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Executives

Joe Diaz – IR, Lytham Partners

Gerry Dinkel – President & CEO

Roger Derse – CFO, Secretary & Treasurer

Analysts

Mark Jordan – Noble Financial

Tom Carpenter – J.J.B. Hilliard Lyons

Warren Darilek – Morgan Keegan & Company

Nelson Obus – Winfield Capital

White Electronic Designs Corporation (WEDC) F1Q10 (Qtr End 12/31/09) Earnings Call Transcript February 8, 2009 4:30 PM ET

Operator

Greetings and welcome to the White Electronic Designs Corporation’s first quarter 2010 earnings conference call. At this time, all participants will be 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 Mr. Joe Diaz of Lytham Partners. Thank you, sir, you may begin.

Joe Diaz

Thank you, Jane, and thank all of you for joining us today to review the financial results of White Electronic Designs Corporation for the first quarter of fiscal year 2010 ended December 31, 2009. With us on the call today are Gerry Dinkel, President and CEO and Roger Derse, the Chief Financial Officer. At the conclusion of today’s prepared remarks we will open this call for a question-and-answer session. If anyone participating on the call does not have a copy of the press release that was filed today, it is available on the Company’s website at www.WhiteEDC.com and numerous financial websites on the Internet.

Before we begin with prepared remarks, we submit for the record the following statement. Certain statements made during the course of this conference call constitute forward-looking statements. The 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 opportunity to improve operating margins, progress in product operations, and the outlook of GPS on our business position in the industry. Additionally, other factors that could materially and unexpectedly affect the Company’s results are set forth in the Company’s most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. The Company cautions you not to place undue reliance on its forward-looking statements. The Company does not undertake any obligations to publicly update any forward-looking statements to reflect events, circumstances or new information after this conference call or to reflect the occurrence of unanticipated events.

With that said, I would now like to turn the call over to Gerry Dinkel, President and Chief Executive Officer. Gerry?

Gerry Dinkel

Thank you, Joe. I would also like to thank everyone participating on the call today. We appreciate your continued interest in White. The first quarter of fiscal 2010 was a steady one. Bookings rebounded from the relatively low number in the last quarter of fiscal ’09 and we saw an increase in orders for GPS circuit card assemblies. Sales were essentially the same for the first quarter when compared to the fourth quarter of fiscal 2009. And while we experienced deterioration in overall gross margin due to lower sales from our electromechanical business, the Phoenix defense electronics operations’ gross margin improved to 39%.

I am sure you all know we recently announced the decision to exist the electromechanical business. As noted in the press release, the exiting of non-core businesses over the past two years has left us with a smaller revenue base to shoulder the burden of corporate costs. We see an additional opportunity to improve operating margins as our revenue grows with the same relatively fixed infrastructure.

Total backlog at the end of the first quarter was $40.7 million, up from $37.8 million at the end of fiscal 2009. Book-to-bill ratio for the quarter was a reasonably healthy 1.18:1.00. Another thing I was pleased to see was the improved management of inventory. This is indicative of the progress we were making on a broad front and the transformation of our product operations. While much of this can be attributed to the focus on implementation of Lean Six Sigma, it is more far-reaching than that. The investments made in process automation and IT infrastructure over the past year have enabled us to do a much better job of planning and process management, providing the knowledge base for smart operational decisions in the simplest form as well achieving more with less.

With that brief introduction, I will now turn it over to our CFO Roger Derse to review the financial details and I will be back with some additional comments before we move into the Q&A segment. Roger?

Roger Derse

Thanks, Gerry. We reported the following highlights: First quarter revenue of $15.6 million; first quarter bookings of $18.4 million; anti-tamper related bookings of $9.1 million; and the backlog as of December 31st, 2009 closed at $40.7 million.

First quarter results. For the first quarter the Company’s net sales were $15.6 million, a 17% when compared to $13.3 million in the first quarter of fiscal 2009. Income from continuing operations for the first quarter was $0.1 million, or $0.01 per diluted share, which included a non-cash impairment charge of $0.2 million, net of tax, related to our Fort Wayne, India electromechanical business, compared to income from continuing operations of $0.5 million, or $0.02 per diluted share, in the first quarter of fiscal 2009.

