White Electronic Designs Corp. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

Dec.10.09 | About: White Electronic (WEDC)

White Electronic Designs Corp. (WEDC) F4Q09 Earnings Call December 10, 2008 4:30 PM ET

Executives

Joseph Diaz – Lytham Partners

Gerald R. Dinkel – President, Chief Executive Officer & Director

Roger Alan Derse – Member Interim Office of the President, CFO, Secretary & Treasurer

Analysts

Thomas Carpenter – Hilliard Lyons

Mark Jordan – Noble Financial Group

Scott Lewis – Lewis Capital Management

Warren Darilek – Morgan Keegan & Company

[Max Thatcher – Windfield Capital]

[Sam Roboski – SER Asset Management]

[Chris White – Green Stern]

[J.D. Paget – Private Investor]

[Nelson Obus – Windfield Capital]

Operator

Welcome to the White Electronic Designs Corporation fourth quarter 2009 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Joe Diaz with Lytham Partners.

Joseph Diaz

Thank you for joining us today to review the financial results of White Electronic Designs Corporation for the fourth quarter and the fiscal year ended September 30, 2009. With us on the call today are Gerry Dinkel, President and CEO and Roger Derse, CFO. At the conclusion of our prepared remarks we will open the call for a question and answer session. If anyone participating on today’s call does not have a full text copy of the press release it is available on the company’s website at www.WhiteEDC.com or numerous financial websites on the Internet.

Before we begin with prepared remarks, we submit to the record the following statement. Certain statements made during the course of this conference call constitute forward-looking statements. Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements.

Specific forward-looking statements in this conference call include but are not limited to the company’s expectations related to the company’s position in the industry including the progress in our internal process improvements and the company’s potential, the impact of funding delays on our fourth quarter bookings and the estimate that certain bookings will occur in fiscal 2010, the contributions associated with lean six sigma and our ERP system upgrade, the potential for growth in partnerships or acquisitions, the likelihood of the sale of the company’s land and building located in Columbus Ohio in December, 2009 and the contributions of directors.

Additionally, other factors that could materially and unexpectedly affect the results are set forth in the company’s most recent annual report on Form 10K and subsequent quarterly reports on Form 10Q. The company cautions you not to place undue reliance on its forward looking statements. The company does not undertake any obligations to publically update any forward-looking statements to reflect events, circumstances or new information after this conference call or to reflect the recurrence of unanticipated events.

With that said, I’d like to turn the call over to Gerry Dinkel, President and Chief Executive Officer.

Gerald R. Dinkel

This is of course my first conference call with White and I’ll preface the remarks on the fiscal 2009 performance as what sound like a standard expression of happy to be here but it also happens to be true. White looked to me as a company with a great deal of untapped potential and some distinct challenges to be addressed in making that potential real. The past four months have not changed that impression and I believe we are making good progress on both the internal process improvement needed to deliver more value to both our customers and shareholders and in realizing the company’s greater potential to be a more significant attributor to national defense.

As you can see from today’s press release we had solid year-over-year improvement in orders, sales and profitability with positive cash flow from operations. Cash was further strengthened by pickup of $10.3 million from discontinued operations. Backlog at year end stands at about $37.8 million, not bad but obviously impacted by the relative weakness in fourth quarter bookings which I would like to address in more detail.

Of the bookings we saw fall out of the fourth quarter substantially all of the value was not loss but slipped in to fiscal 2010 for a variety of reasons not associated with our performance. As I mentioned in the earlier press release, the same programs that are fueling our growth are also making it harder to predict the timing of orders. One conclusion is that we need to be more cognoscente of the status of programs at the prime contractor or government customer level. As far as I’m concerned that was already part of our strategy shift going forward. That is to think or act two or three levels above where we sell. The fourth quarter experience just reinforced that need.

On the revenue side we have a strong operations team working the challenge of converting the bookings in to the desired product results. I’m very confident with the initiatives we have in place associated with lean six sigma will go a long way towards bringing fundamental change to the way we do business. Much of the process improvements has been facilitated by the investment we made last year to upgrade our ERP system. We are rapidly reducing the amount of paper required to track and manage our production processes and this is contributing to reductions in cycle time and improved product quality for example.

With that introduction, I will now turn it over to our CFO Roger Derse to review the financial details but I will come back later with some summary comments before we move in to the Q&A segment.

