Anaren's CEO Discusses F3Q12 Results - Earnings Call Transcript

Anaren Inc. (ANEN)

F3Q12 (Qtr End 03/31/2012) Earnings Call

April 25, 2012 8:30 am ET

Executives

Larry Sala - President and CEO

George Blanton - CFO

Joe Porcello - VP of Accounting

Analyst

Richard Valera - Needham & Company

Mike Walkley - Canaccord

Chris McDonald - Kennedy Capital

Greg Garner - Singular Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Anaren third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Larry Sala.

Larry Sala

Thank you. Good morning and thank you for participating in the interim fiscal 2012 third quarter conference call. I'm joined again today by George Blanton, our CFO; and by Joe Porcello, our Vice President of Accounting. I'll provide a brief overview of the results for 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 actual results to differ materially from those discussed. You're 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, earnings and our stock price.

Net sales for the third quarter were $34.7 million, down 21% from the third quarter of last year. The decline in sales for the quarter was due to the significant decline in demand from wireless infrastructure customers as well as a decline in sales of counter-IED related products within the space of Defense Group.

Non-GAAP operating income for the quarter was $3 million or 8.6% of net sales, down 47% from the third quarter of last year. Margins were negatively impacted by the overall decline in sales; however, third quarter non-GAAP operating margins improved 110 basis points from second quarter level despite a $1 million decline in net sales as a result of the aggressive cost reduction initiatives that were completed in the first half of the fiscal year. Additional cost reduction initiatives were also completed in the third quarter.

Wireless Group net sales for the quarter were $10.2 million, down 33% from the third quarter of last year due to the continuing weak demand from wireless infrastructure customers. The new orders were weak throughout the third quarter. We believe inventory levels at our customers and distributors declined substantially. Current customer order rates and forecasts are showing some strengthening which should result in an increase in Wireless Group sales in the fourth quarter.

During the third quarter, several new wireless infrastructure components and Anaren Integrated Radio or AIR modules were introduced and two new distributors were added to expand our sales channel. We continue to see a steady increase in AIR design activity and have a number of customers transitioning to volume production. Customers that exceeded 10% of Wireless Group net sales for the quarter were E.G. Components, Huawei and Richardson.

For the Space & Defense Group, net sales for the quarter were $24.5 million, down 15% from the third quarter of last year. The decline in net sales was driven largely by the decline in counter-IED related business. New orders for the quarter were $24.1 million and were driven largely by radar, passive ranging and satellite applications.

On April 9, we announced that we had received three contracts totaling in excess of $11.5 million in follow-on orders for passive ranging subsystems. Approximately $6 million of those contracts were recognized in our third quarter orders. In addition, based on contracts that were recently awarded to our customers late in the third quarter, we expect an increase in orders for our Space & Defense Group products in the fourth quarter.

Space & Defense Group order backlog at March 31, 2012, was $95 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 Blanton

The highlights of the third quarter income statement from the balance sheet at March 31, 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 accounting principles generally accepted in the United States. Please refer to our third quarter earnings release for a reconciliation of GAAP and non-GAAP measures.

Non-GAAP gross margin was $11.9 million or 34.4% for the current quarter compared to $16.3 million or 37.1% for the third quarter of last year. Gross profit as a percent of sales decreased by 270 basis points compared to the third quarter of last year due to lower sales volume resulting from unfavorable market conditions and the completion of a significant Space & Defense program.

The company realized additional cost reductions in the third quarter, including manpower, overhead and operating expenditures. Given additional cost reduction initiatives and the expected increased sales volume in the fourth quarter, we expect company non-GAAP gross margins to be between 34% and 38% for the fourth quarter of fiscal 2012.

The investment in research and development was 9% of net sales in the third quarter compared to 10.6% of net sales from the third quarter of last year. Total R&D expenditures for the third quarter were $3.1 million compared to $4.7 million in the third quarter of fiscal 2011. 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 for Space & Defense development efforts.

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