Tel-Instrument Electronics' (TIK) CEO Jeff O'Hara on Q1 2016 Results - Earnings Call Transcript
Aug. 12, 2015 2:45 PM ET | About: Tel-Instrument Electronics Corp (TIK)
Tel-Instrument Electronics Corporation (NYSEMKT:TIK)
Q1 2016 Earnings Conference Call
August 12, 2015 09:00 AM ET
Executives
John Nesbett - IMS, Investor Relations
Jeff O’Hara - Chief Executive Officer
Joe Macaluso - Chief Financial Officer
Michael Schirmer - Chief Operating Officer
Analysts
John Harold - Harold & Associates
Katie Price - Northwest Management
Dennis Tondalo - Luparin Partners
Operator
Greetings, and welcome to the Tel-Instrument Electronics’ First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host John Nesbett of IMS. Please go ahead, sir.
John Nesbett - IMS, Investor Relations
Good morning and welcome to our conference call to discuss Tel-Instruments’ financial results for the 2016 first quarter ended June 30, 2015. On the call today, we have Jeff O’Hara, TIK’s Chief Executive Officer who will review the results of the company’s business operations, and Joe Macaluso, who will review the company’s financials; Michael Schirmer TIK’s Chief Operating Officer will also be on the all and available to answer questions. Following their prepared remarks, we will take questions from our call participants.
Let me take a moment to read the Safe Harbor Statement. This call may include statements that are not historical in nature and maybe characterized as forward-looking statements, including those related to statements concerning the company’s outlook, pricing trends and forces within the industry to completion dates of capital projects, expected sales growth, cost reduction strategies and the results and long-term goals of the company and other statements of expectations, beliefs, future plans or strategies, anticipated events, trends, similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and accordingly actual results could differ materially. Among the factors that could cause difference or changes in general economy, changes in the demand of the company’s product or in the cost and availability of its raw materials, the actions of its competitors, the success of our customers, the uncertainty of government contracts, technological change, changes imply relations, government relations, litigation including adherent uncertainty, difficulties and plan operations and materials, transportation, environmental matters and other unforeseen circumstances.
Remember these factors are discussed in the company’s previous filings with the SEC. The company disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this call.
Okay, with that out of the way, I’d now like to turn the call over to Jeff O’Hara. Go ahead, Jeff.
Jeff O’Hara - Chief Executive Officer
Thanks John. Good morning and thank you for joining us. We issued our first quarter press release earlier this morning I hope that you have had a chance to review it. I’m pleased to report the momentum we experienced in the second half of fiscal year 2015 has carried into the first quarter of 2016.
Compared to the first quarter last year, revenues increased 87% to $5.8 million and pre-tax income increased to $494,000, a $991,000 improvement versus year ago results. This turnaround result of higher revenues and diligently managing our cost and driving significant operational improvement this quarter.
SG&A and R&D cost at $1.36 million for the first quarter was slightly below year-ago levels resulting in operating cost increasing to 23% of revenues versus 44% in the year ago quarter. We expect to see continued progress going forward as we continue production on our major products as well as beginning Full Rate Production and the TS-4530A Army test set starting late this calendar year. We will also begin delivering CRAFT test sets to Lockheed Martin for the Joint Strike Fighter program in the second and third quarter of this year.
As a reminder, we currently have three major government programs and produce another 15 products that are sold at lower volume levels. The three major government programs are the CRAFT product, the portable pre-flight multipurpose testing solution for the U.S. Navy and Coast Guard, the TS-4530A, a portable preflight IFF testing solution for the U.S. Army and Air Force and the Bench Test which is maintenance shaft testing product for the U.S. Navy.
Last week we announced that we received a full rate production release for the TS-4530 sets for the U.S. Army. This is a major achievement for our company that we are poised to deliver and capitalize on. We expect deliveries to begin late in the third quarter due to product lead times in ordering, which ends on December 31, 2015.
We currently have an army backlog of 688 TS-4530A sets with the contract value of approximately $7.8 million. And we continue to actively market this test set to both domestic and foreign markets.
On last quarter’s call we discussed introduction of our new commercial product the TR-36 Communications/Navigation test set which is the initial commercial military offshoot of our CRAFT technology. We believe the products’ expanded functionality and streamlined operating system will make us competitive player in this large commercial market and present a sizeable growth opportunity.
The company is also actively working on its next generation commercial and military test set family that will be smaller and provide greater capabilities at a lower cost of production. It is expected that these products will start hitting the market in the next 18 months. We are not going to provide any more details and capabilities at this point. But we believe that the new family of test sets will substantially broaden our existing product line.
Last quarter we also announced that we engaged a new partner Blue Star Engineering & Electronics who will work on behalf of TIK in both commercial and military markets in Southeast Asia, including India and Bangladesh. We plan to proactively compete for business in this high growth region which offers a particularly significant opportunity for TIK’s TR-220 and TR-36 commercial products and our other new products under development.