Roger Alan Derse

In continuing operations we reported fourth quarter revenue of $15.5 million and fourth quarter bookings of $9.3 million. Fiscal 2009 revenue totaled $62.6 million compared to $56.4 million in fiscal 2008. Fiscal 2009 bookings totaled $64.4 million compared to $56.2 million in fiscal 2008. Anti-tamper related bookings reached $19.1 million for fiscal 2009 compared to $4.8 million in fiscal 2008. Total anti-tamper shipments reached $14.5 million for fiscal 2009 up from $12.1 million for fiscal 2008 and backlog at the end of Q4 closed at $37.8 million.

Discontinued operations; we successfully completed the migration to an all defense electronics operation by the end of the fiscal [2000] year. Substantially all assets held for sale were liquidated as of yearend. Our last remaining asset consisting of land and building in Columbus Ohio is under contract and expected to close in December 2009.

In the fourth quarter fiscal 2009 the company’s net sales were $15.9 million, a 5% increase when compared to $14.9 million in the fourth quarter of fiscal 2008. Income from continuing operations for the fourth quarter was $1 million or $0.04 per diluted share compared to a loss from continuing operations of $1.1 million or $0.05 per diluted share in the fourth quarter of 2008. The loss from discontinued operations for the fourth quarter of fiscal 2009 totaled $.2 million or $0.01 per diluted share versus a loss of $1.5 million or $0.07 per diluted share in the fourth quarter 2008.

Net income for the fourth quarter of fiscal 2009 was therefore $.8 million or $0.04 per diluted share compared to a net loss of $2.6 million or $0.12 per diluted share in the fourth quarter of fiscal 2008. Full year fiscal 2009 results for the 12 month period of fiscal 2009, the revenues from continuing operations increased 11% to $62.6 million and $56.4 million in fiscal 2008. Fiscal 2009 income from continuing operations was $3 million or $0.13 per diluted share compared to income of $2.5 million or $0.11 per diluted share in fiscal 2008.

Revenues from discontinued operations for the fiscal year were $14.4 million compared to $40 million for fiscal 2008. Total net loss from discontinued operations for fiscal year totaled $1 million or $0.04 diluted share compared to a loss of $8.5 million or $0.37 per diluted share in fiscal 2008. Relative to bookings and backlog, bookings for continuing operations for the fourth quarter totaled $9.3 million compared to $17.3 million in the fourth quarter of fiscal ’08. Fiscal 2009 bookings totaled $64.4 million and resulted in a book-to-bill ratio of 1.03 to 1 which represents a 15% increase over fiscal 2008 bookings of $56.2 million.

Fourth quarter bookings were impacted by a delay in funding for several projects, the high majority which are anti-tamper related. These are now expected to book in fiscal 2010. Fiscal 2009 anti-tamper component only bookings reached $12.5 million up from $2.8 million in fiscal ’08. Bookings for anti-tamper circuit card assemblies reached $6.6 million in fiscal 2009 versus $2 million in the prior year. Fiscal 2009 anti-tamper component only shipments reached $9.1 million down from $11.7 million in fiscal 2008. However, shipments of anti-tamper circuit card assemblies of $5.4 million in fiscal 2009 up from $400,000 in fiscal 2008.

Total backlog at the end of fiscal ’09 was $37.8 million compared to $38.6 million at the end of fiscal ’08. The gross margin as a percentage of net sales for continuing operations for the fourth quarter of fiscal 2009 was 38% compared with 40% in the fourth quarter of fiscal 2008. Gross margin for the fiscal year was 39% compared to 41% in the previous year. Balance sheet, our cash position as of September 30th, the company had $64.2 million in cash and no debt. The $11.6 million total increase in cash for the fiscal year was mostly driven by $10.3 million generated from discontinued operations.

Accounts receivable decreased $.4 million during fiscal 2009 primarily as a result of timing of invoices and receipts. Our days sales outstanding was 59 days compared to 68 days at the conclusion of 2008. Inventories increased $300,000 year-over-year. Inventory of $15.6 million as of September 30, 2009 represents about 150 days of inventory on hand down from 168 days at the conclusion of fiscal 2008. Accounts payable increased $1.6 million primarily due to the timing of invoices received and items accrued.

On that note, I will turn it back over to Gerry for some final comments before we move in to Q&A.

Gerald R. Dinkel

I just want to leave you with more of a strategic perspective on the company as I see it. Talking about our place in the defense market and how we see it evolving. Over the past three months we’ve conducted a very thorough strategic review involving outside experts which confirmed to us the current business platform is a sound one. Core capabilities of the company match up very well with the broad customer emphasis on providing more capability in smaller packages at lower cost. There should be continued need in the marketplace for what we do best.

