Attached files
file | filename |
---|---|
8-K - Cyalume Technologies Holdings, Inc. | v178427_8k.htm |
EX-99.2 - Cyalume Technologies Holdings, Inc. | v178427_ex99-2.htm |
Exhibit 99.1
CYALUME
TECHNOLOGIES, #4272139
CYALUME
TECHNOLOGIES EARNINGS CALL
March 23,
2010, 11:00 AM ET
Chairperson: Landon
Barretto (Mgmt.)
Landon
Barretto:
|
Good
day. My name is Landon Barretto, and I will be the moderator
for today’s presentation. With me today are the President and
CEO, Derek Dunaway, and Chief Financial Officer, Mike
Bielonko. Welcome to the Cyalume Technologies conference
call.
|
Mr.
Dunaway and Mr. Bielonko are going to discuss the company’s financial results
for the fourth quarter and year ended December 31, 2009. At the
conclusion of the prepared remarks, we’ll open the conference for
questions. In compliance with SEC requirements, I’d like to read the
following statement: Except for historical information, the matters
discussed in the conference call are forward-looking statements that are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking
statements. The factors that could cause results to differ materially
are included in the company’s filings with the Securities and Exchange
Commission. Forward-looking statements made during today’s call are
only made as of the date of this conference call, and the company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Gentlemen,
please proceed.
Derek
Dunaway:
|
Thank
you, Landon, for that introduction. This is Derek Dunaway, CEO
at Cyalume. Now, let me give you the agenda for today’s
call. First, I’ll provide a brief summary and commentary on the
performance for the final quarter of 2009. Afterwards, I’ll
turn it over to Mike, who will discuss our financial performance in some
detail. Then, I will discuss in further detail our performance
for the quarter and the year along our different product lines and comment
on the outlook for 2010.
|
Overall,
Q4 results were in line with our expectations but continued to lag behind last
year. The demand for our core military ChemLight product has
strengthened from earlier in the year. Sales for the quarter remained
below historical levels. Additionally, we continue to await
resolution on the Minmax [ph] flag contract, the award of which remains
pending. The ammunition business continues to shine, delivering the
strongest quarter ever for that business line, growing from $370,000 to nearly
$2 million from last year’s fourth quarter.
More on
all that in a bit, but now I’d like to hand it off to Mike to discuss our
financials in more detail. Mike?
Mike
Bielonko:
|
Thanks,
Derek. Before discussing results, let me briefly talk about
some background information. Cyalume Technologies Holdings,
Inc. was previously known as Vector Intersect Security Acquisition Corp.,
a special-purpose acquisition company. Vector acquired Cyalume
Technologies, Inc., which we refer to as CTI, on December 19,
2008. At that time, Vector changed its name to Cyalume
Technologies Holdings. In our discussion, we refer to the
entire consolidated company as Cyalume but will occasionally refer to CTI
for just the operating company where
appropriate.
|
As a
result of the acquisition of CTI on December 19, 2008, the audited financial
statements shown in our Form 10K include the consolidated statements of
operations of Cyalume for 2009 and 2008, but also CTI, known as predecessor, for
the period from January 1, 2008, to December 19, 2008. The Cyalume
Statement of Operations for 2008 itself only reflects the results of operations
of CTI for the period December 20th to
December 31st. To
assist people to better understand the changes in our business for the year
ended December 31, 2009, compared to the prior year, for 2008, we have combined
the Statements of Operations for CTI as the predecessor company to that of
Cyalume. Unless otherwise stated, the financial information discussed
reflects such adjusted financial information. In addition, the
amounts have been rounded off for purposes of the discussion.
The
combined financial statements for 2008 and a discussion of adjusted net income
and adjusted EBITDA are non-GAAP items. Please refer to the
disclosures in the company press release of March 22nd for a
detailed discussion on the use of these items and the appropriate
reconciliations to the corresponding GAAP amounts.
Turning
now to the financial results, revenues for the year ended December 31, 2009,
were 32.2 million, a decrease of 8.6 million, or about 21%, from revenues of
40.8 million for the year ended December 31, 2008. For 2009,
approximately 92% of our total revenues were attributable directly or indirectly
to sales to the militaries of the US and the militaries of over 20 other
countries, including NATO member countries. For 2008, such revenues
from the various militaries were approximately 90% of total
revenues.