Income from discontinued operations for the first quarter of fiscal 2010 totaled $0.2 million, or $0.01 per diluted share, related to the sale of the land and building in Columbus, Ohio, versus income from discontinued operations of $0.3 million, or $0.01 per diluted share, in the first quarter of fiscal 2009.

Net income for the first quarter of fiscal 2010 was $0.3 million, or $0.01 per diluted share, compared to net income of $0.8 million, or $0.04 per diluted share, in the first quarter of fiscal 2009.

Relative to the bookings and backlog, our first quarter bookings included $6.6 million of anti-tamper circuit card assemblies and $2.5 million of anti-tamper component-only products. As Gerry noted, total backlog at the end of the first quarter was $40.7 million, compared to the $37.8 million at the end of the fiscal 2009 period.

And the gross margins, gross margin as a percentage of net sales from continuing operations for the first quarter of fiscal 2010 was 31% compared to 40% in the first quarter of fiscal 2009. Gross margins in our Phoenix operation improved to the 39%, as pointed out, as we progressed on the manufacturing initiatives started in the second half of fiscal 2009.

In the area of the balance sheet, with our cash of December 31st, the Company had $65.4 million in cash and no debt. Cash increased by a total of $1.2 million during the quarter with $0.8 million generated from discontinued operations. The completed sale of land and building in Columbus, Ohio, for approximately $0.6 million.

Accounts receivable increased $0.6 million during the quarter primarily as a result of timing of invoices and receipts as a higher percentage of sales were in the last month of the quarter. Days sales outstanding as of December 31st, 2009, was 63 days compared to 59 days at the end of the fiscal year.

Inventories decreased $1.6 million during the quarter. Inventory of $14.1 million as of December 31st, 2009 represented 131 days of inventory on hand, down from 150 days at the end of fiscal 2009.

Accounts payable decreased $1.6 million primarily due to the timing of cash disbursements and receipts of goods and services, primarily inventory. I will now turn it back to Gerry for some final comments before we move to the Q&A session. Gerry?

Gerry Dinkel

Thanks, Roger. Looking at the overall defense market environment, we remain optimistic on the outlook for larger scale production in GPS-guided munitions, which will provide an affordable level of precision strike as well as a more rapid response for ground forces. We also see a continued proliferation of GPS capability in the tactical communications environment. Both of these trends should lead to more business for us as projects in these two areas move into higher rate production.

In parallel, the internal R&D on our flagship next-generation product, a highly reliable and secure (inaudible) drive, is proceeding well and we anticipate initial versions to be available later this year. On a broader front, we are continuing to explore opportunities for strategic teaming or acquisitions that extends our reach in the defense electronics market.

With that short summary, I’d now like to open the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Mark Jordan with Noble Financial. Please proceed with your question.

Mark Jordan – Noble Financial

Good afternoon, gentlemen. My two questions, I’d like to get a little more detail on your – two of your new and growth initiatives, first, relative to solid-state drives. You mentioned that the – you’d have initial availability this year. Is that a manufacturable or deliverable product or is that more of prototype, and if so when would you have at least limited, legitimate production volume available for potential customers?

Gerry Dinkel

Hey, Mark, this is Gerry. It’s more in the line of a prototype. I’d say it’s beyond a prototype in the sense that I think of it so, but based on the way you’ve characterize it, it’s more like that. It will be initial versions for customers to test. Depending on the application the customer might have somebody could choose to go to earlier production on that less mature product, and like anything with this degree of complexity and it is something that matures over time.

As far as the so-called final version, it later – when I said this year on the prototypes, if you want to call it that, it was more like the spring, the late spring of this year. Probably by the end of this fiscal year or the end of this calendar year we’d see more mature products coming out as far as a function of the testing that we do on the initial units.

Mark Jordan – Noble Financial

Okay. You alluded to on it, both today and in the past about the board level business that is available in the munitions area. Obviously, that has started to meaningfully hit the P&L. If you were to look out into the last half of next year, fiscal ’11, could you give us a range of what annualized run rates those types of products in aggregate could be contributing?

Gerry Dinkel

No, I won't do that and for this reason. The number would be – could be big, but they are entirely a function of when the programs get kicked off at the prime level and at what rates they get funded by DoD. And I just don’t want to go out unaccompanied [ph] on something that’s got that much dynamics in it.

You hear – you are probably as familiar with the programs at the top level as we are and you hear thousands of numbers thrown around. I think it’s still up in the air as to how vast quantity of these things that’s going to be put into the field.