White always seems to have in history what I will call good tactical vision, that is the understanding of what the next incremental move in technology should be. I believe this is a real strength which when coupled with our agility as a company has created competitive advantage in the past and is continuing to do so. White is very highly regarded by its customers for bringing significant, if not critical value and most relationships are both long and deep.

The strategic review also focused on developing a longer term vision based on the overall defense environment, budget trends, industry makeup and war fighter priorities to help crystallize the rational and potential for additional growth through partnerships for acquisitions which would complement the core business and further strengthen the company. This includes the avionics precision strike [Q4 ISR] and information assurance areas for which we currently play in a small way.

We see opportunities to be a bigger player in these segments, becoming more of a solutions provider and delivering more value to our customers. This will be a major focus going forward. I also believe the recent appointment of Ken Krieg to our board of directors is a strategic step. Ken brings a wealth of experience and credibility in defense policy and programs and can make a big contribution to our future just by asking the right questions. But, I’m confident he will do a lot more than that.

I just thought it was important to give you my assessment at this time of what our current situation and strategic outlook is. Any time you talk strategy in public details are appropriately scarce but I hope this gives you a feel for our current posture and how we plan to proceed in the future. With that I’d now like to open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thomas Carpenter – Hilliard Lyons.

Thomas Carpenter – Hilliard Lyons

I was curious when they called you and offered you the job and you looked at the balance sheet and said, “Wow, here’s a company about $100 million market cap, $60 to $65 million of cash,” how many minutes you had to deliberate before you decided to accept the job?

Gerald R. Dinkel

Well, I will tell you that one of the first things I said to Brian was, “I’m really intrigued by your cash.” Because that certainly indicated we’ve got the capacity to do things in the marketplace. It took a little longer than a few seconds to work out the details but the initial reception was as you said.

Thomas Carpenter – Hilliard Lyons

I have many questions about the cash on this conference call, we’re not looking necessarily to pin you down as far as timing but just maybe a broad overview of your time frame on the cash and if it’s some tuck in acquisitions versus large acquisitions that help us understand where you see the company going over the next year, 18 months, two years?

Gerald R. Dinkel

I guess there are several ways to start answering that question. My personal view is that the environment in the defense marketplace is ripe for doing things with strategic investment either in R&D or mergers and acquisitions. Of course with M&A kind of gives you a quicker result than the R&D effort. It’s always impossible to give a – I don’t think the correct way to answer any question about M&A is to give a specific time line because that would be inconsistent with the reality of the situation.

Deals come up and sometimes they’re good, sometimes they’re bad, it takes a little time and effort to sort them out one from the other. You can’t force situations. Even if we saw an area that we’d like to be in, it’s not necessarily true that a company or partnership could be developed that would be right. Not beating around the bush so much as being very pragmatic about what the situation is.

As to size, our perspective would be anything from a tuck in to something fairly larger. Obviously the larger it is the more compelling it has to be from a strategic point of view but I do believe at this stage of the marketplace and given our scale in the industry we can create shareholder value by smartly deploying that capital in the M&A arena. The emphasis is on the word smartly. I don’t think we want to be in the position of feeling like we’ve got to do a deal just to do a deal. I’m totally against that and that’s another reason why I can’t give you a time line.

Thomas Carpenter – Hilliard Lyons

You have a pretty varied customer base, I think maybe you’ve had one 10% customer, maybe in two of the past three to five years. Do you see yourself working with some of the main customers you have in the past or do you see yourself diversifying beyond the traditional base?

Gerald R. Dinkel

Good question and the answer is yes. I can see it happening either way. Where we look at say a potential partner who has a similar relationship to one of our customers. We get together with them and in that case we look better to one of our key customers. It could be a diversification but I would be quick to say that we’re not looking for diversity for diversity sake. We’re looking to grow in to strengths. We always want to have a good solid tie back to your core business. There are parts of the business that I wouldn’t want to be in because the business model is quite different than what we do here but at the bottom line it’s really all about following the money and being able to anticipate growth.

Operator

Your next question comes from Mark Jordan – Noble Financial Group.

Mark Jordan – Noble Financial Group

The first question has to do with business mix and gross margins, is there a difference between gross margins and what you think you can earn in the components business versus the assemblies and where were you in terms of that business mix in the fourth quarter and what kind of mix would you project for fiscal ’10.

Gerald R. Dinkel

I’ll give you an overview answer for that and then I’ll turn it over to Roger to go in to details which I’m sure he’ll be happy to do. They’re going to vary more than they have in the past probably because at the higher levels of assemblies sometimes the margins wouldn’t be there but that’s not a bad thing because you’re making it up in volume if you will and you’re spreading your overhead across a larger base. So, we can tolerate lower margins on larger levels of assembly inherently is my attitude as long as it’s within reason. Roger, do you have anything to add to that?

