ADDvantage Technologies Group's CEO Discusses F1Q2014 (Qtr End 12/31/13) Results - Earnings Call Transcript

Feb.13.14 | About: ADDvantage Technologies (AEY)

ADDvantage Technologies Group, Inc. (NASDAQ:AEY)

F1Q 2014 Earnings Conference Call

February 13, 2014 12:00 pm ET

Executives

Garth Russell - KCSA Strategic Communications, IR

David Humphrey - President & CEO

Dave Chymiak - CTO

Scott Francis - CFO

Ken Chymiak - Chairman

Analysts

Doug Ruth - Lenox Financial Services

George Gaffer - Private Investor

Operator

Good day, everyone, and welcome to ADDvantage Technologies' Fiscal First Quarter 2014 Earnings Conference Call. Today’s conference is being recorded.

And at this time, I'd like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead.

Garth Russell

Thank you. Before we begin today's call, I would like to remind you that this conference call may contain certain forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include among other things statements regarding the future events such as the ability of ADDvantage Technologies and it's subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers, and multi-system operators, as well as the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties.

Participants are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or other results due to a variety of factors such as those contained in ADDvantage Technologies' most recent report on Form 10-K on file with the Securities and Exchange Commission.

Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes thereto included in ADDvantage Technologies' most recent report on Form 10-K filed December 10, 2013.

The guidance regarding anticipated future results in this call is based on limited information currently available on ADDvantage Technologies is subject to change. Although any such guidance and factors influencing will likely change, ADDvantage Technologies will not necessarily update the information as ADDvantage Technologies will only provide guidance at certain points during the year. Such information speaks only as of the date of this presentation.

With nothing further, I’d now like to turn over the call to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. Dave, the floor is yours.

David Humphrey

Thank you, Garth. Welcome to ADDvantage Technologies’ fiscal 2014 fourth quarter conference call. With me today is Dave Chymiak, our Chief Technical Officer; Scott Francis, our Chief Financial Officer; as well as Ken Chymiak, our Chairman of the Board.

Before I turn the call over to Scott, who will provide the detailed financial results for the quarter and fiscal year ended December 31, 2013, I want to offer a brief overview of the company's operation and strategy moving forward.

It is clear when comparing our equipment sales for the fiscal 2014 first quarter to the same period last year that we saw a decline. However, a deeper look into the numbers reveals that sales in the fiscal 2013 quarter benefited from a spike in demand following Hurricane Sandy which was not expected to reoccur in fiscal 2014.

That said, total equipment sales would have still been down slightly. This is because, as we have discussed previously, there continues to be a trend across the cable television market of MSOs delaying or limiting investment into the expansion and upgrading of their networks, which has plagued the equipment side of the industry since the recession. But I believe we have managed the downturn well and have remained profitable by cutting cost, reducing our inventory levels. We recognize this as not a viable long term strategy.

Instead, we are focused on realigning out business in an effort to address this weakness in the general cable television equipment industry. This has included focusing on our core businesses selling new and used headend and access transport cable television equipment.

I would like to highlight three different areas of focus. First, we are making enhancement to our sales team in order to promote a cohesive sharing of customer information between each of our subsidiaries and identifying additional product offerings to sell to our customer base. This has been followed by the expansion of the sales team including the hiring of three industry sales professionals from Motorola that bring a wealth of knowledge about many of the MSO networks and strong customer relationships.

It is too early to comment about the results from these recent additions though they are working towards an effective strategy in selling to new product areas which we believe will result in increased sales over the long term.

Secondly, we made this strategic decision to make sizeable investments into new headend and access of transport equipment which includes a new Triveni product line for portable video test equipment and enhancing our ARRIS Motorola in stock inventory. These inventory purchases include certain manufacture incentives for us as well.

These investments have resulted in $2.3 million increase in our inventory to $23 million. Our decision to expand support of new manufacturers and grow business line is necessary to further strengthen our core business. And most recently we made the decision to divest the majority of net assets in operations to Adams Global Communication. This business was mostly focused on equipment that did not directly fit within our core competency, particularly selling used customer premise equipment or CPE, which is predominantly set top boxes and modems.

As part of the sales agreement we are retaining our existing relationship with ARRIS as well as non-CP inventory consisting primarily of headend and access transport equipment. We will also retain the Adams Global Communication's facility. An important aspect of this transaction is that the purchaser of AGC, Adams Cable Equipment, is retaining our Adams Global Communications employees. We believe that the combined companies of Adams Cable Equipment and our own ex-AGC will provide the opportunity for our employees to thrive. We chose to sell the AGC business as we determined that it did not fit within our core cable television equipment distribution business nor was it performing to our expectations.

