazar

And the mix has to right, right 20% EMS and 80% non-EMS.

Mike Crawford – B. Riley & Co. LLC

All right so.

Bel Lazar

And if you look at our November quarter Mike, I mean in our non-EMS EBITDA margin was 16%.

Mike Crawford – B. Riley & Co. LLC

Yes. And again that was only some about $52 million in non-EMS revenue, so your bookings were strong in the quarter without giving guidance, does that, how much, what does that imply for the beginning of the years? Is that, it’s February still expected to be relatively weak compared with Q4 or given that the funnel that you have that that’s grown during the period, and then bookings that were stronger in revenues in the play, what do you expect revenues to be higher in February?

Bel Lazar

Yeah. I mean one thing actually we did point out during my script is, we believe we’ve bottomed out in terms of revenue at the $62.7 million in Q4. We’ve got very strong booking as you saw last quarter, and we have a very good visibility for the fiscal year. So I expect revenues to go up. And as you know, because we don’t get guidance, I can’t give you the exact number or range, but revenues will go up. We expect revenues to go up.

Mike Crawford – B. Riley & Co. LLC

Okay. And then thank you. And then last question again, without providing guidance, given the costs have been taking out of the business and assuming a relatively steady mix of EMS business around the 20% range. Your gross margin before restructuring had been closer to 25% although that the May quarter was a little weak, maybe because of mix similar with this last quarter. When will you expect the gross margin to really get back to the mid-20s or a higher level?

Phil Rehkemper

We have probably get back to the 25% range within a quarter or two, we had some one-time event. First of all, we had lower revenues, so a less absorption and we had some one-time event, some inventory write-downs that we took into our costs, and we didn’t add them to restructure, but I would expect we get back to the normal 25% and even north of 25% in a couple of quarters.

Mike Crawford – B. Riley & Co. LLC

All right, thank you.

Bel Lazar

Sure.

Operator

(Operator Instructions) The next question comes from Bhakti Pavani of C.K. Cooper & Company. Please go ahead.

Bhakti Pavani – C.K. Cooper & Company

Hi, Bel. Hi, Phil.

Bel Lazar

Hi, Bhakti.

Phil Rehkemper

Hi, Bhakti.

Bhakti Pavani – C.K. Cooper & Company

My question is related to your latest acquisition of C-MAC Aerospace. Could you share some color on if the acquisition has been entirely integrated and how was it performing?

Bel Lazar

Yeah. So the acquisition is entirely integrated, performing to our standards extremely well. We have achieved north of 20% EBITDA, as we said at last quarter, we had won a major design win for a classified project that has a lifetime revenues of $90 million. We continue to execute on our new product introduction and we have been extremely successful in new design wins, and at the same time, sustaining and growing the base business.

Bhakti Pavani – C.K. Cooper & Company

Okay. And again, you had record bookings for the quarter and how do you see the growth coming from non-defense market. For instance, you mentioned that in the communication and consumer, the revenues were down, because of the weakening of enterprise communication market. How do you see the change, I mean what kind of change are you seeing in the market and do you expect any growth from the non-defense market areas?

Bel Lazar

Yeah. I’ll just give you some figures first and I’ll answer your question. From an LTM standpoint, our end markets where DoD was like 45% and I will just give you a DoD and government were like 56% commercial, it’s 44%. So even though we are a lot of investors look at as this is the pure defense play, we have really a 60-40. In last quarter for example, we had a 62% defense and 38% commercial. But I would say defense and government I should say, it was 62% and commercial is 38%. On an LTM basis, defense and government is 56% and 44% commercial. So it’s safe to say, we are 60% defense and government, 40% commercial. We expect actually, we expect growth in both these major end markets, both the defense and the commercial.

Bhakti Pavani – C.K. Cooper & Company

Okay.

Bel Lazar

It’s not going be upside at one or another, so we expect growth in both areas.