Roger Alan Derse

Well, I think what we talked about Mark was in the pure component even pre anti-tamper period the primary operation here in Phoenix delivered in around 45% as a gross margin percent. As we introduce the anti-tamper and maybe a shift away from a lot of our ceramic core we were in the low 40s. I think it would be the design of the extremely unique miniaturized integrated circuit cards and that’s the play. We’re not looking at the non-complex board stuffing and therefore we’re not concerned about the integrated circuit card assembly generating low gross margins.

Will they be slightly sub 40%? Yes. As we close the year out at the 38% to 39% gross margin, we indicated in the second half of ’09 that we had quite a few additional costs associated with gearing up our operation that when we sort of pro forma that out we were right in the 40% number. I think as we move in to future point I think we’re still going to be very, very close to that in and around 40%.

Mark Jordan – Noble Financial Group

With sort of Gerry coming on board here, kind of a revamping of the company that occurred in the later part of the calendar year 2009, I was wondering if you have some specific goals with regard to growth for the upcoming year and if you have sort of a longer term basis growth goals that you could articulate at this time?

Gerald R. Dinkel

Well, the short answer is we have goals but we’re not going to articulate them in the fashion you might like right now. We of course have a plan for the year, I’m comfortable with it especially if you factor in what our ambitions might be in terms of deploying our balance sheet, you can draw all kinds of numbers and like any company or any leadership team we’ve got bogies out there or vision of what we’d like to be when we grow up so to speak. But, I don’t think it’s appropriate to comment on those in this environment. We want to get bigger and we want to get better as we get bigger.

Mark Jordan – Noble Financial Group

Let me ask the question in a different way if I may. I would assume therefore in your internal goals you are assuming that you should be able to generate reasonable organic growth with the business that you have, number one. Number two, just relative to the first quarter because of the soft fourth quarter bookings should that be a weaker quarter relative to the overall performance for the year?

Gerald R. Dinkel

On revenue? No, I don’t think so. I wouldn’t characterize whatever shortfall we had in the fourth quarter in bookings having an impact on first quarter sales. Roger?

Roger Alan Derse

I think if you look at the third quarter at $16.6, fourth quarter at $15.5 if you rewind even in the second quarter of $17 million we’ve established a relatively consistent run rate that will then be effected by some of the larger program pops that we’ve been talking about and it’s just a matter of when they hit and when that might occur.

Mark Jordan – Noble Financial Group

Looking at the fourth quarter you had a significant sequential decline in SG&A expense, was that a function of completing some of the ERP investments and other programs and should we look at that sort of $3.5 million as a more normalized run rate versus the $4.5 you were showing in the middle part of fiscal ’09?

Roger Alan Derse

I think you need to give consideration Mark to the cost that we incurred in the third quarter in particular and in the second quarter that were shareholder related costs. We did do a fairly good job illustrating what those numbers were in the second quarter and the third quarter. As you might rewind in to the public filings you’re going to get a better flavor for those as we file our K in the next few days that will give you a little bit of detail. As far as a run rate, if you look at the year it’s about a 26% or so SG&A rate. As a percentage of sales I think the 26% is a reasonable number going forward.

Mark Jordan – Noble Financial Group

The company has been fairly quite with regards to establishing a dialog with the street over the last year as you’ve gone through I guess maybe things in the last 12 months. Do you have a specific strategy for reconnecting with the street?

Gerald R. Dinkel

Yes, we do. It practically starts next week as I’m concerned and let me give you some background to that flip comment. Obviously, I wasn’t inclined to come out and talk to all you guys at a time when I knew literally nothing about the company. By the time we started to learn a few things and put a few things in to place to talk about it go towards the end of the quarter and the reporting period. So, I think it’s really now associated with getting the ’09 results out and behind us and we’ve got a perfect environment to have a greater dialog.

My bias is to have a lot of dialog with the investor community. I don’t see any downside to it whatsoever and I see a lot of upside. I don’t have to comment on why Roger, Dan and guys may have been a little quite over the past year. They were really taking steps to more fundamentally reshape the company at the operational level. Just to comment on that briefly, I view what I saw coming in as if I was to add any value it was to accelerate some of the things that were already starting.

If you want to think of any turnaround activities that were called for, Dan and Roger under the office of the president got a lot of those things going. I don’t think it was a case of accelerating what was already in place.

Operator

Your next question comes from Scott Lewis – Lewis Capital Management.