In addition, it provides us with $2 million in cash, retention of about $900,000 of inventory and the building. While we believe that this increase focus on our core business will benefit our equipment sales we continue to look for ways to diversify further into the telecommunication space.

As previously announced, we engaged an investment banker last year to help us identify a strategic acquisition in the broader telecommunications market. We will keep you updated on our progress on this trend as we continue to review perspective companies.

As you can see, we've worked to stabilize our core business. In addition, we continue to focus on implementing our growth strategies which we hope will further enhance our business. It's important to note that implementing and executing upon these activities takes time and in many cases the full effects won't be immediately seen in our financial performance. However, our ability to remain profitable and maintain a strong balance sheet offers us confidence in the long term opportunity for the business following the implementation of our overall strategy.

I'd now like to turn over to Scott, who will provide the financial results.

Scott Francis

Thank you, David. Turning to the results for the quarter, our total net sales for the first fiscal quarter of 2013 decreased $2.7 million or 28% to $6.9 million compared to $9.6 million for the same period of last year.

The decrease on our net sales was primarily due to the continued decrease in planned expansions and bandwidth upgrades in the cable television industry as well as the absence of equipment sales as a result of Hurricane Sandy for the three months ended December 31, 2012.

Revenue from new equipment sales decreased $1.3 million or 24% to $4.3 million for the three months ended December 31, 2013 compared to $5.6 million for the same period of last year. And our net refurbished sales decreased $1.3 million or 43% to $1.7 million for the three months ended December 31, 2013 compared to $3 million for the same period of last year. Our service revenue decreased $100,000 or 13% to $0.9 million for the three-month period ended December 31, 2013 compared to $1 million for the same period of last year.

Cost of sales decreased $1.7 million or 26% to $4.8 million for the three months ended December 31, 2013 compared to $6.5 million for the same period in 2012. Our cost of sales is lower due primarily to our lower equipment sales.

Our gross profit decreased $1 million or 33% to $2.1 million for the three months ended December 31, 2013 from $3.1 million for the three months ended December 31, 2012. Our gross profit margins were 31% for the three months ended December 31, 2013 as compared to 33% for the same period last year. The decrease in the margin is due primarily to sales of certain refurbished equipment last year that were purchased at significant discount as well as our lower equipment sales this year as compared to last year.

Our operating, selling, general and administrative expenses remained relatively flat at $1.8 million for the three months ended December 31, 2013 and 2012.

Our income from operations decreased $1 million or 79% to $300,000 for the three months ended December 31, 2013 from $1.3 million for the same period last year due to the reason I just described. And net income was $200,000 or $0.02 per basic and diluted share for the three months ended December 31, 2013 compared to a net income of $800,000 or $0.08 per basic and diluted share for the same period of last year.

Cash and cash equivalents as of December 31, 2013 was $7.7 million compared to $8.4 million as of September 30, 2013.

Our net inventory increased $2.3 million to $23 million as of December 31, 2013 from $20.7 million as of September 30, 2013. This increase in our net inventory is due primarily to purchase of new inventory, as David discussed earlier, with certain manufacturing (inaudible). Also, as of December 31, 2013 there continues to be no balance outstanding in $7 million line of credit.

Also, as David discussed earlier, on January 31, 2014 we did enter into an agreement to sell the net assets of one of our subsidiaries Adams Global Communications for $2 million in cash. As part of the sale we retained the headend and access and transport equipment totaling $900,000 and the AGC facility. The net assets that were disposed of consisted of approximately $2.6 million of current assets, $500,000 of non-current assets and $100,000 of current liabilities which we anticipate will yield a loss on the sale net of tax of approximately $600,000.

This concludes the financial overview for the quarter ended December 31, 2013, and I'll now turn the call back over to David.

David Humphrey

Thank you, Scott. With the activities that have already taken place along with pursuing an acquisition in the broader telecommunications market we believe our strategy for strengthening our core business and driving growth is clear than ever for our shareholders. We appreciate your continued support as we make improvements in our business operations.

This concludes our prepared remarks. We now turn it back over to the operator and open the call for any questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions). And we'll take the first of the day from Douglas Ruth with Lenox Financial Services. Please go ahead.

Douglas Ruth - Lenox Financial Services

Hi, thank you for the conference call and thank you for some clarity here. Of the assets that's being sold, could you tell us how much inventory you're selling?

Scott Francis

Doug, I appreciate the question. Basically when I was saying it had $2.6 million of current assets in the sales the majority of that is going to be related to inventory as well as receivables. So what we're looking at is around a little bit less than $2 million is the inventory that was sold out of that.

Douglas Ruth - Lenox Financial Services

What is happening with your contract, the renewal contract with ARRIS now?