Mark Jordan – Noble Financial

Okay. Ask a different question, if I may, and then I will relinquish and get back in line. Generically with one of these boards, if you are having hypothetically a control targeting board for a small (inaudible) or munitions, say, either 105 millimeter Howitzer or a large mortar round, what type of revenue per round might you see?

Gerry Dinkel

That would depend on the content that we have. If you just looked at the GPS element that we are talking about, I’d ballpark it at around $1000.

Mark Jordan – Noble Financial

Okay.

Gerry Dinkel

That’s a rough order of magnitude.

Mark Jordan – Noble Financial

Great. Thank you. I’ll get back and let somebody else – I took three, I apologize.

Gerry Dinkel

That’s okay.

Operator

Thank you. Our next question comes from the line of Tom Carpenter with J.J.B. Hilliard Lyons. Please proceed with your question

Tom Carpenter – J.J.B. Hilliard Lyons

Good afternoon, gentlemen.

Gerry Dinkel

Hi, Tom.

Tom Carpenter – J.J.B. Hilliard Lyons

How are you?

Gerry Dinkel

Good.

Tom Carpenter – J.J.B. Hilliard Lyons

That wasn’t a question, so no count I guess there.

Gerry Dinkel

That’s one.

Tom Carpenter – J.J.B. Hilliard Lyons

This is another, this is another – this is (inaudible) question, it looks like Dan’s team was busy, you guys got backlog going in the right direction in bookings after, but that – the question part of that is what changed in September-December for you guys to go up 98% on bookings?

Roger Derse

The fictitious [ph] comment is customers gave us orders. None of this – yes, I guess it’s a function of the discontinuity [ph] of the business. If the quarter hadn’t ended when it did, things would probably look smoother. I don’t – and the forensics on that are that it’s just a matter of timing. Some of the bookings that came in the first quarter were and were not the same things that we at the beginning of the quarter. So we still have some dynamics in the number and I am not sure how much of that is the nature of the business versus some of the after effects of the recession will be or just get back and take their time placing orders for certain components.

Tom Carpenter – J.J.B. Hilliard Lyons

Sure. For those of – I guess those of us in the outside are trying to grasp it. Was there a change in the funding environment, was it a budget flush, or was it some temporary stuff in September, we are trying to extrapolate I think for this year.

Gerry Dinkel

My sense of it is, you probably can't extrapolate in the sense of – I don’t know that there was one or two things that changed to change that fourth quarter to first quarter performance number.

Tom Carpenter – J.J.B. Hilliard Lyons

Right. Since you are already guess what five, six weeks into the new year, do you see more of a that normalized in a mid-to-high teens, going forward or is there going to be a fair amount of choppiness.

Gerry Dinkel

Choppiness.

Tom Carpenter – J.J.B. Hilliard Lyons

Alright.

Gerry Dinkel

That’s the way I see it and maybe I am being conservative but that’s a better way to act I think than the other way.

Tom Carpenter – J.J.B. Hilliard Lyons

I am sure, now that’s helpful. Then I think you guys have mentioned this also on the call that the SG&A is probably a little bit higher than we were expecting. Can you guide us – I know you said operating margin going to go up this year as the revenue go up, but did a pretty decent uptick from September through December and I hope for that’s just explained by (inaudible) on board.

Roger Derse

Tom, it’s Roger. I think if you looked at the fourth quarter – in the fourth quarter we had some reversal, so fourth quarter was a little bit down, so you see sort of a swing between the fourth quarter and the first quarter. I would say that where we sit in the first quarter SG&A-wise as far as the magnitude and the percent of the revenue that we are expressing, that’s our position going forward.

Tom Carpenter – J.J.B. Hilliard Lyons

Okay. Now that’s helpful and one final question. I will jump back in the queue. When I look at the P&L this quarter, you look at operating income, granted there were some impairment loss there. If you look at your interest income, it looks like your have few lines of business and the interest income line of business is pretty good. I know you guys want to do something with that if you find the right opportunities, and I think you guys are looking at quite a bit. Can you give us an idea of the timing on putting in some of your cash to work and when we can see it if you view it as a maybe more a technology-focused as opposed to an existing business that creates revenue?

