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Anaren, Inc. (NASDAQ:ANEN)

F1Q 2013 Earnings Call

October 24, 2012 8:30 am ET

Executives

Lawrence A. Sala – Chairman, President and Chief Executive Officer

George A. Blanton – Senior Vice President, Chief Financial Officer and Treasurer

Joseph E. Porcello – Vice President-Accounting

Analysts

Rich F. Valera – Needham & Co. LLC

Mike Walkley – Canaccord Genuity, Inc.

Greg P. Garner – Singular Research

Richard Valera – Needham & Company

Bhakti Pavani – C. K. Cooper & Company

Chris McDonald – Kennedy Capital Management, Inc.

Operator

Greetings, ladies and gentlemen, welcome to the Anaren First Quarter Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now turn the conference over to your host, Mr. Larry Sala, you may begin.

Lawrence A. Sala

Thank you. Good morning and thank you for participating in the Anaren Fiscal 2013 First Quarter Conference Call. I'm joined again today by George Blanton, our CFO and by Joe Porcello, our VP of Accounting.

I’ll provide a brief overview of the results of the quarter, after which George will review the financial highlights and we will then take your questions.

Certain statements made during this conference call will be forward-looking statements. These statements involve risks and uncertainties that could cause the actual results to differ materially from those discussed. You are encouraged to review our SEC filings and exhibits to those reports to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales or earnings in our stock price.

Net sales for the first quarter were $39.1 million, up 1% from the first quarter of last year driven by an increase in sales from our Space & Defense Group. Non-GAAP operating income for the quarter was $5.3 million or 13.6% of net sales, up 9.4% from the first quarter of last year, despite a less favorable overall sales mix. Margins improved for the quarter due to the improved operational execution within our Space & Defense Group and the cost reduction initiatives that were completed in fiscal 2012.

Wireless Group net sales for the quarter were $13.2 million down 27.5% from the first quarter of last year, due to decline in demand from wireless infrastructure customers. Though comparisons to the record demand in the first quarter of last year remained unfavorable, first quarter Wireless Group net sales increased more than 29% from their low point in the third quarter of last year. Demand for our wireless infrastructure products continues to improve with customers projecting increased demand for calendar 2013.

New product investments for the quarter remained focused on expanding wireless infrastructure and Anaren Integrated Radio marginal product lines. We continue to see a steady increase in AIR designs. However, we continue to also experience delays in customers ramping to high volume production. We believe that the software tools and the standard base radios that we are now introducing will accelerate customers transitioning to volume production.

Customers had exceeded 10% of Wireless Group net sales for the quarter, were Arrow Electronics, Huawei, Nokia and Richardson.

For the Space & Defense Group, net sales for the quarter were $25.9 million up 26% from the first quarter of last year due primarily to improve execution by the group.

New orders for the quarter were $24.8 million and were driven largely by radar, satellite and passive ranging applications. The group continues to experience a high level of radar and space related new business opportunities.

Space & Defense order backlog at September 30, 2012, was $104 million. Customers that generated greater than 10% of Space & Defense Group net sales for the quarter were Lockheed Martin, Northrop Grumman and Raytheon. George?

George A. Blanton

The highlights of the first quarter income statement balance sheet as of September 30, 2012 are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results to exclude certain non-cash items including equity-based compensation and intangible amortization.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with the accounting principles generally accepted in the United States. Please refer to our Q1 earnings release for a reconciliation of GAAP and non-GAAP measures.

Non-GAAP gross margin was $14.7 million or 37.6% for the current quarter compared to the $14.8 million or 38.1% for the first quarter of last year. Gross profit as a percent of sales decreased by 50 basis points compared to the first quarter of last year, due to a less favorable product mix, which was partially offset by cost reductions realized over the past several quarters. Gross margins are expected to improve with increased sales volumes in the second half of fiscal 2013. We expect company non-GAAP gross margins to be between 36% and 40% of the second quarter of fiscal 2013.

Investment in research and development was 8.5% of net sales from the first quarter compared to 10.1% of net sales for the first quarter of last year. Total R&D expenditures for the first quarter totaled $3.3 million compared to $3.9 million in the first quarter of fiscal 2012. The lower spending levels were due to a reduction in engineering personnel as a result of reduced design requirements and reassignments of a number of employees to funded non-recurring work in the group.