David Humphrey

Unfortunately, we still don't have one. We're still operating off the old agreement. We've had multiple conversations with ARRIS. They promised the agreement by the end of the year. They were hopeful that they would get the agreement by the end of January, now we're in February. The hold up, according to them, is in their legal department. They're just flooded with deals as a result of the transaction of merging the two companies and that's where the bottleneck is.

There is no other problem as far as moving forward with them and they still anticipate us to be a strong player in what Motorola used to call BAN and now ARRIS calls Access and Transport. So we're a key play with them and we anticipate we'll continue to grow with ARRIS/Motorola as we ultimately get that agreement and move forward together. But we're operating under the old agreement today and we're still moving significant portions of their equipment (inaudible) phase.

Doug Ruth - Lenox Financial Services

All right. Just a matter of the time that in theory.

David Humphrey

That's certainly what we are being called and I don't have any reason to believe anything else Doug. Thank you.

Doug Ruth - Lenox Financial Services

Yes. Could you offer a little bit more detail about the inventory sort of the logic that we're selling different products than we have in the past? Is that why what you are explaining?

David Humphrey

Well we have been selling Triveni for a number of years and so we seen an expansive opportunity to sell more Triveni and a new product they launched about three to four months ago, but it's really hitting the mark within the last couple of months. But we are looking at bringing on other product lines in particular because of the three Motorola guys that we referred to in the call that they have some opportunities that they are bringing to bear we haven't seen the fruits of those relationships and those opportunities yet as we mentioned. That's too early to really see the full impact of those but, yes, we are looking at other product lines.

Doug Ruth - Lenox Financial Services

How the (inaudible) --

Scott Francis

Hey, Doug, Real quick, this is Scott as well. To further answer that question on the -- he did address the Triveni, the other side of the purchase that we did with the ARRIS Motorola was again with to just try to enhance our in stock inventory. So that wasn't necessarily a new line. That was trying to make sure we had a very good inventory set of in stock in anticipating the demand and so forth of the market and trying to take care of as we have stated having some benefits that we are trying to take advantage of it as well.

Doug Ruth - Lenox Financial Services

Well, it seems like an exciting opportunity because --

Scott Francis

Well we have watched.

Doug Ruth - Lenox Financial Services

We have watched you generate cash by lowering the inventory, but ultimately if you can increase the sales which sounds like what your goal is having the right inventory is better than just simply reducing inventory.

David Humphrey

And I will turn it over to Dave as far as how -- I think we are still on a trend of continuing to some of this inventory but as you said we are going to take advantage of unique opportunities and that's why we've (inaudible) and increased our inventory in the last quarter. Dave?

Dave Chymiak

Yes, we have talked about it in the last few conference calls. When the opportunities are there we are looking at them. We will be continually reducing our inventory of we'll just say the year we had in stock for a while, there is still good demand for that product, we are still selling a lot of it and that's what's still producing a pretty good revenue stream for especially on the bottom line, because we are not selling as much volume but we are generating money on it. We are looking for incremental income and that's why have put some of the money into one manufacture. The other manufacturer, as Scott mentioned, we had a pretty good incentive to go ahead and purchase equipment that we got pretty low on that we would lost it at the first part of the year.

Doug Ruth - Lenox Financial Services

Okay. My last question is can you just give us a sense is the activity with the investment banker, are they bringing deals or are their opportunities out there that you are interested in or give us a sense of what's happening with the investment banker.

David Humphrey

Very good. Without getting into too much detail, Doug, basically yeah, he has got a number of opportunities, we have investigated a number of opportunities. We're working diligently with a couple of specific opportunities that again we can't reveal until as the adage is it's not a deal until it's a deal. So we are hopeful that we're going to work towards a deal but there is nothing to be announced at this point and time. But yes, he has brought us a number of deals and we continue to work with them and they're doing a very fine job for us.

Doug Ruth - Lenox Financial Services

Okay. Well, I'm very encouraged. Thank you for your efforts and the good work and we are looking forward into more news throughout the year.

David Humphrey

Doug, thank you for your continued support, we very much appreciate it.

Doug Ruth - Lenox Financial Services

You are welcome.

Operator

And we will take our next question from George Gaffer, who is a private investor. Please go ahead.

George Gaffer - Private Investor

Hello, can you hear me?

David Humphrey

Hi, George, yes, we can.

George Gaffer - Private Investor

Good morning. A question on the expected net changes in the balance sheet on the Kansas City sale. How do you see the net out that you are getting relative to how that was valued on the balance sheet? Can you give us any color as to what we might expect? I assume it will be in this quarter when those changes would show, and maybe it involves inventory too if you can talk about that?