For 2009,
ammunition-related product revenues increased to 6.7 million from 2.2 million in
2008. Other military-related product revenues decreased to 22.9
million in 2009 from 34.8 million in 2008. Finally,
commercial-related product revenues were 2.6 million in 2009 compared to 4
million in 2008. In Derek’s remarks, he’ll provide addition insight
into these revenue category changes, as well as the outlook for
2010.
So, let
me move on to gross profit, which for 2009 was 13.4 million compared to 20.3
million in 2008. The decrease was predominantly due to both the
decline in revenues and a change in the sales mix, whereby higher-margin
products represented a smaller percentage of total revenues. In
addition, the cost of sales for 2009 included approximately $700,000 of
amortization of inventory step-up that resulted from the acquisition of
CTI. Corresponding gross margins were 41.6% for 2009 and 49.8% for
2008. The amortization of inventory step-up lowered the 2009 gross
margin by 2.3%.
For 2010,
we expect the gross margin to improve, first as we experience resumption in
sales of military products other than ammunition. Sales of higher-
margin products should improve our mix. Second, we have received some
price increases since around the beginning of the fourth quarter of 2009 that
will provide additional margin. And third, we will not incur any
inventory step-up amortization in 2010.
If 2009
foreign operations had been translated at the exchange rate in effect at the end
of 2008, revenues for 2009 would have been $264,000 higher than reported, and
the gross profit for 2009 would have been $133,000 higher. The impact
on net income would’ve been negligible.
Now
turning to expenses, sales and marketing expenses increased in 2009 to 3.2
million from 3 million in 2008, or about 6.7%. The largest increase
was for distributor-related expenses, as we turned over and retained additional
distributors. Additionally, in June of 2009, we added two
higher-level people to direct our sales and marketing activities for our
European military and ammunition-related products categories.
General
and administrative expenses declined by 1.9% to $4.9 million in 2009 from 5
million in 2007. Increased expenses related to being a
publicly-traded company were offset by planned expense reductions in payable and
other areas.
Research
and development expenses increased by 13% to 1.5 million in 2009, due to an
expansion of that department.
Interest
expense declined in 2009, due to a decline in interest rates on long-term debt
and a reduction in the amount of debt outstanding, both attributable to the
acquisition of CTI in December of 2008.
Amortization
of intangibles expense increased to 3.5 million in 2009 from 2.7 million in
2008, due to the increase in intangible assets that resulted from the
acquisition of CTI. And in the fourth quarter, we recorded impairment
losses of 12.5 million for goodwill and 25.6 million for other intangible
assets. This overall impairment of 38.1 million was driven by our
market capitalization being significantly lower than our equity book value at
the time.
Accordingly,
for 2009, we had a pretax loss of $40.5 million compared to pretax income of 5.6
million for 2008. Our tax benefit in 2009 of 6.9 million represents
an effective rate of about 17%, down from 29% in 2008. This lower
rate is largely due to the goodwill impairment charge, which is a permanent
difference between book and tax accounting.
Inflation
did not have a material effect on the company in 2009 or 2008.
Now, let
me talk briefly just about some balance sheet items. Inventories
decreased by 2.1 million in 2009. Two primary reasons for this were
the amortization of the inventory step-up of approximately $700,000 and a
planned reduction in stocking levels of approximately the same amount to free up
cash flow.
Property,
plant, and equipment increased by about $500,000 to 8.4 million.
Capital
expenditures for 2009 were just under $1 million and were for a variety of
production and facility improvements. For 2010, we currently expect
total capital expenditures to be about 1.6 million. We also expect to
be able to finance these capital expenditures out of operating cash
flows.
At the
end of 2009, we had total debt outstanding of 30.6 million. It
consisted of 27.6 million of senior debt that carries an average rate of about
8% and 3 million of subordinated debt that carries an average rate of just over
7% and for which interest is paid in kind. During 2010, we expect to
make approximately $4 million of regular principle payments against the senior
debt. In addition, we are required and expect to make an additional
payment of $3 million against the senior debt by April 30th through
raising new money.
Finally,
at the end of 2009, to offset future taxable income and taxes, we have available
$9.5 million of NOLs that expire between 2025 and 2029 and $3.8 million of
foreign tax credits that expire between 2016 and 2018.
That
concludes my portion of the 2009 review. Let me now turn the
discussion back over to Derek.
