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

Mar. 7.13 | About: Edac Technologies (EDAC)

EDAC Technologies Corporation (NASDAQ:EDAC)

Q4 2012 Earnings Call

March 07, 2013, 10:00 am ET

Executives

June Filingeri - IR, Comm-Counsellors, LLC

Dominick Pagano - President & CEO

Analysts

Operator

Good morning and welcome to the EDAC Technologies’ Fourth Quarter Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end.

At this time, I would like to introduce your hostess, Ms. June Filingeri with EDAC Technologies. Thank you and enjoy your conference. You may proceed Ms. Filingeri.

June Filingeri

Thank you, Monique. Good morning. This is June Filingeri and I also would like to welcome you to the EDAC conference call. We are here to discuss the company's fourth quarter 2012 results which were reported this morning. With us from management are, Dominick Pagano, President and Chief Executive Officer and Glenn Purple, Vice President, Finance and Chief Financial Officer.

Before turning the call over to management, let me remind everyone that this communication may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the company's beliefs and assumptions. There are a number of important factors that may affect the company's actual performance and results and the accuracy of its forward-looking statements which are beyond the control of the company and are difficult to predict. These factors are described in the company's annual and quarterly reports filed with Securities and Exchange Commission.

In addition, the forward-looking statements included here represent the company's expectations and beliefs as of this date. While the company may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation or intention to do so. Well, that takes care of the formalities and after management’s remarks we will open the call to take your questions.

Now I would like to turn the call over to Dominick Pagano. Dominick, we are ready to begin.

Dominick Pagano

Good morning and thank you for joining us today. We achieved strong results for the fourth quarter of 2012 capping a record year for EDAC. Our first quarter sales increased 25% from the fourth quarter of 2011, reaching a record $28.4 million; that was ahead of budget and included 13% organic growth as well as $2.9 million of sales from EBTEC which we acquired on June 1st.

Our profitability grew as well. Gross profit dollars were up 35% from the fourth quarter of 2011. The gross margin increased to 19.3% of sales compared to 17.9% of sales in the same quarter of 2011. Operating income rose 27% and represented a 9.1% of sales compared with 9% of sales in the 2011 fourth quarter. The improvement in operating income and margins were achieved hereinafter incurring expenses in the fourth quarter of 2012 for the ongoing relocation of our Connecticut facilities to Cheshire as well as the addition of EBTEC’s SG&A to that of our legacy business. Net income increased 31% from the fourth quarter of 2011 to $1.5 million or $0.26 per diluted share.

Our fourth quarter profitability benefited from four main factors: First, the highest levels of sales. Second, the inclusion of EBTEC which is a processing business with higher margins. Third, the completion in the second quarter of a long-term agreement that had yielded lower than targeted margins. And fourth, the increased efficiencies we are realizing from our continued implementation of lean manufacturing practices.

Since 2009 we have executed a strategic plan to achieve strong profitable growth by diversifying our business with prime and Tier-1 aerospace customers, transitioning our industrial business to move more full scale programs and complex parts, broadening our core competencies through selective acquisitions and improving our efficiency company-wide.

Our record sales and strong profitability in each quarter of 2012 are a measure of that progress. For full-year 2012, our sales were a record $106.5 million and net income reached a record $5.9 million or $1.04 per diluted share. Also our operating segments contributed to a year-over-year growth in the fourth quarter, with aerospace segment being the main growth driver.

Aerospace segment sales including EBTEC increased 36% from the fourth quarter of 2011. Our legacy aerospace business grew 17% with sales of military and replacement parts especially strong. As indicated in today’s press release, our sales also included stationary inter-components for the GEnx used in a Dreamliner and the G90 used in a 777. We have now reached full ramp-up in both programs.

They also included rotating parts for industrial gas turbines which are basically ground based aircraft engines. In addition to this legacy and current programs, we had sales for emerging engine programs including the development parts for Pratt & Whitney's geared turbofan engine. We are continuing to ramp-up production of parts for the Rolls-Royce Trent 800 and 900 engines. Sequentially, aerospace segment sales rose 7% after including EBTEC. Excluding EBTEC, they were up 11% from the 2012 third quarter. EBTEC sales were below budget in the quarter because one of their semiconductor customers was acquired during the period, of course, in a temporary halt in orders.

Business with that customer is said to resume as soon as their integration with their new larger owner is completed. Aerospace segment, the operating income including EBTEC increased 15% from the fourth quarter 2011 it was 14% lower sequentially because of the ramp up in the Trent 900 engine program, which is in a initial phase and our production processes have not been fully optimized.

Turning to our industrial segment, the sales for the industrial segment, which consist of APEX Machine Tool and EDAC machinery increased 4% from the fourth quarter of 2011 and lower 5% sequentially, that was due to 8% lower sequential sales of APEX machine tool.

However, APEX fourth quarter sales were above budget and up 4% from the fourth quarter of 2011. As I have discussed last time, we have been successfully migrating in APEX business to include aerospace derivative product for the power generation market that is an addition to APEX’s traditional (inaudible) design tooling and fixture capabilities.