Scott Lewis – Lewis Capital Management

Gerry, I wanted to ask you more of a strategic question, coming in to White as you’ve seen these cultural changes or process changes that you thought you needed to be made, have you brought in new personnel at all to help you with this?

Gerald R. Dinkel

Not in the operational sense but in terms of the process improvements and things like that, in the strategic sense we did. But, let me go back and comment on the operational side. There were some strategic things done in my opinion before I got here to bolster the operations side. They brought in someone to head up operations, someone very well qualified to run quality assurance. We had a new Vice President of Engineer so that entire leadership level of what I would call all of that operation was new to White with the new ideas and energy that comes in with that. So, no I didn’t bring in other people in that arena.

From the strategy point of view, external strategy we did as I alluded to bring in some outside experts to help us look very candidly at what business we’re in. I know that may sound like a stupid question but sometimes it’s hard for a company to really understand and articulate what core business really is and therefore how you should step off and look at other things you might get involved in.

Scott Lewis – Lewis Capital Management

How about in the sales arena?

Gerald R. Dinkel

No new people in the sales arena. The sales environment at White is frankly new to me because I hadn’t been use to a product sales environment before but my first impression is it was pretty well organized, pretty well structured for the business that we are doing. I might speculate that we need to modify that going forward as the business mix changes to be higher levels of assembly of systems but I wouldn’t say we’re late to need on that, it’s just a matter of recognizing change when we need to make it.

A positive statement I should make that I was really pleased with is I was extraordinarily impressed with the level of relationships that this company has with its customers. It’s much, much deeper than I thought. I can’t say I was shocked, I was a little bit surprised at the depth of it. That says a lot about the people I mentioned in the sales and marketing arena. They’re relationship centric and that to me is a first order requirement, that you be very relationship oriented.

Scott Lewis – Lewis Capital Management

On this kind of delay in funding or spending you talked about in your press release, I’ve heard from several defense companies a similar thing about kind of programs that the government does seem wanting to pursue yet somehow the funding, whether it had to do with a change of administration or some of the economic things going on but the funding just sort of dried up or the willingness to spend sort of dried up maybe in the last three to six months. I was wondering if you can comment at all if you’ve seen maybe any change in that over the last just month or two and where you think that may be going?

Gerald R. Dinkel

I can give you a feel for that, I don’t think that macro situation that you’re talking about had a great deal of impact on our numbers. I think ours are more contract process related. But, I will comment maybe on just my overall opinion as opposed to knowledge, there’s always a difference there. The change of administration always brings with it a new look at defense priorities. I think you all know that there is no DOD appropriations bill yet so there is a continuing resolution which essentially says that programs have to operate on the funding they had in the last fiscal year and no new programs can be started.

Having said that, there are several programs that are operating on a war time urgency basis that can get funded but it’s a fairly dynamic environment overall in defense right now. So, I’m not surprised that you’re seeing and hearing companies give you different stories no funding, stability and change. Probably all of it is quite different from one company to the next depending on the business that you’re in.

Operator

Your next question comes from Warren Darilek – Morgan Keegan & Company.

Warren Darilek – Morgan Keegan & Company

A couple of questions, first in regards to I know you can’t be specifics but with the products that you have organically now and even ones you may try to acquire through merger or acquisition, is there any way to give a general look at the size of the market that you’re trying to get involved with?

Gerald R. Dinkel

That’s a hard one, or it’s easy and hard at the same time. We can always come up with a market number but I’ve always believed the defense market is hard to pin down from a market share point of view and market size. I mean the budget is what it is and you can break it down 69 different ways to redefine chunks of it but it tends to flow to one company or another in larger programmatic chunks. Actually, at our level of the business, very far down the food chain we are less vulnerable to swings in the market share than the larger companies, in my opinion. In many cases you might have two or three companies competing for a job, we may be on all three teams, just to use that generic example.

Warren Darilek – Morgan Keegan & Company

My other question was as it pertains to Mr. Kahn, the new Chairman and his involvement in wanting further involvement in the equity stake in the company, can you shed any light on his thoughts, action, focus, what insights can you give us on his participation as a Chairman.

Gerald R. Dinkel

The short answer is none. I think Brian’s ownership of the company, it is what it is and it’s his business and not ours basically. Brian is our Chairman and in large measure is the reason I’m here in terms of how we developed the relationship. But, as far as the ownership activity I don’t think it is something we can comment on.

Operator

Your next question comes from [Max Thatcher – Windfield Capital].

[Max Thatcher – Windfield Capital]

Gerry, now that you’ve been there for what 65 days or 90 days, how long have you been with the company?