It’s interesting to note that India also has the fourth largest military air force in the world. And we’re taking a look at whether some of our military products can be sold to this very important market.
I’d like to now provide a more detailed update on our three large government programs. First, let’s begin with CRAFT. The first quarter saw continued Full Rate Production for the CRAFT program. The CRAFT product replaces seven absolute Navy test sets collectively costs $300,000 making the CRAFT test set an excellent value for the government.
As of June 30, 2015, the company had open orders for 283 CRAFT test sets with a book backlog of $7.6 million. This includes approximately 20 test sets ordered by the Navy in the last quarter against existing IDIQ contract. We continue to work down the early lower price CRAFT orders and we should see our gross margins improving as the year goes on as we saw more of the higher priced relative to the lower price CRAFT units.
As an excellent value to the government, the CRAFT program has significant potential for sales into the balance of the U.S. Military, NATO and other friendly countries. For calendar year 2015 we have already received a $790,000 order from Lockheed Martin related to the Joint Strike Fighter program and expect additional orders from them this year. The Lockheed Martin should begin shipping in the second quarter of the current fiscal year.
With respect to international orders the drop-dead [ph] for decertifying Mode 4 IFF worldwide is January 1, 2020. Many of the NATO countries are struggling to meet this deadline so we anticipate the bulk of the overseas orders to take place in the 2017 to 2020 calendar year timeframe.
Tel has currently sold small quantities of Mod 5 test sets to 18 different foreign countries. So we are in a good position to capture significant share of the large overseas market. As you recall, we currently have three different Mod 5 flight-line test sets, Aeroflex has one Mod 5 flight-line test set that looks like our 4530A so we think we’re well positioned.
In addition, the FAA has also mandated ADS-B, the next generation GPS based navigation system be installed in all U.S. commercial and military aircraft by the same date. We are talking to the Navy about adding full ADS-B test capability to CRAFT test set which could also drive additional sales volume over the next several years.
Second, our TS-4530A product, as I mentioned earlier in the call, after experienced several extended delays we are very excited to receive the Full Rate Production release for the TS-4530A sets from the U.S. Army. We expect to begin deliveries late this calendar year.
As of June 30, 2015 we have a backlog of 688 TS-4530A sets, with a contract value of $7.8 million. And we are also actively marketing this test set to both domestic and foreign market. TIK did receive its first follow-on order from the U.S. Air Force for two TS-4530A test sets last week at a price of $21,500 per unit. These TS-4530A units have not been fielded in volume, so it is difficult to project how many additional TS-4530A test sets the Army and Air Force customers may need going forward.
The third program is I-TEST [ph]. We continued Full Rate Production in the new I-TEST product and have remaining book backlog of 55 units at a value of $3 million. We continue to market this unit to other domestic and international customers.
The last item which we did not cover during the last quarter’s conference call and we received several questions on concerns Aeroflex litigation. We completed most of the TIK depositions earlier this year but have some follow-up depositions that need to be taken next month.
The gist of the current Aeroflex contentions is more fully stated in the pleadings is a TIK used Aeroflex trade secret or confidential information to win the Army Award. It’s due to the fact that we had former Aeroflex employees who were familiar with the Aeroflex product working for our company. Management does not believe these claims have any merit and we are vigorously defending our position.
The trial is currently scheduled for February 2016 but we expect this date to slip at least 120 days.
I’ll now turn the call over to Joe to review the financials. Joe?
Joe Macaluso - Chief Financial Officer
Thank you, Jeff, and good morning everyone. As Jeff mentioned at the beginning of the call, we recorded revenues of $5.8 million in the first quarter, an 87% increase from the same prior quarter last year.
Gross profit increased to $1.8 million from $1.1 million in the prior year period, but as a percentage of sales decreased to the first quarter of 2015. The decrease in the gross margin percentage was due primarily to the shift in the sales mix mainly attributable to the increase in sales for the TS-4530A kits and I-TEST programs which have lower margins since these programs were competitively bid.
That said, our gross margin at 31% did improve slightly on a sequential basis relative to the fourth quarter of fiscal year 2015.
SG&A for the quarter decreased slightly compared to the prior year period. As the percentage of sales SG&A in the first quarter of 2016 was 15% compared to 28% a year ago. The decrease was primarily caused by reduced litigation expenses and professional fees offset somewhat by higher commissions and accrued bonus compensation.
R&D costs increased slightly in the first quarter to $492,000 as we began development work on our next generation of commercial and military products. As a percentage of sales, R&D cost declined to 8% of sales in the current quarter compared to 15% in the year ago quarter. It is expected that engineering expenditures will increase approximately to about 10% of sales on a go-forward basis as we work to bring these new products to market.