EDAC machinery sales increased 3% from the fourth quarter of 2011 and 4% sequentially despite further shadow of a large order into 2013. Smith-Renaud which we acquired in October has been successfully integrating into EDAC machinery. EDAC industrial segment operating income increased 55% from the fourth quarter of 2011 but was down 12% sequentially due to the lower sales in Apex.

Turning to our backlog, at year end of 2012, our sales backlog totaled $304 million compared to $314 million at the end of the third quarter, and $252 million at year end 2011. The growth in our backlog in 2012 includes the $58 million of long-term agreements that we announced in March with Volvo Aero, GE Aviation and Rolls-Royce Canada as well as the (inaudible) that we announced in August with one of our OEM customers for natural case assembly for a military engine program. That growth was also achieved that's the refurnishing a record 2012 sales and as most of you know one of our major growth initiative in 2012 was purchasing the product veneer across engine aircraft engine repair facility in Georgia, Connecticut.

We needed to expand our capacity both to support our substantial backlog as well as to pursue additional opportunities for new engine programs that we will be ramping up in 2014 and beyond, but relocating most of our Connecticut operations into our new world class Cheshire facility and optimally configuring, we can also accelerate our deployment of lean process, slicer manufactures and integrated center of excellence approach.

That is essential for our continue advancement as a non-aircraft parts supplier and process integrator and to further improve our profitability. Our relocation plan for Cheshire is unscheduled. As of today, the move of Apex is just about complete.

Our next area of focus is relocation of our aerospace operation currently in Farmington; that includes large turning and stationary components. The final phase would be the move of our precision parts operation currently in Newington.

Turning to our outlook for the first quarter of 2013, based on our backlog and current shipment schedules, we expect first quarter sales including EBTEC to be in line with the 2012 fourth quarter. We intend to continue executing our strategic plan in each quarter of 2013 and to continue to achieve profitable growth.

Thank you for your time and interest today. We'd be pleased to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Doug (inaudible) with GSW Investment. You may proceed.

Unidentified Analyst

Is it possible to say how much relocation expenses were in the quarter?

Dominick Pagano

$300,000.

Unidentified Analyst

Okay, and now I mean on the operating income break up of that would be on the Apex line?

Dominick Pagano

It’d be split because we started to move large machinery as well.

Unidentified Analyst

Okay, so it looks like it was a good quarter, but it looked like the margins in the aerospace line were a little lighter than a year ago the last quarter, could you talk to that a little bit.

Dominick Pagano

Yes, that was partly impacted by the expense in the moving as I said part of the approximately $300,000 was large turning which are very complex machine to move and also the ramp up that's ongoing for the tread 900 engine that's approximately nine parts, and we haven't started to fully optimize the process and ramp up to the production quantities that would give the most efficiency.

Unidentified Analyst

When do you think there will be a full production on that?

Dominick Pagano

We hope to be by sometime after the second quarter, sometime in the third and fourth quarter.

Unidentified Analyst

Okay. In terms of the relocation expenses, do you expect they will run at this rate through 2013 on a quarterly basis?

Dominick Pagano

Yes, they will but it will also spill into 2014 when our rotating component division in Newington is scheduled to be completed.

Unidentified Analyst

Okay, so taking all that into account is it reasonable to say that margins would be similar to this level in the first quarter and not including for the year, as the (inaudible).

Dominick Pagano

Our expectation would be along those lines.

Unidentified Analyst

Do you have any sense of the timing for the sale of the Plainville facility?

Dominick Pagano

No the Plainville facility we have a contract for user occupied, our prior contract was for developer, but the timeline was long for us. So consequently the current party that we are negotiating with is the user occupier. So the sale could be affected at a much shorter timeline than going through all the approval process for (inaudible) facility. So we still are very optimistic that we could probably sell it after the second quarter between now and end of the second quarter.

Unidentified Analyst

So, kind of bigger picture question is, over the last couple of years, you had some major new OEM announcement which had really lifted the backlog materially. Are there still opportunities for new relationships of that magnitude on borrowing?

Dominick Pagano

Yes, but there is always opportunities because of the cycle of the LTAs. They run from three to five years. One of our major initiative was our new overseas client engine producer that we're pursuing along with a gear turbo fan. Most of those LTAs to all the supply base have been more complex parts and yet to be issued. Their part is still in the process. They were optimistic that they were going to try to release some of those LTAs by the end of the year. It did not happen and the process is still ongoing.

Unidentified Analyst

Okay, so you think that can happen this year?

Dominick Pagano

I would expect so yes.

Unidentified Analyst

Okay, and then last question is, do you anticipate any impact from the [Sequester] in terms of your military sales?

Dominick Pagano

No, little of that I know the sequestration is poor of more in fact people and budget, spending budgets for hardware, military hardware and in my humble opinion it’s not high enough to impact programs that have high inertia to stop and not continue.

Operator

Thank you Mr. (inaudible). (Operator Instructions) There are currently no additional questions waiting from the phone line.

June Filingeri

All right well why don't we turn the call back to Mr. Pagano for closing remarks then?

Dominick Pagano

Thank you again for your interest in EDAC. We appreciate your support and we look forward to speaking to you next quarter. Thank you.

Operator

Thank you ladies and gentlemen for [participating] in the EDAC Technologies fourth quarter conference call. This will now conclude the conference. Please enjoy the rest of your day.

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