Space & Defense group funded non-recurring engineering programs are anticipated to generate $6 million in revenue over the next nine months. R&D expenditures were increased gradually as these funded non-recurring engineering programs are completed over the next few quarter and engineering resources are reassigned to production support in future projects.

Non-GAAP operating income was 13.6% of net sales in the first quarter of fiscal 2013, up 110 basis points from 12.5% in the first quarter of fiscal 2012. The increase in operating profit was a result of reduced operating and manufacturing expenses, which were offset by slightly lower gross margins due to a less favorable mix of business.

Operating expenses were $500,000 lower in the current quarter compared to the first quarter of fiscal 2012, as a result of the company’s cost reduction efforts. The majority of cost reduction efforts have been completed and operating expenses are anticipated to remain at current levels for the reminder of the fiscal year with the exception of slight growth in R&D expenditures.

Non-GAAP net income was 9.4% of net sales or $0.27 per diluted share for the first quarter of 2013 compared to 8.6% of net sales or $0.23 per diluted share for the first quarter of last year.

The effective income tax rate for the first quarter of fiscal 2013 was 32% compared to a tax rate of 30.7% for the first quarter of last fiscal year. The overall projected effective tax rate for fiscal 2013 excluding one-time adjustments is expected to be approximately 32%.

Balance sheet highlights include cash provided by operations was $2.1 million in the first quarter. Capital expenditures were $1.3 million. Cash, cash equivalents and investments were approximately $46 million as of September 30, 2012. The company borrowed $8 million from the existing revolving credit facilities in the quarter. The company repurchased 469,000 shares of its common stock in the first quarter. There were approximately 446,000 shares remaining under the current core repurchase authorization as of September 30, 2012.

Accounts receivable were $33 million at September 30, 2012, up $4 million from June 30. Day sales outstanding were 79 days, up 9 days from the last quarter. The AR balance includes $6 million of unbilled receivables related to non-recurring engineering projects that are using a percent of completion accounting methods. Day sales outstanding excluding unbilled receivables was 69 days as of September 30, 2012.

In addition negotiations with several significant wireless customers resulted in extended payment terms of approximately 30 days, and increased accounts receivable by about $2 million in the current quarter.

Inventories were $37 million at quarter-end, up $4 million compared to June 30. The increase was due to additional inventory recorded to support wireless vendor managed inventory, remain our high level of customer service.

Lawrence A. Sala

Thanks. For the second quarter of fiscal 2013, we anticipate comparable sales for both the Wireless Group and the Space & Defense Group compared to first quarter levels. As a result, we expect net sales to be in the range $37 million to $41 million. We expect GAAP net earnings per diluted share to be in the range of $0.17 to $0.25 meeting anticipated tax rate of approximately 32% an inclusive of approximately $0.05 to $0.06 per diluted share related to expected equity-based compensation expense and amortization of intangible assets.

Non-GAAP net earnings per diluted share are expected to be in the range of $0.22 to $0.30 for the second quarter.

We will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Rich Valera of Needham & Company. Your line is open.

Rich F. Valera – Needham & Co. LLC

Thank you. Good morning, gentlemen. Larry, with respect to wireless, I heard your comments that you expect, your customers are forecasting some growth in the next calendar year, but wondering what the kind of monthly demand trends looks like as you exited the quarter just reported and are now sort of a month into the next quarter?

Lawrence A. Sala

No. I think like we were seeing, when we spoke last quarter, this quarter looks slightly stronger on the wireless infrastructure side than last quarter. Historically, this is a seasonally weak quarter for us. On the medical product side, it’s not a large product segment, but we do traditionally see a decline this quarter as our medical customers like to reduce their inventory levels at calendar year end and then we see typically a stronger pickup in the first calendar quarter on the Maple side.

So we’re seeing relative to last quarter a bit stronger demand on the infrastructure side this quarter than we were last and it’s pretty consistent through the quarter. It’s not back-end loaded or front-end loaded. It’s pretty consistent through the quarter. And we’d say today from what little end market demand we have visibility too, China is driving a good part of that strength right now.

Rich F. Valera – Needham & Co. LLC

Great, that’s helpful color. And then with respect to Space & Defense, you talked about that, I think being kind of a mid-single-digit grow at fiscal 2013, has anything happened to change that over the last quarter?

Lawrence A. Sala

I’d say we are a bit more optimistic now and we feel like we pretty much have every sales book that we’re driving for revenue for us for the year. And I’d say we are leading towards probably high single digit organic growth on the Space & Defense side of the business, with the back half of the year being appreciably stronger on the Space & Defense side in the first half of the year.

