Spectrum Control F4Q07 (Qtr End 11/30/07) Earnings Call Transcript

Jan. 8.08 | About: Spectrum Control, (SPEC)

Spectrum Control, Inc. (NASDAQ:SPEC)

F4Q07 Earnings Call

January 8, 2008 4:45 pm ET


Richard A. Southworth - President, Chief Executive Officer,Director

John P. Freeman - Chief Financial Officer, Senior VicePresident, Director


Ted Kundtz - Needham & Company

James Mcilree - Collins Stewart


Welcome to Spectrum Control Inc.’s fourth quarter andyear-end 2007 conference call. Representing the company today, we have DickSouthworth, President and Chief Executive Officer; and Jack Freeman, SeniorVice President and Chief Financial Officer.

Their discussion of the company’s operating performance forthe quarter and year ended November 30, 2007 should take about 20 minutes. Theywill then try to answer as many questions as reasonably possible. We expect toconclude this conference call at approximately 5:30 p.m. Eastern Time.

As a reminder, the following discussion will include certainforward-looking statements which reflect management’s current views withrespect to future market conditions and operating performance. Theseforward-looking statements are subject to certain risks and uncertainties whichcould cause actual results to differ materially from historical results orthose anticipated.

These risks and uncertainties are described in detail in thecompany’s most recent quarterly report Form 10-Q and annual report Form 10-Kfiled with the Securities and Exchange Commission. The words believe, expect,anticipate, and similar expressions identify forward-looking statements.Listeners are cautioned not to place undue reliance on these forward-lookingstatements.

Such forward-looking statements speak only as of the date onwhich they are made and the company does not undertake any obligation to updateany forward-looking statements to reflect events or circumstances after thedate of this call.

I would now like to introduce Mr. Dick Southworth, Presidentand Chief Executive Officer of Spectrum Control.

Richard A. Southworth

Thank you, John. Welcome to Spectrum Control’s 2007 fourthquarter and year-end conference call. I will briefly review some key operatingand financial highlights for the fourth quarter, as well as fiscal 2007. Afterwhich, Jack Freeman will review our financial performance in more detail. Wewill then be happy to take any questions after that.

For the seventh consecutive quarter, I am pleased to reporthigher earnings. In the fourth quarter of 2007, the company generated netincome of $3.2 million, or $0.24 per share, $0.23 diluted, on sales of $34.7million, compared to a net income of $2 million, or $0.15 per share on sales of$35 million for the same period last year.

For the year 2007, the company had net income of $11.1million, or $0.83 per share, $0.81 diluted, on sales of $136.5 million,compared to fiscal 2006 where the company had net income of $5.9 million, or$0.45 per share, $0.44 diluted, on sales of $125.7 million.

We are very pleased to report that 2007 was a record yearfor our company in generating revenues, profitability, and operating cash flow.Compared to 2006, our current year revenues grew 9%, our net income increasedby 90%, and our earnings per share was up 84%. This strong 2007 performancereflects the completed ramp-up of our State College ceramics operation, thesuccessful integration of our business acquisitions, and the effectiveness ofour ongoing cost reduction and consolidation efforts.

Customer orders were somewhat disappointing throughout mostof the fourth quarter before rebounding late in that period. Total customerorders received in the fourth quarter amounted to $33.1 million. As a result ofthis softness in orders, which we believe is only temporary, our fourth quarterrevenues and earnings were slightly below our previous expectations.

Going forward, however, our overall business outlook forfiscal 2008 remains very positive and we expect to build upon our record 2007performance and further enhance shareholder value.

At this point, I would like to introduce Jack Freeman, ourChief Financial Officer, and ask Jack to review our fourth quarter and year-endfinancial results in greater detail. When Jack has completed his presentation,I will conclude with some final comments and we will then open the floor toquestions.

John P. Freeman

Thanks, Dick. Our operations continue to be conducted infour reportable segments: signal and power integrity components, microwavecomponents and systems, power management systems, and sensors and controls.

During the current quarter, customer orders for our Signaland Power Integrity products were negatively impacted by overall soft marketconditions, particularly in the telecom equipment sector. As a result, totalcustomer orders received for these products in the fourth quarter of fiscal2007 amounted to $13.5 million, compared to $15.6 million in the same periodlast year.

Shipments of signal and power integrity components were alsodown in the current quarter, totaling $15.1 million, a decrease of 8% from ayear ago. For the fiscal year, however, aggregate shipments of these productswere $60.7 million in 2007. That’s up about $2.2 million or about 4% from 2006.In addition, with our State College ceramic operations lowering material costsand improving productivity, operating margins for this business segmentcontinue to improve.

Currently, our Microwave Components and Systems arepredominantly used in various military and defense applications includingsecure communications, smart weapons and munitions, as well as countermeasuresfor improvised explosive devices.

After several years of significant growth, sales for thisbusiness segment were relatively stable throughout 2007. In the currentquarter, sales of our microwave products amounted to $12.3 million. That’s anincrease of about 2% from the same period a year ago. For fiscal year 2007,sales of these products totaled $47.7 million. That’s down about 2% from fiscalyear 2006.

