Aeroflex Holding's (ARX) CEO Len Borow On Q3 2014 Results - Earnings Call Transcript

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 |  About: Aeroflex Holding Corp. (ARX)
by: SA Transcripts

Aeroflex Holding Corporation (NYSE:ARX)

Q3 2014 Earnings Conference Call

May 7, 2014 8:15 AM ET

Executives

Andrew Kaminsky – SVP, Corporate Development and IR

Len Borow – President and CEO

John Adamovich – SVP, CFO and Secretary

Analysts

Quinn Bolton – Needham & Company

Operator

Good morning, and welcome to the Aeroflex Holdings Corporation webcast and conference call where management will discuss the Company’s financial results for the third quarter of fiscal 2014 which ended on March 31, 2014. 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 would now like to turn the call over to Andrew Kaminsky, Senior Vice President of Corporate Development and Investor Relations for opening remarks.

Andrew Kaminsky

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 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 third 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, I’m very pleased with our financial results. We had strength across many of our core markets, especially in our ATS wireless business and our AMS HiRel business which performed well in light of macro government headwinds. Our book to bill ratio was solid again at approximately 1-to-1 which is positioning us well to continue to deliver strong results in the fourth quarter.

Our wireless infrastructure business continues to benefit from demand for next generation LTE Technology, especially in growing market such as APAC. Our strong customer relationships continue to deepen as our technology is viewed as a key component of our customer’s future success. Our customers rely on us to provide them with key products and technology that can help them to compete [ph] successfully today and in the future. We continue to invest in our product offerings through investments such as TeraVM which differentiate us in the market and allow us to build strong long-term partnerships with new and existing customers that will ensure the future success of both, Aeroflex and our customers. To remind you, TeraVM helps service providers and network equipment manufacturers load, analyze, develop, validate and validate the performance and capabilities of a wide variety of network and security devices by providing realistic and very high load traffic generation and analysis from 1 Gigabit to 1 Terabit, with comprehensive measurements and performance analysis on each and every application flow to easily pinpoint and isolate problems.

In our ATS AVComm business, we are very optimistic about some of the significant new program opportunity we have been pursuing. These opportunities are with foreign governments, as well as domestic government agency and armed forces. These opportunities combined with our core savings initiatives in AVComm will help drive growth and increase profitability over the long-term. In AMS we are beginning to shift new products into new and existing markets across our HiRel and RSW [ph] portfolio. We anticipate these new products will not only play a key role in our growth but also in expanding up margin profile.

We continue to concentrate on operational efficiencies throughout the company, and the result of these actions are positively impacting our financial results. I would like to now turn the call over to John Adamovich to discuss our financial results.

John Adamovich

Thanks, Len and good morning to everyone on the call with us this morning. I’m going to briefly discuss the financial results for the quarter and then comment on our balance sheet before turning the call back to Len, who will discuss our business outlook before we open the line up 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 of the quarter, let me remind you that the continuing operations we are reporting exclude the operating results of our UK service business, ATES, which was sold in September 2013.

And now concerning the line item specifics, net sales for the quarter were $156 million, which is comparable to the net sales in the third quarter of fiscal 2013. Sales from AMS which were negatively impacted by the embargo in Russia, as well as a reliability problem with the supplier’s component were $88 million, and sales from ATS’s continuing operations was $67 million.

Gross margin for the quarter was 53.7%, up 270 basis points from 51% in the third quarter of fiscal 2013, as the effects of many of our cost saving activities were taking affect, as well as a favorable product mix in ATS. ATS’s strong margins reflect increased sales of wireless test products which carry margins greater than the corporate average. SG&A for the quarter was up modestly, $190,000 compared to the third quarter of fiscal 2013. R&D for the quarter was $22.7 million, down slightly from $23.2 million in the third quarter of fiscal 2013.

Our non-GAAP operating income for the quarter was $27.7 million, up $3.7 million from the third quarter of 2013, and Adjusted EBITDA was $33.1 million, up $3.8 million or 13% compared to $29.3 million in the third quarter of 2013. The increased profitability is driven by higher margin sales and the impact of cost savings initiatives undertaken over the past year.

Our customer diversity continues to remain strong. For the quarter, no customer accounted for more than 10% of net sales. This quarter approximately 22% of net sales were in APAC, 22% Europe, 50% in the U.S., and 6% in other parts of the world. Net sales for the U.S government or to prime defense contractors or subcontractors of the U.S. government were approximately 30% in the quarter. Our geographic mix of non-GAAP pretax income from the quarter resulted in a non-GAAP effective tax rate of 32%.

Now turning to the balance sheet, our gross debt balance remains at $587 million. With cash on hand of $47 million we have net debt of approximately $540 million. As we mentioned last quarter, we have now fully utilized our tax NOLs and R&D tax credit carry forwards and therefore have been making cash tax payments. This quarter we paid approximately $1.4 million in cash taxes, bringing our nine month total to $13.6 million.

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

Len Borow

Thanks, John. The strong book to bill achieved in the second and third quarters has positioned us well to deliver another seasonally strong fourth quarter. For the fourth quarter of fiscal 2014 ending June 30, we expect net sales to be between $186 million and $196 million, and Adjusted EBITDA to be between $48 million and $52 million.

I would like to turn the call back to the Operator to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Quinn Bolton – Needham & Company

Hey guys, congratulations on the nice results, especially on the margin and the op income side. Len, I just wanted to serve a couple of questions on the first commercial wireless, can you just give us a sense, obviously it sounds like China is going full throttle now with their LTE build out, can you get us an update how long you see that demand lasting? And then I’ve got a couple of questions on AMS.