Net income in the first quarter was $279,000 or $0.09 per basic share and $0.02 per diluted share compared to a net loss of $384,000 or $0.12 per basic and diluted share in the first quarter last year. However, adjusted EBITDA for the quarter was $506,000 or $0.16 per share as compared to a loss of $206,000 or $0.06 per share in the first quarter last year.
Turning to the balance sheet, we continue to closely manage our cash balances as we continue to grow our business. Inventories increased to $4.5 million at the end of first quarter primarily due to shipments from one I-TEST vendor which we were contractually obligated to accept. The good news is that the deliveries for the I-TEST program from that vendor were made in August and we’ll begin working down these inventories starting this quarter. This should improve our operational cash flow and our cash position in the following months.
I’ll turn the call back to Jeff now.
Jeff O’Hara - Chief Executive Officer
Thanks Joe. And just with that, I want to clarify that one inventory question we currently have about $500,000 of excess inventory which are purchase contract required us to accept an advance. So, that will help as we have fully paid for all that inventory.
This quarter we continued to make excellent progress and achieve a second consecutive quarter of improving operating results. During the quarter, we began to capitalize our increased shipments of the TS-4530A kits. And with the recent Full Rate Production release we expect to realize increased volume later this year.
The higher price CRAFT units are also expected to contribute meaningfully throughout the rest of the year with $24.8 million in backlog and a large overseas market for Mod 5 flight-line test sets, we are confident in long-term sustained growth opportunity than our new product development and legacy programs provide. We also continue to actively work potential military opportunities.
We remain committed to investing meaningfully and product development with a goal of supplementing Aeroflex as the market leader in commercial avionics testing as we have already accomplished in our core IFF testing market. The TR-36 Navigation/Communication test set represents a significant opportunity to reenter and capitalize in the large commercial market with a highly competitive product.
As mentioned earlier, we’re also working diligently on a new family of low-weight commercial military test sets which we believe will broaden our product line and help the company achieve its long-term objective of returning to its traditional 50% gross margin performance levels.
With the return to solid profitability for the trailing 12 months, we are now in a position to more actively market the company to investor conferences. And we are working with IMS to determine which conferences provide the best return on investments. Thank you for your continued support. And we look forward to updating you next quarter.
Operator, we’ll now open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question today is coming from John Harold from Harold & Associates. Please proceed with your question.
John Harold - Harold & Associates
Good morning and congratulations on the turnaround, and good quarter. Listen, you surprisingly touched on the Aeroflex litigation in your opening remarks. Obviously this is really, really hurt to performance of the stock during the company’s very impressive turnaround due to the uncertainty. But the company has been a target of this frivolous litigation as I would consider it for the last six years by Aeroflex.
And earlier this year or late last year you guys said it was a top priority in 2015 to get that suit resolved. The lawsuit, in going through the court documents, I have never once seen specified specifically by the plaintiff what the damages are result of. And it has significantly prevented the stock from reaching its potential during the turnaround.
So, now that we’re several months past your statement of revolution as a top priority, where are you guys in the process? Have you maybe had any discussions with Aeroflex about them just buying out Tel-Instruments, isn’t that their ultimate goal? It seems to me that in the first place, they wanted to be able to pick up your assets on cheap when you were struggling. And now that you’re not struggling they’ll have to tie-up.
Am I way off base or there are merits to my thesis, and what about the guidance going forward EPS and revenue wise? Thank you.
Jeff O’Hara - Chief Executive Officer
Well, that’s quite the question John. I think the, the Aeroflex lawsuit is really tough for us to figure out. I think, as I said before, the gist of it is that since we had two people who knew the old product that we must have known something that helped us to win the product. And as an example, they would say, okay, you had a marketing guy working at Aeroflex and they must have known something about their pricing theories and that gave us an unfair advantage.
And it’s really biased in my mind because at the end of the day we were significantly under them on the bid price. And if we had any knowledge of their pricing, we would have come in at a $1 less. So, I think my own personal hypothesis is that it was originally filed to lead the company and interfere with the contract performance. And now it’s just kind of gotten the life of its own.
I’m not going to comment whether we’ve had any meeting with Aeroflex on it. And I can neither confirm nor deny that we’ve had meetings with Aeroflex on it. And I will say that traditionally in these kinds of situations they very rarely get to try out but there is no assurance on that. I mean, from our standpoint, we’ve done nothing wrong. And if it costs us $1 to settle, that would be a problem for us.
With respect to Aeroflex wanting to buy us, I have no idea what’s going on with the new combined COPAM Company. I think they bit-off a lot - they bit-off a very big chuck. And I don’t know what their, I have no comment about what their motivations are in this lawsuit. We just feel that we’ve got a very good case. And if it goes our way there could be benefits for us down the road. Now, when it goes our way I should say.