Rich F. Valera – Needham & Co. LLC

Not that anyone can predict it, but what are you thoughts if sequestration were to happen, how that – any sense of how that would effect your business?

Lawrence A. Sala

Obviously, we’re as concerned as anybody with that, and can’t – don’t have great ability to predict. We think in the near-term it will have minimal impact on us, obviously most of what – which I said are years relatively booked, so we don’t expect things quarters that are placed to be with drawn. Longer term, the programs we are on are in the – I guess the beginning stages of volume production we think more than the tail end. There is no big single platform that we’re highly concerned with.

The largest revenue stream we talked about in a lot, it’s TPQ-53, it’s a ground mobile radar for the army. We think it’s a high priority, but that’s our one high revenue concentration, we’re expecting 10 million across the year from that particular project. No other single project is anywhere near that magnitude to us. As far as new starts, we think the next generation of ship borne radar, it’s called AMDR is a very significant future potential program for us.

Certainly that would inhibit our ability to grow in the future of those kinds of programs get canceled. But other than a lot of different variables, it’s very difficult for us to be too specific about potential impact.

Rich F. Valera – Needham & Co. LLC

That’s helpful. And towards your respective gross margin, one was that gross margin a pretty clean number this quarter, in other words were there any sort of one-timers positive or negative in it? And two, where do you think it takes the revenue line to get to that 40% sort of level in gross margin we’re hoping kind of low $40 million revenue?

George A. Blanton

Right, there really weren’t any unusual gross margin events. We did have a little less favorable product mix in our satellite business, but not anything that really stands out. So I don’t think there is anything unusual. Obviously, the wireless business sequentially came back in the third quarter of last year both in the fourth and this quarter that was helpful from a gross margin standpoint.

And I think that to answer your question about 40% gross margin, I think probably that $40 million range given that we have the similar product mix of Wireless and Space & Defense, I think that could get us to that 40% gross margin. It also gets us close to that 15% operating profit too. So a little more volume in the Wireless business would be very helpful to our gross margins.

Rich F. Valera – Needham & Co. LLC

Understood. Okay. Thanks gentlemen. (Inaudible).

Operator

Our next question comes from Mike Walkley of Canaccord. Your line is open.

Mike Walkley – Canaccord Genuity, Inc.

Great. Thanks. Larry, I was wondering if you could talk a little more about the Wireless business, you talked about some extended payment terms, I know but then you talked about improved visibility for the calendar 2013. Can you just provide some color; did you get better pricing for the extended payment terms and just kind of what you’re seeing for the visibility for 2013? And then also mainly for the December quarter, I thought it would be up a little bit from your prior comments, but it sounds like it’s flat-ish, so maybe you can just walk through all the moving parts there for us?

Lawrence A. Sala

Sure. We started with payment terms and pricing, I guess, just generally we never get better pricing for anything it seems in the Wireless side, so market where our customers are constantly expecting reduced prices. So, no, we didn’t gain a lot there. The transition from working with an independent distributor to directly with a volume purchase agreement without saying we now have the relationship with Huawei as well the two largest players in the market. Those volumes are vendor managed inventory arrangements and have longer payment terms for us. So part of transitioning to that type of an arrangement of supply extended payment terms. For us, that’s – in this stage of interest rates not the biggest issue for us with the quality of payers that they are.

From a going forward standpoint worth negotiating next year arrangements with customers, we're seeing – generally, we don’t have very good visibility, but generally those forecast are up from this past year, not up substantially, but up maybe 10% to 20%. Again all of those purchase agreements anticipate fairly substantial price reductions again next year. So, none of those price reductions were still seeing some increased demand for calendar ‘13.

Right now, we’d say from the visibility that we have for next year, as usual the beginning of the year is a little weaker and it strengthens in the middle of the year and that’s always pretty typical of the infrastructure business on the forecast we get.

For this quarter, yeah, I’d say our infrastructure growth expectations are a little less now than they were when we had our call last quarter, we thought this quarter would be a little bit stronger, but not appreciably different from what we were expecting three months or four months ago. So I’d say if anything on the Wireless side, our bias is that there is potential for Wireless to maybe be a little bit stronger than what we’re projecting, but not dramatically different than what we’re projecting.

Mike Walkley – Canaccord Genuity, Inc.