Derek
Dunaway:
|
Thank
you, Mike. Now, I’ll provide more detail on the performance and
outlook for each of our revenue
categories.
|
First, US
military chemical. Overall, US military revenue in 2009 was down
about 28% from 2008. The majority of this shortfall was due to
challenges we faced in the first half of the year due to stocking and contract
issues which I’ve discussed on previous calls. The fourth quarter,
however, was also a soft—rather soft quarter. This was due in part to
the strong revenue numbers that we saw in Q3, as well as lower than—a
lower-than-anticipated December month. Also impacting these revenues
were delays in the renewal of one of our two DLA [ph] contracts, which was
renewed in the first quarter of this year as a five-year sole source
contract.
Based on
the feedback that we’ve received from the military, as well as our partners, we
do anticipate 2010 US military chemical revenue to rebound somewhat from 2009,
but we do not expect to return fully to 2008 levels.
Next, a
word on our reflective business. Our reflective business was also
considerably off for 2009, and as I have explained on past calls, the sole
driver to this shortfall has been the delay in the awarding of the three-year
IDI [inaudible] contract with the DLA. We continue to be assured that
the award decision is pending, and we remain confident that our product is the
best product available and it should win the contract. However, given
the length of the delay, we are not confident in the timing of the
award. Our 2010 performance will certainly depend highly on the end
result of this award. We have been given an indication that the award
will take place in the second quarter.
To
compensate for the delay, the military has placed an order with us at the
beginning of the first quarter for 250,000 flags to bridge the gap until the
contract is awarded. Additionally, we are confident that we will be
able to retain the other reflective business which we achieved in 2009, which
amounted to approximately $2 million in revenue, and at a minimum, should be
able to maintain 2009 levels in 2010.
International. Our
international business actually ended the year on a positive note, with fourth
quarter revenue returning to performance on par with 2008. Overall,
the international business was down roughly 34% from the previous
year. The decrease was mainly due to the difficult economic
conditions which especially hit the European defense sector very
hard. And as a result, we saw several militaries elect to
substantially cut back and even cancel forecasts during the year.
In spite
of the challenges there during the year, we did make some significant
investments in our sales activities in the European market in
2009. And we anticipate seeing those investments begin to pay off in
2010. As such, the year has started well, with the UK ordering back
with—consistent with historical levels. We’ve also received more
favorable forecasts from several other NATO militaries which had substantially
cut back ordering in 2009. Our plan for 2010 is to continue to expand
within NATO, introduce products which are currently not being sold overseas,
such as the infrared flag, and strengthen our distribution relationships with
other key countries outside of Europe.
A word on
the commercial business. The commercial market ended the year with
2.6 million in revenue, off from 4 million in 2008. Much of the
shortfall as well can be contributed to the overall poor economic situation of
2009. In addition, we did execute a substantial change in strategy
during 2009, building a new distribution network and moving away from the very
low margin OEM revenue which had characterized our revenue in previous years in
the commercial market.
In 2009,
we did successfully build a new web of distributive network of over 75
distributors, which we expect to see pay dividends in
2010. Additionally, at the end of the year, we launched a new
product, our flare alternative. And we feel this product is well
positioned to impact revenue during the second half of this year.
Finally,
I’ll comment on our ammunition business. This area of business was
certainly the highlight of the year. Ammunition revenue grew over
200%, from 2.2 to 6.7 million. The use of the product by the US
Marines continues to grow, and the feedback and customer satisfaction is very
high and positive. In fact, we’ve seen quotes as high as $20 million
in cost savings by the Marines as a result of using our environmentally-friendly
non-dud producing training round.
Two
thousand ten is poised to be a strong growth year for ammunition, as
well. We anticipated continued growth of our current 40-milimeter
high velocity product. We expect orders from the US Marines through
our partner, Rheinmetall, to remain consistent with 2009. We also
anticipate increased international demand for the product. We
continue to work closely with the US Army to drive demand for the 40-milimeter
training round and hope to see some results from these efforts in
2010. Additionally, we anticipate the launch of our new round, the
low velocity 40-milimeter training round. Now, we had anticipated the
orders for this round to begin being placed at the end of 2009. It
has been delayed. But we have indications that the orders will be
received around the middle of this year and production will begin in, mostly
likely, the third quarter of 2010.
The
long-term outlook for our ammunition business remains very positive, as
well. We continue to work on numerous new projects with our partners
and directly with the military in developing new ammunition applications for
Chemical Light. While many of these products certainly have
multi-year development cycles, we believe we’re on pace to demonstrate
additional applications before the end of the year.