Gerald R. Dinkel

106 days.

[Max Thatcher – Windfield Capital]

My question is this, tell me first of all what have you been doing with your time, how have you been spending your time? Then, I have a follow up to that, that will ask you what your opinion of certain things are as you’ve gone around.

Gerald R. Dinkel

I think I’ve characterized it to Brian and a few other ones, I’ve had a lot of number one priorities but I don’t think that’s unusual. The first priority was to spend time understanding the business, what’s here and what do we need to do to fix things. As I mentioned earlier Max, there was a lot less that I needed to do in terms of changing people and things like that than someone might expect, it was mainly fine tuning.

I also spent time talking to customers, getting to know them and finding out how well we were doing the job for them and also what more we could do for them. I think it was one of my convictions coming in that white wasn’t very well known in the marketplace except for where it was already established. To be honest with you, I hadn’t heard of the company six months ago, seven months ago. But, when you look at what we do it’s a case that I’m kind of convinced that there are other people that could make use of our capability.

So, I spent some time doing that and there was a fair amount of activity associated with the board as you might expect so that took some time. That pretty well is the sum of it. About half internal, half external orientated maybe with a bias towards the internal.

[Max Thatcher – Windfield Capital]

Then my follow up question is I’ve heard you’re impression that much of what you were doing was how should I say keeping the engine that was already running running and tuning it so that it ran a little better. I’d like to maybe get your general impression about how much more work there is to do, not that it ever is over but how much more work there is to do before you feel like the machine is running at close to its maximum capability and our six sigma programs are actually installed and in place and on a more of a maintenance than an installation type basis? Which, would be in the view of [Windfield] as larger holders priority number one.

Gerald R. Dinkel

That’s a good question obviously. The LSS, the lean six sigma activities is how I would couch the answer to your question. It’s a process, it’s not instantaneous as you already said which I was going to say anyway, it never does end. But, you’re really asking when the vast majority of things are in place and you’re on as you put it the maintenance side of things. I don’t have a crystal ball but my hope is that it would be by the end of this fiscal year that we’d be seeing down to the point where you’re the slope is pretty shallow and you’re getting incremental improvement. Actually, some of our experts in the process area may contradict me and say it’s going to take longer than that for all I know but I don’t think it’s going to happen in two or three months.

Operator

Your next question comes from [Sam Roboski – SER Asset Management].

[Sam Roboski – SER Asset Management]

Now, when we start to look at this book-to-bill, what is a typical book-to-bill that you would expect? And, with your sales where it is can you achieve an $80 million sales based on the products you have now or do you need additional new products? What is a reasonable expectation of what type of sales you could reach with the products you have now?

Gerald R. Dinkel

That’s really a market saturation type of question. I don’t know how to quantify that. Of course, we always want to maintain a book-to-bill ratio greater than one, we’re looking to do that. I’m hesitating because I’m trying to give you a constructive answer, the change over from a component only to more of [inaudible] system in a package type environment has already changed the basic level of business that we could go get.

If you look at White in the past, it was operating at least on the defense electronic side maybe $40 million a year of core business. So, you could argue that okay that’s it, if you stay in that niche of the business that’s what you’re going to generate. We’re now in the process of growing the business as a result of these higher levels of assembly. The problem with defining how big it can get is because that puts you in to a whole new realm of put and take as far as your marketing resources.

The opportunities go up for sure and your addressable market goes up for sure. Where I think you get limited is just how much new business you can shove through an operation at any one time and not stumble from the operational side of things. That’s one reason we’re so focused on making sure we get the factory if you will leaner and meaner so we can get more capacity freed up to do some of these programs. I can’t comment on the $80 million because any number I give you is going to be wrong by definition. I hope that wasn’t too off the market in answering your question.

[Sam Roboski – SER Asset Management]

But what kind of capacity could you produce in your facilities and if you needed more capacity would you want to go outside or what is your way of handling it based on the products you have but presumably you’ll be looking for additional products or tuck in acquisitions? I’m trying to sort of get a handle where you could go with what you have? Right now you’re not offshore or anything, I’m not sure you’ve sort of come to a conclusion on that at this point and probably by the next conference call you may have a better idea but, what you see now what is the capacity that you’re working at? You’re on one shift, two shifts?

Gerald R. Dinkel

I’m going to let Roger pick up on this but I’ll make an introductory comment. We’re operating two shifts in some areas, it depends on the product line. My feeling is we’ve got a lot of unused capacity and we’re not looking at a capital limited situation to handle the business that we see going forward in the near term.