Okay, great, and that’s helpful, thanks. And then George just – good job on the OpEx management (inaudible) but can you just walk us through the R&D increase again? Will it take up OpEx you think maybe to a $9.5 million to $10 million per quarter range or is it a smaller increase and that R&D line was, it sounds like the other two line items you will be basically flat throughout the fiscal year?

George A. Blanton

Yeah, we’ve got – over last year the D&A portion, we said, we talked about the bonus expense going up and that was offset by other cost reductions. We are spending a little bit on some continuous improving activity right now, but for the most part, the operating expenses will just trickle up slightly, primarily due to research and development going up a little bit more as these non-recurring engineering contracts roll up. We have just a couple of large contracts that will roll up over the next – this quarter and next quarter.

And so we see that going up, maybe $200,000 to $300,000 throughout the end of the year from this quarter, just a gradual uptick. So I think, other than that that’s what we would expect going forward, everything else would remain relatively constant from the first quarter.

Mike Walkley – Canaccord Genuity, Inc.

Okay, great. That’s helpful. And Larry, just last question from me, and I’ll pass it on. Just on the Space & Defense side, you had another strong quarter of bookings. Was there anything in this quarter that looks like late in the quarter larger lumpy product that generates some upsides to revenue or maybe just $25 million to $26 million kind of a good way to think about the business over time?

Lawrence A. Sala

Yeah, I think for the first half of the year, we are thinking at this $25-ish million range is where we’ll be. In the second half of the year, we are thinking $26 million, $27 million. It’s probably more of the range will be. And like I said, most of – all of that is booked business and really going to be driven more by execution than any expected new orders.

Mike Walkley – Canaccord Genuity, Inc.

Okay. Thanks for talking my questions.

Operator

Thank you. Our next question comes from Greg Garner of Singular Research. Your line is open.

Greg P. Garner – Singular Research

Thank you. Good morning. I just want to make sure I understood the progress on the forecast for wireless that on an ongoing basis there really isn’t much change in what you’re seeing from your end customers, what they are forecasting for demand and that does account for 10% to 20% up from last year. Is that right?

Lawrence A. Sala

Yes. So just to be clear, we have quite good visibility of the quarters. So for the rest of this quarter, we’ve got forecast that are very clear and our expectation is that business will be relatively flat, maybe up a little bit on our total wireless business. The infrastructure side, it looks up a little bit; our medical business looks down a little bit in the current quarter.

For calendar ’13 and beyond, we have very limited visibility. We negotiate annual purchase agreements, our customer – only a couple of customers even dare to forecast the next year and negotiate the next year with us. So we have much reduced visibility out beyond the quarter, which is why we’ve always provide a quarterly guidance.

Those annual negotiations are happening now, their demand looks up given the price reductions that we typically see, their forecast still look up some to us from what we’ve experienced in the last year, and we would say maybe 10%, 20% at the strongest of what we’ve seen, but it’s very limited from very few customers. And obviously, they’ve been accurate and conservative most of the time, but in the last year, they’ve been very challenged to provide us with good long-term forecast.

Greg P. Garner – Singular Research

Okay. In those percent increases, I understand that 10%, the 20% will be the high-end. Is that volume or is that volume after – or total revenues after price…?

Lawrence A. Sala

That’s revenue. That’s revenue for us.

Greg P. Garner – Singular Research

Okay. All right. I just wanted to be clear on that. That’s all.

Lawrence A. Sala

Yeah.

Greg P. Garner – Singular Research

On the AIR product, you mentioned the software tools, can you tell us more about what these are – what that mean for ramping up some of these product designs?

Lawrence A. Sala

Our initial radio introduction, product introduction right up until the last quarter or so, we’re proprietary type radios where software coding is virtually unique to every different radio design. So every application, our customer has to develop their own software protocol and tools to implement their wireless communication link.

And we found, as we’ve introduced proprietary radios, at a lot high percentage of our customers, it helped them with their hardware implementation and accelerated that development, but they were still challenged on the software side. So we’ve been developing our own proprietary software tool to help customers implement a high percentage of the types of applications that we see in the market place.

From a fairly simple to use tool accelerate that type of development to more standardize the software implementation of the communication link. And we’ve just started introducing that tool to customers in the last couple of months and we’ll be broadly introducing it over this quarter. We’ve also started to introduce standard space radios. We announced our ZigBee product line.