Now, help me out with the second question you had in terms of the guidance. So, in terms of the guidance I think with Michael Schirmer and our manufacturing improvements were very predictable company. We’ve already given you guys enough information with respect to the set production coming out. The only guidance left here is really how much our gross margin is going to improve.
And I think we’re getting to be a very predictable company and you guys can model yourself. We’ve have extensive discussions at the board and they don’t want to provide forward EPS guidance.
John Harold - Harold & Associates
Okay. Going back to the lawsuit briefly, I think that the company has the appropriate insurance to cover any losses if things go Aeroflex’s way?
Jeff O’Hara - Chief Executive Officer
No, you can never have insurance for that type of situation. I think the, I think if we thought there was a major risk, we’d be bellying up to the table. We’re very confident in our position.
John Harold - Harold & Associates
Okay. And what’s the reason for not wanting to give any EPS guidance by the board?
Jeff O’Hara - Chief Executive Officer
It’s a conservative company and it’s hard to predict in our business. We as an example you have even in the last quarter, you had DCMA that comes in, in the old days came in every week, now they’re coming in twice a month. If in the last week of the month they don’t come in you could be short $750,000, it’s just - there is just timing differences that make it a little bit troublesome for us.
I think we’re much more predictable than we were but we would like to give it another quarter to just get into a steady repeatable business.
John Harold - Harold & Associates
Well, the reason I ask is, because you guys laid out revenue guidance for this quarter and I think you beat it, and I figure that you would at least have revenue guidance for the next quarter, for Q2?
Jeff O’Hara - Chief Executive Officer
Well, I think just what we’re talking about in terms of the call and in terms of our programs that are running solidly. And we have additional JSF businesses quarter, it’s going to - it’s going to be higher than this quarter.
John Harold - Harold & Associates
Okay, great. Well, listen, I appreciate it. Thanks and good luck.
Jeff O’Hara - Chief Executive Officer
Okay, thanks John.
Operator
Thank you. [Operator Instructions]. Our next question today is coming from Katie Price from Northwest Management. Please proceed with your question.
Katie Price - Northwest Management
Hi, good morning. So, today’s call you discussed some new commercial products. And I was wondering if you’d be able to elaborate on how the commercial market figures into your current revenue breakdown?
Jeff O’Hara - Chief Executive Officer
Yes, that’s a very good question. For the last seven or eight years, this company has been focused 100% on military markets. We’ve had three major programs that have kind of consumed our business. And as a result, over the last 10 years, our company’s mix is kind of switched from 50% commercial, 50% military to kind of 90% military. And we’ve kind of seeded the commercial market to Aeroflex, we have products in the commercial market but they’re long in the tooth and not overly competitive.
We’re working very hard to come up with some exciting new products that we think beat the competition. And we think the commercial market in the next three or four years is going to be a vastly increased proportion of our business and it’s going to be profitable business.
Katie Price - Northwest Management
Great. Thank you.
Operator
Thank you. [Operator Instructions]. Our next question today is coming from Dennis Tondalo from Luparin [ph] Partners. Please proceed with your question.
Dennis Tondalo - Luparin Partners
Hi, good morning guys. Congratulations on the very nice quarter. Jeff, my question is really pretty much been answered. I know how you laid out the three programs and doing the math and as far as guidance goes. The F-35 Lockheed Martin contract, will the bulk of that be done in the second quarter or was it kind of evenly split between the second and third? How is that going to break down?
Jeff O’Hara - Chief Executive Officer
Well, in our contracts we have a FIFO these are all highly rated first-in, first-out. And these are, they have the super top priority rating for the military. So we’re obligated to finish our Navy - 25 units for the Navy before we can deliver any units to Lockheed. So, we’re actively working to complete the Navy units and then whatever we have left we can get to Lockheed. So, it’s probably going to some of them are going to slide into the third quarter.
Dennis Tondalo - Luparin Partners
Okay. But the majority will be done in the second then?
Jeff O’Hara - Chief Executive Officer
Maybe 50-50 is what Michael is nodding to me over there.
Dennis Tondalo - Luparin Partners
Okay. Well then sequentially you guys should have a very nice improvement over this particular quarter revenue wise and I would imagine income wise. And the third quarter you are on the Full Rate Production plus in Lockheed business. So, as far as I can see for the next two quarters, sequentially you’re going to get better and better each quarter?
Jeff O’Hara - Chief Executive Officer
Everyone is nodding but I was going to say no comments.
Dennis Tondalo - Luparin Partners
I appreciate it. And listen, again, thanks for all your reference and continued success.
Jeff O’Hara - Chief Executive Officer
Okay. Thank you so much.
Operator
Thank you. That does conclude today’s teleconference. We thank you for your participation today. You may disconnect your lines.
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