I’d like
to say a few words about our research and development efforts. Such
work, obviously, greatly affects our future revenues. During 2009, we
concentrated on two main areas, advancing our chemical technology and developing
additional ammunition-related uses and application. We believe that
we’ve made significant progress in both areas, and in conjunction with this,
filed 11 new patents to further strengthen our intellectual
property.
So in
summary, overall, though 2009 was a certainly somewhat disappointing year
relative to 2008, we’ve made strong strides in positioning Cyalume to capitalize
on our growth opportunities in 2010 and beyond. We’ve made
significant investments in our ammunition business and remain confident in our
long-term vision of growing chemiluminescent ammunition into a new category of
ammunition.
I thank
all of you for attending the call today, and Mike and I will now happily take
your questions.
Operator:
|
Thank
you. We will now begin the question-and-answer
session. If you have a question, please press the star,
followed by the one on your touchtone phone. To withdraw your
question, press the star, followed by the two. If you’re using
speaker equipment, you will need to lift the handset before making your
selection.
|
Our first
question comes from the line of Paul Johnson with Nicusa
Capital. Please go ahead.
Paul
Johnson:
|
Thanks. Derek,
two questions. First is can we do a revenue breakout for the
fourth quarter by the major areas that you’ve talked about in the past
quarters?
|
Derek
Dunaway:
|
Okay,
certainly. Let me just—give me a second. Revenue
breakout for the—for Q4, we saw US military chemical revenue around 3.4
million; European of about 1.4; ammunition of about 2; reflective of about
400,000; and commercial of about
700,000.
|
Paul
Johnson:
|
Perfect. If
everything works out—that’s not a question. I lied, there’s
three. Second question is can you talk a little bit about the
military, the ChemLight product for the military? Two thousand
eight is proving to be a record year. Two thousand nine, the
first half, was a little bit frustrating because of significant delays;
second half good but not back to the level. Two thousand ten
sounds like it could grow a little bit from ’09. Is there some
change in procedure or protocol the military relates to what happened in
’08, or is this just a grower level of consumption of the
product?
|
Derek
Dunaway:
|
Well
to be honest, Paul, and I think of discussions with you in the past, but
we do have limited visibility into the consumption rates for the military
so there is a little bit of frustration there. The feedback
that we’re receiving from the DLA is that demand and consumption of the
product is still consistent with historic levels. Now, the 2008
numbers, I think, were skewed very high for a couple
reasons. There was some stockpiling of things, and there was
some—and some ordering that I think took place in the latter half of ’08
that probably should’ve, had it been smoothed out, really would’ve
probably taken place in 2009. Then when 2009 came along, we had
the contracting issues. They did an esteem off of that stuff—or the
stockpile that they had and as a result, certainly we saw very little
demand flowing through to us. But the word that we are
receiving from both our sales team that’s out in the field speaking with
soldiers on a regular basis, as well as from the DLA is that there has
been no change in consumption patterns and no change in the use of the
products.
|
Now, with
this type of contract, with an IDI [inaudible] contract like this, we certainly
see ebbs and flows in the demands. And looking at this on a
quarter-to-quarter basis can be somewhat difficult to really pick out patterns
because we see, you know, spikes and valleys inconsistently. I think
the realistic takeaway is in ’08, we did roughly $23 million in US military
chemical sales. This was probably a higher level than we’ll likely
see any time in the near future. But if you look back at ’07, ’06,
you know I think that the traditional demand from the US military is somewhere
around $18 to $20 million of US military chemical business, and we think that
that’s probably a steady state.
Paul
Johnson:
|
And
’10 would look similar to that steady state, best you can
tell?
|
Derek
Dunaway:
|
That’s
our expectation.
|
Paul
Johnson:
|
All
right, very good. Third question is talk a little bit about
ammo. Obviously, high velocity has done very well and the
feedback you’re getting from the Marines is strong. I assume
the delay in the low velocity is merely because of standard military
procedural—this is a change in protocol, therefore it takes them a little
while to implement it but once they get going it should book very similar
to the high velocity, very steady state, regular consumption,
very—somewhat predictable, quarter-to-quarter very predictable annual
business.