We will be now announcing other standard base radios over the next couple of quarters. We are – there are more established tool set in software protocols already out there for customers to choose from and should be able to get their products up and running faster both from the hardware side with our Radio Modules. And the software side using the more readily available standardized software tool sets that are out there for these standard types of radios.

So we think both of those factors should start to accelerate customers getting to that volume production where we just see a significant lag from our original expectations and with a lot of customers continuing to develop and design in our products with very a few coming up the other end of the pipeline into volume production.

Greg P. Garner – Singular Research

Okay. Well was there any meaningful contribution this first quarter from the AIR products and just wondering what’s it like?

Lawrence A. Sala

There was not, in fact AIR was actually lower than our expectations last quarter and will probably be a little lower this quarter. We hope to start accelerating at the beginning of calendar 2013. Our largest volume customer had to transition through a re-design this quarter, a very unexpected re-design that had a significant impact on our revenue this quarter, because they had ramped to fairly significant volume than we were expected to be a big part of our revenue this past quarter. Then we expect that that will get going again within the next month or so and we will start to see a more rapid growth in revenue and bigger contribution from AIR as we get into the first part of calendar 2013.

Greg P. Garner – Singular Research

Yeah. And how does the margins, the gross margin line with Space & Defense versus Wireless to the AIR products?

Lawrence A. Sala

The AIR products see kind of in between the two.

Greg P. Garner – Singular Research

Okay.

Lawrence A. Sala

So whereas we said our gross margins are kind of mid-30s, Space & Defense mid-40s or higher, Wireless, we’d say, the AIR products, our target to be right kind of at that 40% gross margin range.

Greg P. Garner – Singular Research

Okay. And one last question on the Space & Defense, you mentioned about some radar opportunities, is this the AMDR that you mentioned about the new navy or radar system or shipborne radar, is that…?

Lawrence A. Sala

That’s one of them. So we have a couple of development contracts as there has not been a down selection to one supplier on that program yet. So we – that has been a part of what we’ve talked about for the last year or so of large development contracts that are in our Space & Defense Group, so those continue. But there is several others as well that we supply into, not just the TPQ-53 system and AMDR, but just generally we’re seeing a lot of activity in Phased Array Radar applications.

Greg P. Garner – Singular Research

And what would be a normal timeframe from where you are now till that becomes higher volume deployable project is of course if we…?

Lawrence A. Sala

Well, a program like AMDR would be very similar we would hold to a program like TPQ-53 or what was originally EQ-36. That program for us, we have our first volume production order six months ago, but that program has been meaningful to us, well probably five years or more, meaningful being $4 million, $5 million a year first development work, then engineering and prototype model, building then low rate initial production and qualification unit, manufacturing and now volume production.

We would expect a program like AMDR to go through a very similar cycle. This past year, it’s been that short order magnitude for us, millions of dollars of revenue for a very initial designs and development. It will be another four or five years before we are in production and over those timeframe, it could be $5 million to $10 million a year program for us. Long-term, we think a program like AMDR would be substantially larger than other programs we have. We would expect that program could be a $20 million a year or more program for us, given the kinds of content and complexity of that system.

Greg P. Garner – Singular Research

Okay. Thanks I appreciate that.

Lawrence A. Sala

Yeah.

Greg P. Garner – Singular Research

And just one last question on the share repurchase, the current thoughts about – if they were to be executed to do it with some debt also like it was in the prior quarter?

Lawrence A. Sala

Well, we just had some investments that were out a little longer in time and rolling off and we just elected to draw down use of debt unless those and investments, run their course. So we didn’t really have a great need for cash. About $16 million of our cash sits in China, and so we still have ample available cash balances, but we would increase in receivables due to these unbilled receivables, we expect those to roll off fairly substantially this quarter or next. So we’re certainly having a wherewithal either way we choose to continue to be aggressive in our share repurchase.

Greg P. Garner – Singular Research

Okay, great. Thank you.

Lawrence A. Sala

Yeah.

Operator

We have a follow-up question from Rich Valera of Needham & Company. Your line is open.

Richard Valera – Needham & Company

Thanks, George. Just a quick one. Can you tell me the D&A for the quarter?

George A. Blanton

I am sorry, depreciation and amortization?

Richard Valera – Needham & Company

Yes.

George A. Blanton

I think it was about the same in total amount for the depreciation and amortization for the quarter.

Joseph E. Porcello

I think it was $2 million.