Gerry Dinkel

I’ll probably get this question in every earnings call and probably gave the same answer every call. Timing is indeed it’s impossible to predict on this. We had a deal right around the corner, so we are not going to talk about it. We are still looking at a lot of different options and different things that would add to the quality of the business. One – two ways to look at it and you alluded to both of them. If you are looking for scale plays, things that would really nicely relate to the business we do now, provide a lot of synergy, and increase our base, so this – some of this fixed infrastructure that we have could be spread across a larger base, and I think that will help (inaudible) in and of itself.

We are also pretty equal emphasis on looking at what I will call technology plays whether it might be a compelling piece of technology that we can pick up either as an item or through a Company that we feel has high leverage going into the future either to reinforce us in an existing product line or to add another product line. And we are continuing to look at all of those avenues and having conversations with along all those lines. But we are not at the point where we can predict when that might happen.

But if you look at the level of business we have now and obviously sensitive it is to volume, being one of the highest priorities in the Company is growing that top line and – spreading the fixed cost across a larger base and driving EPS that way.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Warren Darilek with Morgan Keegan & Company. Please proceed with your question.

Warren Darilek – Morgan Keegan & Company

Yes, I appreciate it. The question pertains to getting the feel if we could on – take for instance the GPS products and new potential areas of growth in that area. Is there any way to generally define the market size for that type of business, not business that you all think you are going to get, but just the cap of how big a market that is in a general sense?

Gerry Dinkel

It’s pretty difficult. You can come up with some pretty large numbers on that if you – you have studies that show the military GPS market, for instance, I wouldn’t even presume off the top of my head to tell you what those are. My attitude in the defense business is that market share is not that big – if that’s where you are going – it’s not that big a – it doesn’t answer that much of the question, because it tends to come in large chunks as a function of program wins or design wins in our case.

Warren Darilek – Morgan Keegan & Company

Right.

Gerry Dinkel

Certainly that market is plenty big for us to have some upside in it is the way I look at it if that helps you.

Warren Darilek – Morgan Keegan & Company

Okay. And in regard to you acquisitions of either technology or companies, obviously it’s find the right place, the right company at the right price and time. Are you finding candidates that even remotely look like they can be serious for consideration going forward or is that very difficult to find some potential opportunities? I am getting a peg for are there opportunities, is it really hard to find them?

Gerry Dinkel

No, it’s fairly easy to develop a fairly long list of candidates and then everything you mentioned upfront becomes – the way that list gets whittled down to something.

Warren Darilek – Morgan Keegan & Company

Okay, good, good, I appreciate it.

Gerry Dinkel

Sure.

Operator

Thank you. Our next question comes from Mark Jordan of Noble Financial. Please proceed with your question.

Mark Jordan – Noble Financial

Thank you. A bit of a followup and this relates to the when the process of closing down or selling Fort Wayne when you move that to a disco status at some point in time. And secondly, is it fair say that in the current quarter given the – I mean, I thought traditionally this was about $1.5 million revenues per quarter, so it sounded like the results were a little weaker than sort of trend line. So revenues would have been about well $1 million to $1.5 million and the profit contribution would have been somewhere between breakeven and about half a cent [ph] of share, is that correct?

Gerry Dinkel

Go ahead, Roger.

Roger Derse

Mark, Fort Wayne was significantly depressed through the quarter. Their revenue was sub a million dollars. They had a negative gross margin due to a significant volume variance for that operation. Keep in mind that was our view looking forward at – what that operation might generate for the year. You know that was really the foundation for hard look in our decision. I would defer you to the 10-Q that will be filed tomorrow relative to additional information relative to Fort Wayne as well as any forthcoming filings that we will make to update our original 8-K with some numerics that give you the color on what the shutdown values and costs and so forth that are associated with that.

Mark Jordan – Noble Financial

Okay. But then to reiterate it, if Fort Wayne had not been part of the Company in the first quarter you would not have had the $0.01 impairment charge and the loss of its operations also would have increased reported earnings from continuing operations.

Roger Derse

Absolutely correct.

Mark Jordan – Noble Financial

Thank you.

Operator

Thank you. Our next question comes from the line of Tom Carpenter with J.J.B. Hilliard Lyons. Please proceed with your question.

Tom Carpenter – J.J.B. Hilliard Lyons

Hey gents.

Gerry Dinkel

Hey.