Bhakti Pavani – C.K. Cooper & Company

But like what kind of initiatives are you doing or what areas are you focusing when it comes to non-defense, because you are well diversified into medical communication industrials market. So how is that growth focus coming?

Phil Rehkemper

Well, the growth actually is coming from like medical, commercial aerospace is growing nicely for us, industrial same thing we have some new design wins in the download market. Also a little bit, we expect a little pickup in the communication and some in consumer, but in general medical, industrial and commercial aerospace as we pick up.

Bhakti Pavani – C.K. Cooper & Company

Also you had about $21 million of cash on the balance sheet and you have been talking to just refiguring out strategic alternatives. I have two questions related to that. First of all, what kind of assets are you evaluating and the second is, if you happen to sell any of the non-core or core assets then you receive cash. How do you intend to use your cash?

Phil Rehkemper

Well, as I stated earlier, I gave a paragraph on this Jefferies process so we really not like not to discuss it, but any potential asset sale we’ll start paying down debt.

Bhakti Pavani – C.K. Cooper & Company

Okay. Okay that’s it from my side, thank you very much.

Bel Lazar

Sure.

Operator

(Operator Instructions) The next question comes from Ed Schwartz of Schwartz Investments. Please go ahead.

Edward H. Schwartz – Schwartz Benefit Services, Inc.

Hi thanks for taking the call. I’m concerned about the Standard & Poor's credit agency your keep down grading your credit, could you talk a little about, what are you doing to get your to turn that around and have them your positive reports.

Phil Rehkemper

Hi, this is Phil Rehkemper. Yeah so Standard & Poor's was required to issue an update to their credit rating because we withdrew our public rating the financing that you saw that we completed on February 6, we replaced our old public debt with a private debt offering with the Guggenheim lease, so they were required to kind of issue in update on that activity, so we’re going to continue to work with the credit rating agencies as we report our result and keep them apprised of the company’s progress.

Edward H. Schwartz – Schwartz Benefit Services, Inc.

I would like to approve that one of the ways of getting your credit is to show profits, and looking back at the history of API in your back many years, I mean there has been very few quarters or quarter-after-quarter where you have been profitable, so when can an Investor expect to see some profits, and I think you should be giving guidance, and you should be call when the corporate for those.

Bel Lazar

Ed, well thank you for your comments and the advice and if you look we have been profitable from an EBITDA standpoint, we’ve reported almost $40 million FY ‘12 as far guidance we have always accept the situation was to give guidance or not and we will be letting you know if you do that or not

Edward H. Schwartz – Schwartz Benefit Services, Inc.

The $40 million in EBITDA is well and good, but a far cry from what the investment community expected it somewhere between $55 million and $60 million?

Bel Lazar

Yeah. But that the okay that’s a valid point, we’ll take into consideration, but it’s really we will measure against the EBITDA, and I realize what you’re saying, but we believe with the current revenue stream being down we still achieve good EBITDA for the year at 14%.

Edward H. Schwartz – Schwartz Benefit Services, Inc.

Good, thank you

Bel Lazar

Sure.

Operator

The next question comes from Mike Katz, a Private Investor. Please go ahead.

Unidentified Analyst

Hey, guys I believe you guys came into the Q4 period with a 1.2 book-to-bill in the EMS business, can you discuss what happened in the business there, and why revenues were down as much as they were

Phil Rehkemper

You mean like last quarter, we had EMS of 1.2 book-to-bill right that’s what you meant.

Unidentified Analyst

Correct

Phil Rehkemper

Yes, so the bookings came in on lead time in the EMS it varies between 13 to 26 weeks depending on the program, and the material content, so it’s timing, so we couldn’t get even though the booking was positive, it’s timing into the future quarters.

Unidentified Analyst

Thank you.

Phil Rehkemper

Sure.

Operator

There are no further questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Bel Lazar, President and CEO for any closing remarks.

Bel Lazar

We appreciate your time today. I would like to thank you again for participating in today’s call. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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