George A. Blanton

Yeah, it’s just under $2 million. I know our depreciation expense year-over-year was down to couple of $100,000, we had some significant assets rolling off. So we think that that level will continue throughout the rest of the year.

Richard Valera – Needham & Company

I’m sorry, Joe, what did you say?

Joseph E. Porcello

$2.1 million.

George A. Blanton

$2.1 million, Rich.

Richard Valera – Needham & Company

Got you. Okay. And with respect to AIR, I appreciate all the commentary you gave there. Just wondering what’s going on with your relationship with TI, it seems like, if anything – they’re increasing their focus on embedded as they’re exiting some of their wireless businesses, just wondering, it does sound like there could be potentially some disruption there, but ultimately perhaps even more focus in embedded, which is sort of where you work with them, just wondering if you’re seeing anything there as it relates that company’s structure?

Lawrence A. Sala

There’s definitely seem to be reshuffling resources and I won’t comment on their business expectations, but emphasis seem to continue to be on these low power wireless products and it certainly seems like it should continue to advantageous for us, we’re still very close relationship, see their product pipeline that product pipeline seems to be strengthening with a good flow of new products coming over the next year and we hope to continue to be their leading partner in developing modular solutions of those products. So I’d say generally our sense is, right now, the changes they are making are favorable for us.

Richard Valera – Needham & Company

Great. And just wanted to clarify the comments around the 10%, I think, increase in the Wireless. What is that number based on Larry? Is that something you are…

Lawrence A. Sala

That number is based on the annual forecast that we are starting to see as we enter into negotiations for next year’s demand from our couple of larger customers. So it’s a very limited set of forecast.

Richard Valera – Needham & Company

Presumably, your two largest…

Lawrence A. Sala

It’s really just an annual number. We don’t really get a lot of color on how they expect that demand to flow throughout the year.

Richard Valera – Needham & Company

Sure. And presumably your two largest customers will be included in that?

Lawrence A. Sala

They’re really the only ones.

Richard Valera – Needham & Company

Right, right, that gives that kind of forecast.

Lawrence A. Sala

And we do negotiate pricing for the coming year with a couple of other large customers, but they typically don’t provide us any real detailed forecast.

Richard Valera – Needham & Company

Right. And how would you assess the historical reliability of those types of numbers, it seems like they’ve been sort of a bit hit or miss, but what’s your sense of the reliability of those numbers shortly?

Lawrence A. Sala

We’ve been doing this for more than 15 years and our guess would be probably 80% of the time they are accurate to conservative and 20% at a time, they’ve been substantially aggressive, more aggressive than reality.

Richard Valera – Needham & Company

Right.

Lawrence A. Sala

We’d say the majority of time, more than the majority of time, they are under forecasting of the business expectation.

Richard Valera – Needham & Company

Okay, that’s great. Thanks gentlemen.

Lawrence A. Sala

Yeah.

Operator

Thank you. Our next question comes from Bhakti Pavani with C. K. Cooper & Company. Your line is open.

Bhakti Pavani – C. K. Cooper & Company

Hi, George, hi, Larry.

George A. Blanton

Hi.

Lawrence A. Sala

Good morning.

Bhakti Pavani – C. K. Cooper & Company

I had a question for the Space & Defense Group. What percentage of backlog would be convertible into revenues over the next six months, if any?

Lawrence A. Sala

It’s probably something like over the next six months, I can tell you up in top of my head, but over the next 12 months, 75%, 80% of our backlog is probably shippable in the next 12 months. We have our unit circuit business, which is very much a book and ship business, and that’s the only real part of our Space & Defense business, that’s – that kind of book and ship business. The real programmatic business that is more annual types of orders, as I said, that’s all pretty much booked out through the next nine to 12 months of expectation.

Bhakti Pavani – C. K. Cooper & Company

Okay. And would it be possible to give a backlog distribution between the space and the defense, how much of the backlog of $104 million is, I mean, what percentage of the backlog is related to the space and what percentage to the defense?

Lawrence A. Sala

Yeah, I can only give you a guess. I don’t have that accurately. We’ve been lining revenue wise something on the order of maybe 25% of the business being driven from Space moving to 30% or more, so it’s definitely been growing. I mean, it’s somewhere in that relative range. So if I look at the backlog, because we do have a fairly substantial backlog of iridium. The iridium program is probably still in the high-teens, millions of our backlog. The backlog is probably skewed more towards space than that 25% or 30%.

Bhakti Pavani – C. K. Cooper & Company

Okay.