Len Borow

Yes, well, you’re right Quinn. We were strong all over, we were strong in Europe, we were strong in Asia, and we see this growing on for at least the next couple of years. These cycles tend to last basically three year types of cycles and we’re just in the first year of that cycle.

Quinn Bolton – Needham & Company

Great. And then on the AMS side, you’d referenced some new products there, are key to the growth – future growth in the business, I was just wondering if you could give a little bit more color, what types of product – are they sort of satellite, or they high reliability, any more detail would be helpful.

Len Borow

Well, they are satellite programs, and more specifically they are power management programs that we believe are game changing in that, they offer more efficiency, lighter weight products which is what the space industry is always clamoring for. And additional station [ph], our other satellite program are starting to really take hold now.

Quinn Bolton – Needham & Company

Okay. I guess I was getting to my follow-up on satellite. A couple of your competitors on the microelectronic side have given more cautious outlooks for the aerospace, for their satellite businesses, it sounds like you’re not seeing any softness in bookings or current revenue trends for the space through satellite business?

Len Borow

Well the difference is not growing as far as the numbers of satellites, but we believe that because of our new products we’ll be taking market share, and have been taking market share.

Quinn Bolton – Needham & Company

Great. And then just to add a quick one for John, it looks like this is a first quarter where there is a difference between GAAP and non-GAAP revenue, can you just give us the explanation why there is a differences this quarter?

John Adamovich

Yes, typically those differences have come in with respect to acquisitions, and with the acquisition of Shenick there is little bit of a difference between the way the things would be reported from a GAAP perspective and a non-GAAP perspective.

Quinn Bolton – Needham & Company

Will that continue going forward or is that just kind of a one-time…

John Adamovich

No, it probably would continue for another couple of quarters until things wind down.

Quinn Bolton – Needham & Company

Okay, great. Thank you.

Operator

Your next question comes from the line of Patrick Newton with Stifel. Please proceed.

Unidentified Analyst

Good morning, thanks for taking my call. This is Robert [ph] for Patrick this morning. Just a couple of questions, looking at gross margins, pretty good, if you talk about what drove more specifically the sequential increase, and then you talked about favorable product mix and if there were anything else that was driving that?

Len Borow

I think you’re starting to see the results of our strategy to concentrate on our infrastructure products and stay away from the pure handset testing world which is now overcrowded with tremendous competition and falling margins. And our infrastructure products carry a very good gross margin, as you could see, we had the highest margins ever in our ATS group. So that helped drive the overall margin expansion.

Unidentified Analyst

Great, thank you for that. Then as we’re speaking of the Shenick acquisition, I believe last quarter you’ve mentioned that it contribute around $1 million to revenue, I was just wondering if you could give us an update on whether that came in relative to the expectations? And how that contributes to your guide for next quarter?

Len Borow

Yes, it contributed about $1.5 million to the revenue in the quarter, and it was modestly dilutive from an EBITDA perspective. And we don’t guide going forward with respect to products and things.

Unidentified Analyst

Okay, great. Thank you for that. And then so – as we talk a lot about operational efficiencies, it looks like we’re seeing the benefits of that. Going forward how would you – I guess what would you anticipate as far as how much more do you expect that to – how much more benefit do you expect to see out of that, how much of this is going to be driven by revenue growth increase in gross margin improvement?

Len Borow

Well, you’ll see it in both areas. We’re just about finished with the wireless portion, we have a little bit more to do in AVComm to be totally efficient, and then we see just sales growing which will again fuel growth more than just cost cutting…

Unidentified Analyst

Got you, thanks for that. Alright, and then just kind of – I guess one last question on debt – I know you mentioned now the extinguished many NOLs [ph], meaning more cash tax payments, just wondered what your thoughts were on – paying down debt going forward?

John Adamovich

We expect to continue paying down on debt, something that we look at each and every quarter, and we’ll make a decision on – maybe the amount we paid down when we get into the June timeframe as we typically do.

Unidentified Analyst

So you’re kind of – look at it annually but – or look at it quarterly but maybe on an annual basis looking to pay down instead of every quarter?

John Adamovich

We look at it on an annual basis with the cash that we used for Shenick at the beginning of the year combined with the cash taxes. We knew that debt payments this year were going to be more back end loaded, and that’s obviously how it’s played out. So that decision will be made, it would get into our June portion of our fourth quarter.

Len Borow

And then as a member of that our biggest collection quarter is the summer quarter because we always have a very, very large fourth quarter. So collections come in in July/August, and that’s when we have our most cash. So that would probably be when you’d see our payment pay down debt too.

John Adamovich

Yes, we’re at a point that we paid down so much debt over the last few years that we have no new required payment, so effectively what we do now is on a voluntary basis, and as I mentioned, we do look at it annually and in light of the acquisition that we made early in the year on this. And the tax payments, we just – we knew that this will be a fourth quarter item, so it’s something that we’ll be deciding in the next couple of months.

Unidentified Analyst

Got you. And then, just – I guess a follow-up on that. So there is no required payments right now – when does that – how long does that last for?

John Adamovich

That will last pretty much through the AVM [ph]. The only thing that we have in between – in October of each year we have an access cash flow payment, and that’s simply required by – they give a debt agreement and we’ll be well positioned to make that because there is one point out – there is plenty of cash that comes in the first quarter of our year, so we’ll be in good shape with that as well.

Unidentified Analyst

Got you, thank you. I appreciate for taking my questions.

John Adamovich

Alright.

Operator

And at this time we have no further questions. Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

Len Borow

Thank you.

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