Recently, however, demand for our microwave products is onceagain demonstrating some signs of growth. Customer orders received in thecurrent quarter amounted to $12.7 million, up 9% from the same period a yearago. For the entire fiscal year 2007, total orders for these products amountedto $53.1 million, an increase of $9.9 million or about 23% from fiscal year2006.

Sales of our sensors and controls were also relativelystable in the current period, with sales of $4.9 million in the fourth quarterof fiscal 2007, as well as the fourth quarter of 2006. For fiscal year 2007,sales of these products amounted to $20.5 million, up $8.7 million or 73% fromfiscal year 2006.

Now of this $8.7 million increase, $5.5 million specificallyrelates to our acquisition of Advanced Thermal Products Inc. back in July oflast year, with the additional current year growth reflecting increasedshipments of our custom position sensors and related assemblies. Now, theseproducts are used in various commercial, aerospace and military markets withmajor applications in medical and meteorological instruments, aircraft flapposition actuators, as well as military vehicles.

With $3.2 million of increased shipments from our customposition sensor products in fiscal year 2007, the organic growth rate for our overallSensors and Controls Business was a very strong 27%.

Customer orders for our power management systems were $2.3million in the fourth quarter of fiscal 2007, up nearly 40% from a year ago.For the entire fiscal year 2007, customer orders totaled $8 million, an increaseof 29% from a year ago. So with this increased demand, as reflected in theincreased order rates, sales of these products amounted to $2.3 million in thecurrent quarter and $7.6 million in the current year, up 52% and 14% respectivelyfrom the comparable periods of 2006.

Encouraged by this performance, we remain very optimisticabout the long-term growth potential of our power management systems, which areused in various infrastructure equipment including long-haul optical switching gear, airtraffic control, as well as voice-over-Internet protocol.

During the current period, our overall sales by industryremained relatively unchanged. For the entire fiscal year 2007, consolidatedsales by major end markets were 48% for military and defense, 6% for commercialaerospace, 20% for communications equipment, and 22% for medical and industrialinstrumentation.

Throughout fiscal 2007, no single customer was more than 10%of our total consolidated sales.

In the fourth quarter of fiscal 2007, our overall grossmargin was $9.3 million, or 26.9% of sales, compared to $8.3 million or 23.6%of sales for the same quarter last year. This significant improvement in grossmargin when compared to a year ago reflects the benefits that continue to begenerated by our new State College ceramic manufacturing operations.

Despite this improvement when compared to a year ago, ourgross margin in the current quarter was still somewhat disappointing. Ourmaterial and labor costs for the quarter were very much in line with ourexpectations. However, with customer orders and related shipments for thequarter falling short of our previous expectations by more than $1 million, wewere not able to leverage our fixed manufacturing overhead as effectively as wehad anticipated.

Looking ahead to 2008, however, we expect our gross marginsto continue to improve as we continuously implement cost reduction andconsolidations and further expect to leverage our fixed manufacturing costs overgreater sales volumes.

During the current quarter, our SG&A expense totaled$4.3 million, or 12.4% of sales, compared to $5.2 million or about 14.8% ofsales in the same period last year and about $5.1 million, or about 14.5% ofsales for the immediately preceding quarter, the third quarter of this year.

Compared to the third quarter of this year, our fourthquarter advertising expenses and incentive based compensation in the aggregatewere nearly $750,000 less than the expense levels we incurred in the thirdquarter of this year, as major advertising and catalog programs were completedand incentive-based compensation accruals and provisions were adjusted toreflect the actual fourth quarter operating performance.

On an ongoing basis, we expect our SG&A expenses tooverall average approximately 14% of our sales.

Our operating cash flow continues to improve significantly.Net cash generated by operating activities in the current quarter reached $4.2million, bringing aggregate operating cash flow for the fiscal year 2007 to arecord $13.6 million. This positive cash flow allowed us to reduce our bankborrowings by $7.3 million in fiscal year 2007, as well as fund all of ourcapital expenditures of $5.8 million.

Our overall financial position remains very strong. At theend of fiscal year 2007, our current ratio was nearly four-to-one and ourdebt-to-equity was only about 0.25-to-one. And we currently have all of our $35million borrowing capability under our domestic line of credit available to usto support our future growth and acquisition opportunities.

So we continue to think we are strategically positioned tosupport our future anticipated growth.

With that, Dick will make some concluding comments.

Richard A. Southworth

Thanks, Jack. Although customer orders received in the lastfew weeks of 2007 demonstrated improvement over levels earlier in the fourthquarter, overall customer order rates in the short term remain we believeunpredictable. Accordingly, we are not currently in a position to give anyspecific guidance for our first quarter of 2008. But in the same hand, lookingahead for the entire year, we are very optimistic that we can build upon our2007 financial performance and achieve dynamic growth in revenues,profitability, and operating margins and really further enhance our company’svalue to our shareholders.

At this point, I would like to open the discussion for anyquestions you may have.



(Operator Instructions) Our first question is from TedKundtz with Needham & Company. Please state your question.