Lawrence A. Sala

So, that – those orders of magnitude, we can give you a detailed estimate.

Bhakti Pavani – C. K. Cooper & Company

Yeah, that would be helpful.

Lawrence A. Sala

Yeah.

Bhakti Pavani – C. K. Cooper & Company

Any potential opportunities, you are focusing on the commercial aerospace side?

Lawrence A. Sala

We continue to develop products through our M.S. Kennedy subsidiary for commercial aerospace applications. Mainly in the motor control, in the control side, doing things like high power controls for wing flap actuations and those types of things. So we’d expect over the next year for those to start being revenue streams for us, some of those aircraft that those are been qualified and are starting to move to production. And it’s an area that we are trying to put out increased emphasis on given the concerns with the defense budget.

Bhakti Pavani – C. K. Cooper & Company

Any particular aircraft that you are focusing on or are there variety of platforms?

Lawrence A. Sala

There is one large European aircraft, I don’t know that we have the approval to disclose where we are participating. So I am hesitant to do that.

Bhakti Pavani – C. K. Cooper & Company

Okay. Also with regards to the defense budget that since the revolution has not – I mean there is no resolution on the budget and we have already started the fiscal year, it looks like the government is again in the continuing resolution, and if I look at the bookings of last quarter they were about $34.8 million, and I believe this quarter is $24.8 million. So are you seeing any kind of shift or is there any pull back or delay in the new bidding opportunities?

Lawrence A. Sala

No, I wouldn’t read anything at all in to that. In our expectation for this year, we’ll have a positive book to bill even at current revenue expectations. It’s a very lumpy business from an orders standpoint. We get $10 million and $15 million and $5 million orders here and there. They can pushed out or pulled in for a multitude of reasons that are outside of our control. So I wouldn’t read anything into the fact that we had a large quarter last quarter and about a 1:1 book-to-bill this quarter. It’s just not a booking shift, linear kind of business.

Bhakti Pavani – C. K. Cooper & Company

Okay. Just last question, any kind of visibility on the federal tax credit you’re expecting maybe in this year and the coming quarters?

Lawrence A. Sala

Well, the R&D tax credit if it’s reinstated at the end of the year, would be very favorable for us. We think there is – if that happen it would be about a $1.2 million that we would receive and I think that translates in the $0.09 or $0.10 a share if it’s reinstated. And the timing, we have no idea unlike everyone else and that would obviously adjust our tax rate, our tax rates for the year.

Bhakti Pavani – C. K. Cooper & Company

Yeah.

George A. Blanton

Our tax rates for the year in the 26% to 27% range. And we’re talking 32% right now, but it would be retro for I think six quarters for us.

Bhakti Pavani – C. K. Cooper & Company

Okay.

Lawrence A. Sala

So the question is does it get reinstated first and then if it’s reinstated, does it get reinstated retroactively. Right now we are in the worst case position of 32% tax rate, the most favorable would be we stated retroactively and drive our annual tax rate down as George said in that 25%, 26% range. So it’s a big swinger for us, wondering if that – if it gets reinstated at all and then if it gets reinstated retroactively.

Bhakti Pavani – C. K. Cooper & Company

Okay. Thank you very much guys.

Lawrence A. Sala

Thank you.

Operator

Thank you. We will have the next question from Chris McDonald of Kennedy Capital. Your line is open.

Chris McDonald – Kennedy Capital Management, Inc.

Good morning.

Lawrence A. Sala

Good morning.

Chris McDonald – Kennedy Capital Management, Inc.

How does the bid pipeline look relative to foreign military opportunities?

Lawrence A. Sala

We said in many different meetings, our foreign military business is probably more than half our business these days. We do a tremendous amount of exported business through our U.S. OEM, so a good percentage of what we do with (inaudible) especially is exported. Our direct export business is looking fairly healthy as well. We are seeing increases in spending in South Korea where we directly sell shipbourne jamming subsystems and as well as an increase in opportunities through our OEM customers. So that side of the business has really been, I think the bigger driver of strength than the U.S. market has been.

Chris McDonald – Kennedy Capital Management, Inc.

Very good. Thank you very much.

Lawrence A. Sala

Yeah.

Operator

Thank you. I’m showing no further questions in the queue at this time. I’ll hand the call back to management for closing remarks.

Lawrence A. Sala

Great. We greatly appreciate your participation and we look forward to speaking to you again next quarter.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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