Tom Carpenter – J.J.B. Hilliard Lyons

Going back to the acquisition question, which you probably will get that a lot going forward, are there opportunities with some of your existing larger customers, the prime customers that might want to outsource businesses, do you guys have that scale to you know pick up those businesses from someone like a Raytheon of L3

Gerry Dinkel

Well, depending on the piece. In principle, we will have the scale I think reviewed as a strong, financially strong and technically strong supplier to them. Those kind of ideas tend to fall out of those companies when they decide to do it. It’s not something that we can particularly make happen and – obviously if a situation like that crops up, it would make immediate sense because then you would have a customer who thought it was a good idea.

Tom Carpenter – J.J.B. Hilliard Lyons

Right okay–

Gerry Dinkel

And you look at the economics of it.

Tom Carpenter – J.J.B. Hilliard Lyons

And then looking at some of the technology plays, is that something that it’s more likely you guys would purchase outright or are there any partnership opportunities, there seem to be more and more companies are doing that going forward?

Gerry Dinkel

They – the experience to-date, the dialog to-date say it runs the gamut. Some of the companies that have some really interesting technologies may not quite be ready to go into full-scale manufacture and that would lead to perhaps a longer term partnership with them as opposed to an acquisition. I don’t think we want to reach out and become and look to you guys like we are venture capital fund. So it – when you get into the technology world, the first order that come in to me is how ready is it and where are the customers lined up to take advantage of it if only for a credible manufacturing capability.

Tom Carpenter – J.J.B. Hilliard Lyons

Got it. You guys would be able to add the manufacturing and you also add capital?

Gerry Dinkel

Right and also the design capability because more often than not the technology is that the – at a design level, which is going to enable to perform in a certain way, but it’s often that the products has to be completely redesigned to be manufactured in large volumes and that’s what we are good at.

Tom Carpenter – J.J.B. Hilliard Lyons

Okay, excellent. Best of luck in the March quarter.

Gerry Dinkel

Thank you.

Roger Derse

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Nelson Obus with Winfield Capital. Please proceed with your question.

Nelson Obus – Winfield Capital

Yes, for Gerry, leaving aside acquisitions, when you’ve – I am sure you’ve gotten around to talk to your larger customers, what are they telling you about what White can do to be better?

Gerry Dinkel

Well, they always got some ideas for sure even if we are operating perfectly. They like us to be more on time, lower cost, all of those things that you can imagine. I am not trying to dodge your question, but they are – we are always getting pushed to be better and there is no question we can be better.

Nelson Obus – Winfield Capital

And have you put into place program that reduce turn time and–

Gerry Dinkel

Yes. Yes, I figured that’s the question because you brought it up the last quarter. I am much more comfortable now than I was three months ago with the state of our operations from a – addressing what needs to be done. I alluded to that in the opening remarks but intentionally didn’t go into a lot of detail on it. See – I think if you take the pieces – the automation, moving some of our process from manual to automated has corrected some problems that we had with hardware that went out the door previous years all they way up to say the middle of last year. And it takes – some of those areas we’ve spent a few hundred thousand dollars over the past year and have had some dramatic improvements in the quality of what’s going out there.

The other piece of it is in the IT, the ERP system that was upgraded before I got here. Just the fact that we can now get much more information in real time out of the system allows you to both detect the problem early and more importantly gives you the forensic information to go back and do something about it. And then the overlay to that is this Lean Six Sigma environment, which to me where you bring in the people and you have process and procedures that are well understand, you get the people to follow on and – I don’t care how good your technology is, if you haven’t got a workforce that’s engaged in the right way to do things the right way every time, it’s just not going to work and I think that’s where we’ve made some great strides in getting the buy-in of the work force. I am comfortable we are on the right track operation wise. My top priority right now is on the top line and doing everything we can to get more business into here to take advantage of the capability we got. That’s how I feel at this point.

Nelson Obus – Winfield Capital

Alright, thanks for the update.

Gerry Dinkel

Sure.

Operator

Thank you. At this time, there are no further questions. I would like to turn the conference back to Mr. Gerry Dinkel for closing remarks.

Gerry Dinkel

Hey, thank you all for participating and we hope this has been an useful time updating you on our status and we certainly look forward to the next time we do this. As always, we invite our investors to initiate dialog with the Company and to contact us by phone or email. Pleased to answer any questions you may have and provide you with a better understanding of the Company. Thanks for your time and talk to you in three months.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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