Scott Francis

Okay. George, this is Scott. I will try to answer the question as I think you are asking. We will be restating basically our previously issued financials as of the next quarter on the March 31st, 10-Q and we will start going backwards with that on the restatement to show the Adams Global results as discontinued operations that we'll have a continuing operations balance sheet and income statement and we'll have the net on the discontinued operation. Those will be starting to come out as a March 31 Q. And I can't really comment at this point as to what does discontinue our operations will look like on the restatement backwards.

Now, what I can tell you as far as you can see on the -- what you can anticipate to see on the balance sheet side, when I went through in the prepared comments and its in the 10-Q on our subsequent event footnote on footnote 6 if you want to get it in writing, what we can say is the net assets we're still doing some calculations, but we believe that it's going to be about $2.6 million of current assets for which, as Doug was asking earlier, the majority of that is going to be inventory. And that inventory is, as we've previously disclosed as well on our press releases, is primarily what we would call customer prevalence equipment, it's primarily which would be set tops and modems which is the main majority of AGC's inventory.

There were some receivables and other things and there's current assets and then we had $0.5 million of non-current assets which are part of that, a lot of that was goodwill. And then we of course add some payables and accruals that are consisted about $100,000. So that's kind of held in a high level hell of a shake out on the balance sheet, but we're still refining that.

George Gaffer - Private Investor

Okay, all right. And then looking for some additional side on this venture out into the acquisition mode, this obviously head this underway for a considerable period now and is your approach you have alluded to your new sales personnel and hopefully bringing to you some aspects of opportunity that potentially you haven't been involved in the past. Is the acquisition hunt associated in the direction of utilizing the sales personnel that you brought on board with their backgrounds or is that not part of the search process at this point?

David Humphrey

I'm going to give you a few specifics and my CFO is going to give me a -- maybe give me a red flag, I will follow his advice, but basically our initial intent, George and for the other people on the call, was to look at the facility in the cable space and ultimately with the broader telecom space is we have evolved our search process, we are probably looking more outside of the cable space from an opportunity stand point. And basically we had a couple of key criteria of anything we are looking at. We did want to focus on growing businesses that were sustainable that had a good level of profitability historically.

This company has been very successful and I think this was pointed out by either you or Doug in a previous call about we have had good success by turnaround opportunities and Dave and Ken have done a good job turning around that's where NCF scheme from NAGT but we are not focused on at it at this point of time. We are looking for actual growth business that we can add to our portfolio of companies. And so those are key criteria we are looking at and its mostly going to be outside the cable space is where our focus is now but in the broader telecom space.

George Gaffer - Private Investor

Okay. And just one --

David Humphrey

I'm sorry, I didn't answer the specific question, it does not relate necessarily to the sales people that we are bringing into help promote our cable business.

George Gaffer - Private Investor

Okay. All right. And in terms of this putting this process together an acquisition what's your capability financially to the upper limit side in terms of size or commitment that both cash and potential credit that you could generate in terms of that opportunity on a value basis?

Scott Francis

I guess all I could tell you is I really can't go down that path other than to tell you, you can look at our balance sheet and know how much cash we have got in this capacity and ultimately we have good borrowing capacity from our bank as well. And we think we can look at significant opportunities for the company; we are not looking at small deals, we are looking at what we call significant deals. And that's all I can tell you right now, George, although I do appreciate the question.

George Gaffer - Private Investor

Okay. All right. Well, it looks like laying the groundwork for moving out on that side of the equation and I'm sure that then investors are going to be carefully watching to see what you can do as add-ons and put the company into a stronger growth mode. Thank you.

Scott Francis

Absolutely. That is our commitment as well. Thank you, George.

Operator

And no one else is on the queue at this time, but I would like to give everyone another opportunity. (Operator Instructions). And it appears there are no other questions. So I would like to turn it back to David Humphrey for any additional or closing remarks.

David Humphrey

Well, again, we are very appreciative of all of our investors. We very much appreciate your continued support. It was not a good quarter from our standpoint. We were not pleased. We would hope that we're going to continue to do better and we are committed to grow in both the cable business as well as complete an acquisition that will provide additional growth to our business. And we've not lost our focus on that and I think we have got a very clear future ahead of us and we're very committed to that and trying to build our business. And our Chairman Ken would like to make few comments.

Ken Chymiak

Everybody knows we've got an annual meeting coming up in the first week of March. We always welcome our shareholders come and visit us at sunny Tulsa, Oklahoma. It will be 50 to 60 degrees.

David Humphrey

Very good, thank you, Ken. Well, that concludes our remarks. Thank you, operator.

Operator

And thank you very much. That does conclude our conference for today. Thank you everyone for your participation and have a great 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!