Ted Kundtz - Needham& Company

I got disconnected there for a while. Did you guys give anyforward-looking guidance?

Richard A. Southworth

No, we didn’t, Ted.

Ted Kundtz - Needham& Company

You mention an up year, you mention improving margins -- canyou give us any thoughts around that, any parameters as to what those could looklike, what range are we talking about or --

Richard A. Southworth

Well, overall our targets have not changed and that is, asyou know, our overall target and how we define dynamic growth is on average 25%increase in revenue and historically over the last four to five years now, wehave averaged about 10% organic growth and so the rest of that growth we’dexpect to supplement through acquisitions.

What we are really saying is that those longer term targetsand goals remain unchanged and we remain very optimistic we can hit those, aswell as enhanced operating margins and gross margin. It’s just that the currentenvironment and the softness of orders that we saw during most of the fourthquarter has made us hesitant to at this point in time be in a position toforecast on a short-term basis say for the next quarter, but ongoing all of ourprevious goals and targets remain in place.

Ted Kundtz - Needham& Company

Okay, because I see the book-to-bill is down a little belowone. You mentioned a strengthening in the second part of month, I guess, right?Things started picking up a little bit?

Richard A. Southworth

That last half of the quarter.

Ted Kundtz - Needham& Company

Last half of the quarter? Okay. Is that -- do you have asense that’s going to be continuing? Is that what you are thinking here? I knowwe’ve got a big potential program coming on with the [Crew 3] and maybe youcould address that a bit, update us on that.

But do you see the rest of the business sort of prettystable or firming or not getting any weaker? Any color on that?

Richard A. Southworth

You know, I think -- it’s really a very difficult questionto answer quantitatively because of the fact that we have so much of ourshipments in each quarter come from bookings during that quarter, and we didsee the last three to four weeks of last quarter were very strong and thatcontinued through right before to the holidays.

Now what we’re looking for is what’s going to happen inJanuary and February and I wish we had more visibility into that. But ordersremain fairly good but they can -- I guess they can -- it’s somewhat dependenton -- we’ve seen soft telecom. Is that going to continue or is that going tostrengthen again?

Ted Kundtz - Needham& Company


Richard A. Southworth

And your question as far as Crew 3, I think for us, webelieve Crew at a very minimum will be equal to what it was in 2007. And we arein all the new programs and you know, the funding that just came out for Crew 3and -- what we are told, there is another -- there was another funding inaddition to that that was not publicly broadcasted. But we are working with allfour of those that were funded.

There will be initial design-in revenues. We don’t expectthat to be really, really significant because those products won’t be releaseduntil the latter part of 2009. So we see much of the growth in 2008 willinitially start with the -- I think the demand change or the -- I’m trying tothink of the best way to explain it to you -- will be for the changing threatin upgrading the existing equipment, and as well as the development of the Crew3. And some of the equipment manufacturers that have already developed theirCrew 3 programs and had them tested, we are well embedded with them. So we arevery optimistic over the long haul for --

Ted Kundtz - Needham& Company

For that program but you --

Richard A. Southworth

For all Crew programs.

Ted Kundtz - Needham& Company

Okay, but your thought now is that you won’t see muchsignificant revenue from that until ’09?

Richard A. Southworth

We think for ’08 that we certainly have an upside of webelieve is around $15 million above what we did last year.

Ted Kundtz - Needham& Company

You’re talking about just Crew or you are talking about --

Richard A. Southworth

All different Crew programs, all the different manufacturersand -- which even go into the people who produce the antennas for it.

Ted Kundtz - Needham& Company

Okay. Thank you.


(Operator Instructions) The next question is from Jim Mcilreewith Collins Stewart. Please state your question.

James Mcilree -Collins Stewart

Thanks. Good evening. The telco weakness that you saw, isthat geographic? Is it focused on one geography or one customer set or is itmore broad-based?

Richard A. Southworth

It actually was in the wireless side and it was with acouple of the manufacturers.

James Mcilree -Collins Stewart

Do you have any insight if that might be for the domesticmarket or international markets or you just don’t see that --

Richard A. Southworth

I don’t see that right now. I don’t know where they shiptheir end products to.

James Mcilree -Collins Stewart

Okay. All right, and the acquisition market, have you beenactively evaluating new acquisitions or are you still digesting the last oneand --

Richard A. Southworth

No, we are very aggressively and have been, and we have amodel that we live to in evaluating these opportunities. I would say to reflecton that for 2007, we had a lot of -- we spent a lot of the time of ourresources that we would normally apply to that to getting our State Collegefacility up and running. We have three of our businesses now centered in thatfacility and it really consumes an enormous amount of our time. But we have Ithink very good opportunities going forward for acquisitions for 2008.

James Mcilree -Collins Stewart

Okay, terrific. Thank you very much.


I’m showing no further questions in queue. I would like toturn the call back over to management for closing remarks.

Richard A. Southworth

Thank you and if there are no further questions, then we’llconclude this conference call. Thank you for joining us today.


Ladies and gentlemen, this does conclude today’steleconference. You may disconnect your lines at this time. Thank you for yourparticipation.

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