Roger Alan Derse

Let me approach it at sort of the revenue perspective and then we’ll speak to the capacity element. If you look at the $62 to $63 million this year, if you look at the year-over-year of about 11%, if you take that and throw another 10% the following year, 10% or so, 12% the following year, you’re staring right at that $80 million you’re talking about. So, there are a couple of years right there to do sort of a natural increase base on the business that’s evolving.

You’ve seen through the press release that we went from $400,000 in integrated circuit cards in ’08 and in ’09 over $5 million. So, that’s where we indicated the next revenue play would really be. Now, let’s look at our operations from a capacity standpoint. Our business historically was component, component only. We run a couple of shifts in the component area, okay. We brought a lot of new equipment in to upgrade the capability to feed volumes of components out of our component side of the house to the integrated circuit card.

But, the integrated circuit card is really almost at a floor level. We have not near even shift level utilization on the integrated circuit card aspect. So, you could really see as we talk about and our initiative is really to that higher level of assembly, we have a very, very significant footprint that if anyone looks at the history of White, that foot print of course was derived from the shutdown of our commercial operation which was in the SMT area so we are well positioned to really ramp up that integrated circuit card side of the business really that could take that above that 10% or 12% and certainly let that 80% run higher.

So, we have very good foot print, we have low utilization on the one side, sort of moderate utilization on the other side in our component area and I think we’re well positioned to really ramp it up.

Operator

Your next question comes from [Chris White – Green Stern].

[Chris White – Green Stern]

Just a quick question, what was the annualized D&A and then a maintenance cap ex? Then, are you giving any guidance on cap ex as well?

Roger Alan Derse

If you look at our cap ex that we finished the year up with we had about $4.3 million in cap ex for this year. We have always historically stated that our cap ex is in and around $4 million. One of the points that we made in the third and fourth quarter of ’09 we made comments that we are positioning ourselves to be able to ramp up a little bit on our integrated circuit card assembly. We have every reason to believe that the $4 million once again would be a reasonable bogie for our ’10 period but I think one cautionary remark on that is as some of the larger programs, as the sort of lumpiness sort of hits us in the integrated circuit card activity, there may be a need for some spot cap ex that might throw a blip on that and we’ll report on that as it occurs.

[Chris White – Green Stern]

So the D&A is somewhat similar then, correct?

Roger Alan Derse

Yes. In that context I can tell you that we were about near $3 million for ’09 and we’re modeling it maybe $3.5 million, it’s about a tick off from what the cap ex is that we incurred.

Operator

Your next question comes from [J.D. Paget – Private Investor].

[J.D. Paget – Private Investor]

One, I wanted to pick up on an earlier question about the SG&A, the decline this quarter was there any sort of reversals of incentive compensation or anything in there?

Roger Alan Derse

No, there were not.

[J.D. Paget – Private Investor]

So could that be a reasonable base line looking forward, the $3.5 million or more to your earlier point it will kind of be more in the $4 million range, 26% of revenue?

Roger Alan Derse

I would say that $3.5 to $4 million – I’m operating obviously on sort of a 25% to 26% of revenue even as our revenue expands based on our need to adjust as we grow in the SG&A area. I think that I would just model it as a 26% of revenue as you go forward.

[J.D. Paget – Private Investor]

But that quarter was a reasonably clean look at things?

Roger Alan Derse

There were no reversals, no adjustments in that context.

[J.D. Paget – Private Investor]

The other question was just help us understand how much business you could get in any given quarter from turns, orders that are booked and shipped in the same quarter as opposed to flowing out of backlog?

Roger Alan Derse

Interestingly enough is we have hit recent quarters, we may sit at three quarters of our quarters is already in backlog and then we’ll pick up another quarter. So, if you take another $16 million you’re coming in at $12 million, you tick up the other $4. We certainly have to be cognoscente of our build cycle such that if you’re sitting in the end of your second month of a quarter you really are not in a position to turn because this is not a commercial business, you’re not able to take components off the shelf and deliver because obviously in the mill spec environments to what we do we don’t see that turn business.

Operator

Your next question comes from [Nelson Obus – Windfield Capital].

[Nelson Obus – Windfield Capital]

I just wanted to get you to comment a little bit on the last paragraph of the press release when you’re explaining the book-to-bill ratio that is somewhat disappointing in the quarter. You talk about that reflecting the implications for strategic shift in the company’s business from a component only provider to a more vertically integrated supplier of complex electronic assemblies. That’s a pretty profound transition.