|
Derek
Dunaway:
|
Yes,
I think that’s definitely the case. And like you said, these
delays—it’s difficult to anticipate them, but they seem to always happen
with the contracting vehicles. You know, the sales effort for
this is being obviously led by our partner, Rheinmetall, and they have an
excellent relationship with the Marines and we’re very confident that this
product is going to be going through. We’re planning for the
production. We’ve been working directly with our partners on
planning to scale the production up. So it’s certainly—we’re
confident that it is imminent. It’s just a—really more of a
timing issue.
|
Paul
Johnson:
|
And
I guess a slightly philosophical question on ammo, which is
related. You’ve got the Marines out using the low velocity—high
velocity. The low velocity is coming out. If, in
fact, you—I assume the people that are using this product are, as you
said, delighted with it and as a consequence—the gentleman’s just asking a
question; I apologize—as a consequence, I assume that they tell stories
and they talk among themselves and the word is out in the military
community about this product. If it’s saved them $20 million,
that’s real money. It’s hard for that not to leak out, in a
good sense of leaking out—free marketing, if you will—to leak out to other
parts of the military, other units, other, you know, potentially
interested parties. Has that started to happen, or are we still
a little early in the development?
|
Derek
Dunaway:
|
No,
I think it is starting to happen. There’s people are becoming
more and more aware of chemiluminescence as an application within the
ammunition space. We get actually a fair amount of inquires
now, even directly from the military, directly from—and hear from other
areas of the military, asking about whether we could use a
chemiluminescent solution for different applications, be it training or
even a number of tactical illumination type of applications. So
the awareness of the application of chemical light as a payload in
ammunition is growing. It takes a little bit of time,
obviously, for that grassroots type of thing to grow. But it is
certainly growing, and I mean we’re obviously hoping to be able to
leverage that to one, push the products like the 40-milimeter into other
branches of the military, particularly into the Army, which is one of our
big focuses and efforts for 2010; but also to be able to launch some
additional development efforts which we have underway and we’re in
discussions with a number of different people about. So the
awareness is definitely growing. We’re getting some nice
internal PR from the success that we’ve seen around the [inaudible] with
the 40-milimeter high velocity. So that definitely is the case
at this point.
|
Paul
Johnson:
|
Final
question. If you get your product in either the high velocity
or the low velocity and as you look out a couple of years, not five or 10
but two or three, is there any reason to believe that this wouldn’t just
continue at some steady state kind of indefinitely once it becomes
protocol, once it becomes part of the standard operating
procedure? I assume—again, you can’t predict exactly how many
shells are going to be exploded every year, but as a steady state kind of
indefinite program, I assume.
|
Derek
Dunaway:
|
Yes,
I mean it’s obviously dangerous to rely 100% on that, and I think that
fighting very hard—our sales and our partners fight very hard to make sure
that we maintain the position, the competitive position that we have
there. But yes, I think that once you’re in and—you know, we’re
certainly seeing this as we compete and try and knock other people
out—once you’re in, it’s very difficult to get knocked out of the position
there and you become standard, you become part of the protocol, you become
part of the doctrine, you become part of the training table—those types of
things. And yes, you’re very, very well ingrained and it’s
extremely hard to displace you. So you do create somewhat of an
annuity of revenue by bringing these products out. And that’s
been our strategy all along with what we’re trying to do with
ammunition. As we bring out the low velocity 40-milimeter, as
we bring out the 30-milimeter, 18-milimeter, different projects that we’re
looking at, you know, we see these as—each of them as different blocks and
layers of revenue opportunity that should be layered upon each other and
as you get them out, you get them accepted. While they do take
a number of years to get to that point, they’re—once they’re in, they are
pretty secure for a good chunk of years going
forward.
|
Paul
Johnson:
|
Thank
you.
|
Derek
Dunaway:
|
Thanks,
Paul. Good to talk to
you.
|
Operator:
|
If
there are any additional questions, please press the star, followed by the
one at this time. As a reminder, if you’re using speaker
equipment, you will need to lift the handset before making your
selection.
|
Management,
I show there are no further questions at this time. Please
continue.
Derek
Dunaway:
|
Thank
you for your time today.
|
Landon
Barretto:
|
Okay,
great. Thank you, everyone. Thank you for attending
the call. The transcript of this will be available on the
website in the near future.
|
Operator:
|
This
concludes the Cyalume Technologies earnings conference
call. Thank you for your participation. You may now
disconnect.
|
END