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

Aeroflex Holding Corp. (NYSE:ARX)

F1Q14 Earnings Call

November 7, 2013 8:15 a.m. ET

Executives

Andrew Kaminsky – SVP, Corporate Development and IR

Len Borow – President and CEO

John Adamovich – SVP, CFO and Secretary

Analysts

Jim Covello – Goldman Sachs

Patrick Newton – Stifel Nicolaus

Operator

Good morning, and welcome to the Aeroflex Holdings Corp. webcast and conference call where management will discuss the company’s financial results for the first quarter of fiscal 2014, which ended on September 30, 2013. If you do not have a copy of the earnings press release, you may access it through the Investor Relations 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’d now like to turn the call over to Andrew Kaminsky, Senior Vice President of Corporate Development and Investor Relations for opening remarks. Please proceed sir.

Andrew Kaminsky

Thank you. Good morning and thank you for joining us. With me on the call today are 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 morning that is posted on our website. After we review the results of the first 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 morning and thank you for joining us today. This quarter we continued to execute well but are disappointed in our overall results as the weakness and uncertainty in our government end markets continues. Our commercial markets, specifically in wireless communications, have started to stabilize and we continue to perform well in these areas. The divestiture of ATES, our service business which was located in England with our wireless commercial test business, will allow us to better focus on our more strategic wireless test business.

At this time, the wireless business offers us the best opportunities for growth, while government budgetary issues are being debated, and this time, hopefully resolved with long term solutions. As we have done over the past year, we have continued to concentrate on operational efficiencies throughout the company and have planned throughout – have more plans throughout fiscal 2014. The results of these actions began to positively impact our operations this quarter.

We are still operating in a challenging environment, but we believe the need for our products across all of our end markets is critical to the success of our customers. As a segment, ATS was very focused on operational efficiencies during our seasonally slowest first quarter, while building its pipeline for fiscal 2014. In that regard, our wireless group continued to strengthen its leading infrastructure market position with key endorsements from carriers and bookings from key network equipment manufacturers around the world.

In AMS, we hired a new COO for our HiRel business with a proven track record for successfully driving profitable growth of HiRel product lines. His leadership skills are well suited for enhancing our new product development activities, as well as bringing new operational concepts that he has experienced while working at other world-class companies over the last 20 years. His expertise will help us improve our AMS HiRel operational efficiency and accelerate our strategy of adding more content per platform in the space markets and expanding the use of our proprietary technology in commercial markets.

AMS had multiple meaningful orders across its space portfolio this quarter, including over $5 million of next generation RadHard power modules used on two major satellite programs, approximately $3.6 million of multi-chip modules used in satellite bus applications and $3 million of our actuators and controllers for a new commercial satellite program.

Despite continued delays in government spending, we are still cautiously optimistic about our growth prospective [ph] due to our leading edged proprietary market position on key programs -- strong customer relationships and market position of our wireless infrastructure products.

As the work involved in implementing many of our operational changes over the last year have started to subside, we’ve increased our activity in evaluating opportunities for growth through M&A. We continually balance M&A opportunities with deleveraging and will ultimately make the best decision that will create the most shareholder value over the long term.

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

John Adamovich

Thanks, Len and good morning. I’m going to briefly discuss the 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 business outlook 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 reconciliations of our GAAP to non-GAAP results can be found in the press release, we issued this morning.

Before getting into the details, let me mention that the sale of ATES which accounted for as a discontinued operation. From an accounting perspective, we have also adjusted our comparable period in fiscal 2013 to reflect the results of ATES as a discontinued operation.

Concerning the line item specifics, net sales for the quarter were $135 million, including approximately $2 million of sales from ATES through the closing date. Without ATES, sales were $133 million. Sales from AMS were $74 million and sales from ATS’ continuing operations were $59 million.

Gross margin for the quarter was 49.8%, which is comparable to the 49.7% in the first quarter of fiscal 2013. As you know from prior earnings conference calls, we’ve been actively making operational changes predominantly on the ATS side of the business that will enhance our operating leverage and increase profitability. For instance, in ATS’ wireless business, the actions necessary to consolidate our European operations into the United Kingdom are now substantially completed.

In ATS’ AVComm business, we recently completed the consolidation of a small facility in California into AVComm’s larger manufacturing facility in Wichita, and are in the process of moving manufacturing from our Lenexa, Kansas facility into Wichita. These actions, which will be completed over the next few quarters, together with other cost saving activities we have begun, have already produced benefits as our SG&A for the quarter was down $1.8 million to $32.2 million from $34 million in the first quarter of fiscal 2013.

R&D for the quarter was $21.5 million, comparable in amount to the $20.8 million in fiscal 2013’s first quarter. Non-GAAP operating income for the quarter was $12.5 million and adjusted EBITDA was $18.4 million with ATES and $17.9 million without ATES.

Our customer diversity continues to remain strong. For the quarter, no customer accounted for more than 10% of net sales. This quarter, 18% of net sales were in APAC, 15% Europe, and 64% in the U.S. Net sales for the U.S government or to prime defense contractors or subcontractors of the U.S. government were approximately 33% for the quarter, which is comparable to the first quarter of fiscal 2013.