One of the things that characterizes that transition is a whole different relationship with your customer where the customer looks to you for leadership rather than you just sitting there and hammering out components. Where are you in that process? I know you’ve sort of talked around it a little bit in this conference call but have you made that transition successfully so you can represent yourself as being a vertically integrated supplier of complex electronic assemblies and all that goes with that in relationship to your customers?

Gerald R. Dinkel

That’s a pretty profound question when you come right at it. The answer is, it’s early in the process. I think the words are correct but they could be interpreted as more robust later in the process. We’re not building systems or LRUs but this transition is really looks like it’s largely been because our customers want us to do that.

[Nelson Obus – Windfield Capital]

You’ve got no choice and you’re not alone.

Gerald R. Dinkel

It’s not a case where we’ve gone out and tried to force it down their throats or anything like that. A lot of what I see in terms of the circuit card assemblies and that sort of thing has been because it looks good from their point of view to have us do that. But, I think our ability to turn that in to more and more momentum and get in to bigger and bigger things, we’re early in that process. The other thing I’d comment on here is that you could easily get in to a situation where you are competing with your customers if you’re not careful and we don’t envision ourselves doing that at all.

You don’t want to get in a situation where we go out and say, “Alright, we’re going to take over the business from you.” It’s self limiting in that sense unless we moved over in to a segment of the business where our customers weren’t competing but we could. That’s all part of this strategic look of okay where’s the money going and where can we play that we’re not playing and maybe we have the rationale to pick up a company that is already strong in one area but maybe needs more financial capacity to be more successful. It’s all part of the fuzz ball of deciding what to do.

[Nelson Obus – Windfield Capital]

I think it takes a lot of fine tuning and I guess from my perspective I’d much rather see you get that right, find the right balance than go out and use your cash to make an acquisition where you have to worry about integration. In other words I’d like to see that process come to fruition and maybe even determine where you make your acquisition.

Gerald R. Dinkel

I think we’re saying the same thing. I agree with you. I think it’s all intertwined.

Operator

Your next question comes from Mark Jordan – Noble Financial Group.

Mark Jordan – Noble Financial Group

Can you talk a little bit about your pipeline? Would you describe your tracking methodology and therefore sense of what visibility you feel that you’ve got on the next 12 months revenue?

Gerald R. Dinkel

I’ll take a stab at that, one thing that comes to mind when you ask the question is I was fairly impressed with White’s tracking of opportunities and the detail in which we go in to in terms of where the sales opportunities are. One of the difficulties we had in that process is really getting ground truth on some of them and that boils down to sometimes our customers don’t even know when the money is coming in, let alone us. But, the pipeline, the sales force has seems to me a good real time handle on where the opportunities are. My sense of it right now is we ought to be focused on expanding that opportunity base as opposed to worrying about the quality of what’s there, it’s a capacity thing.

Mark Jordan – Noble Financial Group

A second one then, on R&D it was the highest level, $1.3 million in the fourth quarter, it looks like you were around $1 million to $1.1 million on average in the first three quarters of the year. In terms of absolute levels, where do you think that should be trending in fiscal ’10?

Roger Alan Derse

As you know, we alluded to our movement in to the solid state drive area. We expressed that we would be doing developmental work in house. You are now seeing in the fourth quarter of ’09 the commencement of that sort of in house expense effort. You can see that in the R&D as a percent of the revenue for the quarter that we were at 8.4% so certainly we’re in to territory that is certainly an uptick. We feel that based on our developmental activities on that and other items that we’re going to continue to be at similar levels and I think from a modeling stand point I think the fourth quarter is representative as we move in to ’10. I would operate at that level.

Now, clearly if we have some significant program wins that convert in to revenue and you have some significant elevated second half activity then obviously as a percentage of revenue that will come back down. But, I think that the run rate we are experiencing and looking at going forward that that would be a good level to operate at.

Operator

I would now like to turn the call back over to management for any closing comments.

Gerald R. Dinkel

Again I’d like to thank all of you for participating in today’s call. We feel that our fiscal 2009 results reflect all the implications of the strategic shift in the company’s business from a component only provider to a more vertically integrated supplier of more complex electronic assemblies. Overall, White is well positioned. Virtually all the new programs in our outlook enjoy high priority even in this more uncertain defense budget environment. We also believe, as we said earlier, there will be opportunities for strategic relationships and acquisitions to further strengthen the company.

We invite all of our investors to initiate dialog with the company and to contact us by phone or email. We’re pleased to answer any questions you may have or provide you a better understanding of the company. Thank you for your time and we look forward to talking with you again at the conclusion of our first quarter. Happy holidays.

Operator

Ladies and gentlemen this conference has concluded. Thank you for your participation.

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!