Our geographic mix of non-GAAP pretax income for the quarter resulted in a non-GAAP effective tax rate of 32%. To briefly adjust the balance sheet, inventory has increased at September 30 when compared to its level at year end. This is similar to our prior year patterns where inventory is built ahead to position us for deliveries in quarters 3 and 4.

Our gross debt balance is the same as it was at year end, at the end of the fiscal year at $587 million. With cash on hand at September 30, we have net debt of $524 million. We have now fully utilized our tax NOLs and R&D credit carryforwards and therefore are expecting to make more significant cash tax payments, as evidenced by the $11.6 million paid in the first quarter. These payments will reduce our ability to pre-pay debt at the rate we have in the past years. As a reminder, we have made debt payments totaling $144 million over the last two fiscal years.

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

Len Borow

Thanks, John. Our seasonal pattern over the last 20 years demonstrates that our second and third quarters are better than our first quarter, which leads into a very strong fourth quarter. This year will be no different.

Our outlook reflects the removal of ATES operations, which had net sales of $4.4 million and adjusted EBITDA of $900,000 in the second quarter of fiscal 2013 and $15.7 million in net sales and $2.8 million of adjusted EBITDA for all of fiscal 2013.

With this in mind, for the second quarter of 2014 ending December 31, we expect net sales to be between $146 million and $154 million and adjusted EBITDA to be between $21 million and $25 million.

I would like to now turn the call back to the operator to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from Jim Covello of Goldman Sachs.

Jim Covello – Goldman Sachs

Len, the weakness in government, how much of that is related to the ongoing sequester versus how much incremental weakness did we see as a result specifically of the shutdown?

Len Borow

Well, it’s hard to exactly tell, Jim, but it was compounded, because they haven’t been asking very robust lately anyhow as far as getting orders out the door. But then they came to a grinding halt. Because all the people placing the orders were on furlough at that time.

Jim Covello – Goldman Sachs

If we think about the test business, going forward, do you think all the growth is going to come from the base-station test business or do you still forecast some growth going forward in the handset test business?

Len Borow

No, we expect the majority of the growth for us to take place in the infrastructure, because we still dominate there and with the additional wins that we got in China and the affirmation by the largest carrier in the world, we expect and have just gotten the first orders which resulted from that affirmation. So we expect that to be a good market for us, probably in the next – probably start evolving as I’ve said just now and continue for the next couple of years.

Jim Covello – Goldman Sachs

And then final question from me. When you mentioned evaluating M&A before, do you think that’s more likely for you in ATS or AMS?

Len Borow

It doesn’t matter. What we need to do, Jim, is we need to prune our whole company in that we need to have it more aligned into where we think our growth will be, and we’re going to do that. So you will see divestitures and acquisitions just to make both ATS and AMS stronger.

Operator

Thank you. The next question is from Patrick Newton of Stifel.

Patrick Newton – Stifel Nicolaus

I guess just dovetailing off that potential divestiture comment and about I guess streamlining ATS and AMS, given some of the steps you have been taking to streamline operations, should we – could we see an acceleration in these divestitures? Is there kind of a I guess holding pattern as you continue to go through these consolidations, or how should we think about the cadence of some of these moves?

Len Borow

There is no cadence. I mean, obviously all of these businesses are nicely profitable. We are no hurry to sell any of them. We just feel that if we can come up with a good value for these operations and better position ourselves within markets by acquiring other companies, we’re going to do that. But there is no timeline, Patrick.

Patrick Newton – Stifel Nicolaus

Okay. Should we think about it as being kind of one-offs like the ATES business, or should we think about it as potentially being larger divestitures of your business?

Len Borow

No, I think you will just see it as one-offs.

Patrick Newton – Stifel Nicolaus

And then I guess Len, you touched on this a little bit just talking about your first orders coming out of China infrastructural rollout. But I am curious just with another quarter under our belt since we last talked, do you have a better sense as to the timing of these expenditures or are we still kind of looking at the black box?

Len Borow

Well, again we got – these things take a little time. People evaluate especially in China and just this week, we got the first follow-on order which represented the endorsement we got from the biggest carrier in the world.

Patrick Newton – Stifel Nicolaus

Outside of that infrastructure order in China, in general, could you comment on how is the infrastructure businesses faring [ph] in North America and Europe?

Len Borow

It’s been tracking. I mean it hasn’t been what I would call robust. But it hasn’t been slow either.

Patrick Newton – Stifel Nicolaus

And then just last one from me, Len, is I guess on a competitive landscape. You’re going to have a spin-off coming from – that’s going to create a T&M focused competitor. I am curious if you have any thoughts on this announcement and if you have seen any change in competitive dynamics as a result?

Len Borow

No. We don’t speak that much with Agilent Wireless – that business – they don’t – they’re not in the infrastructure and God bless them, they can play all they want in the handset business, that business is crowded enough and competitive enough as it is.

Operator

Thank you. As there are no further questions, I’d now like to hand the call back to Mr. Len Borow for closing remarks.

Len Borow

I thank everyone for listening and hopefully the government will be in better shape when we talk again. And we will have good results to give you. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And 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 F1Q14 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts