艾睿電子 (ARW) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Nu Horizons third quarter fiscal year 2009 earnings conference call. Please take note that today's call is being recorded. For the purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, our statements today may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made with information currently available to the management, including Management's own assessment of the Nu Horizons industry and competitive landscape.

During the presentation, your line will be in a listen-only mode. At the conclusion, we will -- there will be a question and answer session and instructions on how to ask a question will be given at that time. And now for opening remarks and introductions, I would like to turn the call over to Mr. Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corporation. Please go ahead.

Thank you. Good afternoon, and welcome. I am Richard Schuster, President and Chief Operating Officer. With me today is Arthur Nadata, Chairman and Chief Executive Officer, who is off site; Kurt Freudenberg, the Company's Executive Vice President and Chief Financial Officer; Kent Smith, Executive Vice President of Nu Horizons Distribution Division, and Connie Chandler with our Investor Relations firm. Kurt will give an overview of the numbers for the third quarter of fiscal 2009. I will then give a brief market overview and synopsis of the industry and our Company's performance, and then we will open the call to questions you may have. At this point, I would like to turn the call over to Kurt.

Thank you, Rich, and good afternoon, everyone. Our balance sheet is strong and liquid, with $187.206 million in working capital and a current ratio of 3.2 to 1 at November 30, 2008. Our day sales outstanding was 68. Our inventory turn, 5.8 times on average. At November 30, 2008, we had an aggregate of $61.6 million available in all of our bank credit lines and as of today, our outstanding debt is down to $45.4 million. Additionally, we had $5.8 million in cash and bank deposits at November 30, 2008. The Company continues to believe that the resources provided by cash flow from operations and credit agreements will be sufficient to finance its operations for at least the next 12 months.

Turning now to the results for Q3 of fiscal 2009, net sales were $188.2 million compared to $192.8 million for the comparable period a year ago, a decrease of 2.4%, with this decline resulting from lower demand associated with slowing economy for the third quarter. We had net income of $150,000, or $0.01 per diluted share as compared to a net loss of $373,000 or $0.02 per diluted share for the third quarter of last year. The net income in the third quarter 2009 included an income tax benefit of $1.1 million, or $0.06 per diluted share based on a domestic loss in the third quarter and tax adjustments related to the fiscal 2008 federal tax filing, partially offset by foreign income taxes. Overall gross profit margin for the quarter ended November 30, 2008 was 15.1% as compared to 16.5% for the prior year quarter and 15% for the current year-to-date compared to 16.7% in the comparable prior year. The decrease in margin for the quarter and nine months as compared to the prior year periods is attributable to an increase in lower margin sales in the Asian market and higher amount of low margin business in North America and Europe, as well as higher freight costs, customer discounts and lower supplier discounts.

For the nine months ended November 30, 2008, net sales increased to $600.184 million from $553.487 million in the comparable period last year, an increase of 8.4%. Net income for the nine months ended November 30, 2008 was $1.497 million, or $0.08 per diluted share compared to a net income of $2.098 million, or $0.11 per diluted share in the comparable period from last year. The $46.7 million increase in sales for the nine month period is largely attributable to $42.3 million increase in Asian sales and a $12.8 million increase in our systems business, offset by lower sales in North America and Europe. Sequential total sales decreased $23.594 million, or 11.1%, due to lower global demand associated with the current economic slowdown, along with $13.8 million of nonrecurring system orders for discontinued Sun Microsystems products in Q2 fiscal year 2009. Gross profit in the systems group in Q3 increased $1.784 million, or 17.1% of revenue compared to $1.183 million, or 9% of revenue in the same period of the prior year. The increase in gross profit percentage over a year ago is due to the Company's continuing efforts to offer high margin value added solutions to its customers. Overall, our operating expenses for the third quarter ended November 30, 2008 as a percentage of sales decreased to 15.2% from 15.7% in the prior year. And year-to-date was 14.3% compared to 15.1% in the prior comparable period.

Total operating expenses for the third quarter of fiscal 2009 decreased $1.6 million from the prior year quarter, primarily due to a reduction of $1 million of professional fees related the to the previously reported 2007 restatement of our financial statements related to income taxes and the previously disclosed inquiry by the Securities and Exchange Commission and the action captioned, "In the matter of Vitesse Semiconductor Corp." and the Company related internal investigation being conducted by the audit committee. Additionally, selling expenses decreased $1.4 million primarily as a result of lower commissions and a previously announced reduction in work force. However, these cost savings were offset by warehouse consolidation costs of $295,000 and the inclusion of $505,000 in operating expenses associated with C 88, a franchise distributor of electronic components based near Copenhagen, Denmark, which were required on December 9, 2008 and therefore, were not included in the prior quarter. Year to date our operating expenses as a percentage of sales decreased to 14.3% from 15.1%. Total operating expenses increased $2.3 million, or 2.7% as compared to the prior nine month period, primarily due to the previously mentioned Vitesse related professional fees which increased $1.5 million where our severance costs related to the consolidation of the Company's New York warehouse into the expanded Mississippi warehouse and the inclusion of C 88 operating expenses since its acquisition on September 9, 2008.

Due the current economic downturn and related increased product demand, the Company has recently taken several cost reduction actions. In the third quarter of fiscal 2009, the Company eliminated its employer contribution match to the employee 401(k) plan. Additionally, in the third and fourth quarters of fiscal '09, the Company announced a reduction in its work force and implemented a salary reduction program. Finally, the Company is adjusting its commission plans to reduce commission rates in fiscal 2010. Collectively, the Company expects these actions to result in approximately $6.5 million to $7.5 million in savings annually, not including approximately $300,000 in severance costs. Interest expense for the quarter ended November 30, 2008 was $740,000, down $421,000 from $1.1 million in the prior year period. This is primarily due to a reduction of the effective interest rate to approximately 4.5% from approximately 7.6% in the year-ago quarter. Interest expense for the year-to-date period ended November 30, 2008 was $2.5 million, down $564,000 from $3.1 million in the prior year period. This is due to a reduction of the effective interest rate to approximately 5.2% from approximately 8.6% in the prior year period. Our effective tax rate was a benefit of 127.6% and its revision of 161.1% for the three month periods ended November 30, 2008 and 2007, respectively. Our effective tax rate was a benefit of 9.1% and provision of 56.9% for the nine months ended November 30, 2008 and 2007 respectively. The effective tax rate differs significantly from a statutory rate of 35% for the three and nine months ended November 30, 2008, primarily due to domestic tax benefits through either as a result of the domestic loss before tax, which was partially offset by foreign income tax.

Also, in comparing our fiscal 2008 tax return, we determined that certain tax adjustments for permanent items to the Company's tax revision were required, resulting in recording an additional tax benefit of $586,000 for the three and nine month period ended November 30, 2008. The effective tax rates differ from the statutories of 35% for the three and nine months ended November 30, 2007 primarily due to penalties and interest associated with the correction of errors in the US, federal and state tax returns. On an adjusted basis, excluding the professional fees mentioned above whereas consolidation costs including severance, tax benefits and other one time items, diluted earnings per share would have been $0.01 per share for the three months and $0.18 per diluted share for the nine months ended November 30, 2008, respectively, compared to $0.07 and $0.27 per diluted share in the comparable periods in the prior fiscal year. Now I'll turn the call back over to Rich.

Thank you, Kurt. During the third quarter of fiscal 2009, we faced significant obstacles in the market resulting from the global economic conditions, but we also continued to make progress in certain key areas of our operations while maintaining our financial strength. In addition, we believe the efforts we're implementing to reduce our cost structure which we announced today will better position us to navigate through these difficult times. Overall, the worldwide slowdown in demand put pressure on our sales distribution activity during the third quarter of fiscal 2009 across all the geographic regions that we serve. As we have reported, top line revenue growth was down sequentially 2.5% in Asia, 3.3% in North America, and 6.3% in Europe. The most significant challenge in Asia was the order weakness and lack of visibility as is true in the rest of the world. In particular, EMS customer orders were down significantly compared to quarter two, representing the majority of the sales decline in this region during the third quarter. However, local OEM business remains flat during the quarter and we continue to focus major attention on building our opportunities with these customers. On a positive note, our year-over-year sales in Asia during the quarter three of fiscal 2009 increased 17.7%.

We continue to achieve strong operating profits in this region during quarter three and we expect to remain profitable in Asia in the near term, with relatively minor adjustments to our costs. In general, we believe we are in a good position in Asia to gain market share through the current economic downturn and to return top line growth -- return to top line growth as the global economic conditions improve. While sales declined in North America region both year-over-year and sequentially as mentioned earlier, the decline sequentially was impacted by the nonrecurring system sales of approximately $13.8 million in quarter two of fiscal 2009. We expect growth in our core electronics distribution business in North America to be an ongoing challenge. Nevertheless, business from North American suppliers that were added during the past two years offset declines resulting from the economic downturn. In fact, demand creation metrics, both registration and design wins, were at an all-time high in North America as our design activity continued to be strong in this region. In addition, a number of suppliers have reduced their number of channel partners, which we expect to increase our opportunities with customers in North America.

Two areas of recent investment and focus for Nu Horizons in North America, displays and power products, are adding to both our revenue and the opportunity pipeline as expected. During the third quarter, display product revenue grew 20% and power product revenue grew 58% year-over-year, with 14% of the new design activity in North America from display products alone. Although all vertical markets in North America appear to be negatively impacted by the current recession, we believe our focus on the industrial and instrumentation market segments, as well as medical and military applications, will provide significant opportunities for market share gains and growth in North America. During the third quarter of fiscal year 2009, our systems group had approximately $10.4 million in revenue compared to $13.1 million in the same quarter a year ago and $26.3 million in the previous quarter of this year. As discussed earlier, the systems group executed several large transactions in quarter two in response to the discontinuing of certain product lines by Sun Microsystems. Those transactions created increased revenue in quarter two, but also effectively lowered revenue opportunities in future quarters as volume was pulled into quarter two. It is particularly noteworthy that although revenue declined in this business during the quarter, systems gross profit in quarter three nearly doubled as a percentage of revenue both compared to quarter three of last year and sequentially. The increase in gross profit percentage in this business is due to the Company's continuing efforts to offer the higher margin, value added solutions to both existing and new systems customers. Overall, we are seeing distinct softness in demand in the systems business consistent with the general market contraction, including enterprise IT infrastructure, which is down sharply. Having said that, several of our larger segments, such as wireless infrastructure and medical systems have remained stable.

In Europe, we continue to expand our product offering and line card with the recent addition of Xilinx in Denmark and Sweden, and XR in the Danish, Swedish, Norwegian and Finnish markets. Although the overall semiconductor market in Europe declined in quarter three versus quarter two, our expansion into eastern Europe is beginning to pay dividends with this region of Europe performing ahead of expectations and already profitable with sales growing significantly in quarter three over quarter two. This is relative to the ongoing business from our EMS customers that we can now service locally. The current book to bill in eastern Europe is strong with continued growth expected over the next several months. The UK is seeing a major impact from the economic downturn. Despite the current top line revenue challenge over the past nine months, we have made major progress in developing strategic engagements with larger OEMs in the UK. Additionally, designs for many of the major suppliers that were brought to the UK through the acquisition of DT Electronics in 2006, and that typically experienced an 18 month design cycle, are now expected to move into production. Although Germany is experiencing some of the same softness in demand as in the UK, we believe Germany will also benefit from design activities with the first significant designs expected to move to production in quarter four and continuing to contribute to growth in Germany going forward. Although Europe has been severely impacted by the global recession, we see growth possible for Nu Horizons in this region through market share gains and new design activities.

We continue to make substantial progress in growing our design win opportunities by offering OEM customers not only advanced technologies, but also engineering expertise to facilitate state of the art design solutions. Total design win revenue increased 19% to $50.1 million in the third quarter of fiscal 2009 compared to $42.1 million in the same period in 2008. Year to date, this revenue increased nearly 17% to $147.2 million compared to $126.2 million in the same period in 2008. Design win registrations rose approximately 11% for the third quarter in 2009 and 17% for the nine month period over comparable prior periods. Similar to the performance in our core business, the passive components business was hit hard by the global economic slowdown, particularly in the later part of Q3, which brought top line revenue growth down by nearly 13%. Gross profit margins held during quarter three as cost for raw materials came down enough to lower overall cost of goods. Weakness was more evident in North America as both OEMs and distribution customers looked to lower inventories in the shorter lead time environment. Sales of specialized passive components have held up well as prices stabilized and certain applications remain healthy in respect to demand and new designs.

In closing, we expect the marketplace to continue to be turbulent and that visibility will be murky for the next few quarters. While we cannot control external forces, we believe we are managing our business with the fiscal prudence necessary to persevere through these uncertain times. We expect that our model and strategy will enable Nu Horizons to be in a strong position when the global economic environment ultimately improves. At that time, we anticipate that the electronics market will look to distribution for quick turnaround on inventory and logistics as demand is restored. With a vision toward a strong recovery, we believe there are still many opportunities for Nu Horizons to achieve substantial growth. Our major objectives in the months ahead are to continue to manage our costs and improve productivity, concentrate on demand creation design activities and to aggressively expand our market share. Thank you, and I would now like to open the conference call to any questions you may have.

Thank you. (Operator Instructions). First in our queue with Thomas Weisel Partners, we have Matt Sheerin.

Yes, hi. It's Matt Sheerin. Could you just -- Rich, you gave a lot of detail there and we appreciate that. You talked about turbulence, but could you tell us what you're seeing so far in this quarter. I know you don't give guidance, but has the weakness you've seen continued and in the November quarter, did you see things get worse later in the quarter, which most of your competitors and suppliers seem to be saying? And we hear that that weakness continued into December. So what is the February quarter looking like right now?

Well certainly, we did see the weakness in the third quarter accelerate in November and we continue to see weakness. Again, the visibility is not there. The response from major customers is that we'll wait and see. Doesn't look positive at the moment, but we don't know how long the effects of the recession will continue. So all I can really say is that the weakness does continue. I don't know if Kent would like to add anything to that.

As Rich mentioned, November is when we saw a change in bookings, or noticeable change and demand and visibility has been questionable for some time. I believe we'll continue to see the same softness in the marketplace pretty much from most segments, if not all segments and for the foreseeable future.

Okay. Could you tell me what your book to bill looks like right now?

So the book to bill for the quarter ended finished off at approximately 0.84.

Okay, and is it in that neighborhood now still?

Yes, roughly, roughly the same.

Okay. Okay, and, Rich, you talked about the increase in the demand creation sales, which is a positive, up year-over-year for the quarter, when your overall revenue was only flat. Yet your gross margin is still flat year-over-year. Is that because the -- you're seeing more margin pressure on the fulfillment side of the business, or is it a mix issue?

I think that's a good point to bring up. I'm going to let Kent answer that. I did want to -- since this is Kent's first conference call in his new position as Executive Vice President, just to give him a brief introduction to the people on the call. Kent has been with the Company since 2003 in various roles as Regional Vice President and then Vice President, Senior Vice President of Sales in the Americas, and Kent now has responsibility for global sales and we're all very happy to have him in this position and think he'll do a great job. On that note, Kent, why don't you answer Matt on that question.

Yes, so from a mix -- I would describe the mix piece a little differently than you might expect. It's -- what we're seeing from a fulfillment standpoint as well as design standpoint, is of course substantial success in the Asia,or a APAC region. So the percentage of our revenue in those -- in that market in particular continues to increase for design wins as well as -- or design revenue, as well as fulfillment. And of course, the expectations from a geographical standpoint are different with Europe, the Americas and Asia for design win gross profit percentages, as well as the gross profit percentages for fulfillment. So it's really -- when I drill into it, it looks into -- it looks much as it has historically. It's more a mix of the -- where the demand -- where the revenue's coming from.

Okay, thanks. And just a question for Kurt regarding your balance sheet. You generate cash, and I imagine that revenue continues to decline, inventories will decline and you should see some nice cash flow. Do you just intend to work down the debt balance then with your free cash?

Yes, the plan right now is to continue to pay down debt as the cash becomes available.

Okay, okay. Thanks very much.

Welcome.

Thanks, Matt.

Thank you.

We'll move on to Mike Neary with Neary Asset Management.

Hi, guys. Couple questions.

Sure.

What exactly is your weighted financing rate right now? And did you mention that debt was -- total debt was now 45 million?

Yes, yes, a little bit lower than that.

Okay, so down from $62 million at the end of the quarter, we're now at $45 million?

$45.4 million today.

Okay, great.

Borrowings is 1.75 over LIBOR. That's probably the best measure.

Okay. And can you talk a little bit about inventory and receivables, the health of both trends you're seeing and talk a little bit more about those?

Well, receivables, as you would expect, are coming down. So we're using, obviously, that cash to pay down debt, which is expected. Receivables -- I believe the health of the inventory and the receivables is stellar. It's been where it's always been. We haven't seen any issues there. Inventory levels are remaining the same. Those are currently not coming down yet. Any other questions on that front?

Yes, I mean, are they worth what they are on your books for?

Yes, they are on fair value. There's no additional reserves necessary. We go through a pretty rigorous test every quarter to look at the aging, look at what's returnable, what's not returnable, and all of it is very healthy.

Okay. Okay. And in terms of cash, then, so working capital come down, you'll pay off debt. Any plans for additional acquisitions at the current time?

Not at the current time. We're always -- we always have our eyes open and we're willing to listen, but there's no current plans.

Okay, thanks.

Moving on now to John Deysher with Pinnacle.

Good afternoon.

Good afternoon.

On the expense reduction, the head count specifically, how many -- what was the reduction in head count, I guess?

Roughly 60.

60, okay. And when approximately did that occur?

It's effective January 6, was most of it. There was a previous (inaudible) a few weeks before that, but the bulk of it was January 6.

January 6, okay. So will there be severance costs in the current quarter and if so, what would you guess those might be?

Yes, it's going to be around $300,000 in the current quarter.

Okay, and that's the fourth quarter, okay. Do you have plans in hand to further reduce expenses, I mean if things really deteriorate?

We're always looking because of the current economic situation to look at the cost structure and to right size the business. So we're going to see how the top line progresses and then take a view at that point.

Okay, great. Regarding the Vitesse examination, are you -- I know you can't talk too much about it, but obviously, the numbers are going up, which means the intensity level is going up. Do you have any sense as to when this might end?

We do not know when the SEC will conclude its investigation related to Vitesse. The Company continues to fully cooperate with the SEC in connection with any investigation of Vitesse. The internal investigation is winding down by our audit committee. We expect that by the end of this year, into the beginning of the first quarter of next year, it should be completed and that all of the costs are winding down as well, and we're seeing that in the current quarter.

The costs are actually winding down at this point. I don't think they increased this quarter, did they?

Right. They are winding down.

Okay. All right. That's a good sign. Is any of that covered by insurance?

We're currently looking into that at this point. Not sure I can give you a complete answer on that yet.

I'm sure you must have some type of policy in place that perhaps would cover something like this.

We have policies and we're investigating that right now.

Okay, very good. Thank you.

You're welcome.

Next in our queue, we have Scott McKay, he's a private investor.

Hi, guys, good afternoon.

Good afternoon.

As someone relatively new to this story, can you give me a little bit of insight into your thoughts on return on invested capital? Basically, the reasoning is you have a pretty good debt rate, you have good relationships with your banks, yet your stock's at a quarter of tangible book value. Thanks.

I think we're in a similar situation to a lot of companies right now globally, given the current economic crisis, the credit situations out there. Things in the marketplace are kind -- have kind of been turned upside down, so the explanation of why we're trading at below book, I don't have one for you other than to tell you that there's kind of a global economic crisis going on out there, a slowdown, and it's affecting all companies.

So why pay down debt, just because it's a reasonable use of cash and why not just work some of that cash?

Why not just -- I'm sorry?

Why not hoard a little cash if you're continuing to be concerned about the ongoing economic issues? You have several different options, all of which are positive, as long as you generate free cash, that's a good thing.

I think that we have enough cash going forward in all of our credit lines, so I'm not really concerned about cash going forward. And to me, I've always looked at it as the best use of cash is to pay down your debt, which is accruing interest.

Okay, fair enough. Thanks.

You're welcome.

We have one question remaining in our queue. (Operator Instructions). With SKIRITAI Capital, we have Russ Silvestri.

Hi, good afternoon. I know last quarter you guys had talked and examined the possibility of doing a share repurchase, and I was just curious, given the fact that you are settling so far below book value, every purchase of shares is going to be accretive -- basically going to increase book value per share going forward. I was curious what some of the rationale was behind not pursuing the buyback.

This is Richard. We have discussed this very seriously at the board level and determined in lieu of the economic environment, the uncertainties out there and the credit crisis, that the Company would be best served to use its cash to pay down debt and remain as strong as possible financially to navigate this downturn, which of course, none of us know how long will last.

And then the credit agreement you currently have, when does that expire?

Well, we have a few credit agreements. The one in the US, we have a few more years on. There's one in Asia that is up within the year.

Okay. And how much is that for?

The one in Asia is $30 million of availability -- $30 million max and we borrowed $5 million on it.

Okay. Thank you very much. Can I ask one last question, the infrastructure buildout in China, there was another distribution Company I listened to this morning and they talked about that being a positive for their business. Do you see that, the $40 billion that the government of China approved the other day having any material impact on your business?

Well, as we mentioned earlier, we, we're -- while our contract manufacturing business has been impacted, our local OEM business in Asia has remained stable. So I think that that stimulus package will help our local OEM business in China, yes.

Would you be willing to estimate in terms of impact, quantitative impact?

No, I wouldn't have any idea at this moment.

Okay, thank you.

Gentlemen, we have a follow-up question from Mike Neary.

Yes, I just wanted to add that so far during this downturn, you guys are doing a very good job, and I appreciate you bringing the costs down and what you've done on the inventory side and receivables. So I appreciate what you guys are doing.

Thank you.

Thank you very much for the comment.

And, gentlemen, we have no further questions at this time. Mr. Schuster, I'll turn the conference back over to you.

Okay. I would like to thank all of you for participating in this conference call and we look forward to our continued dialogue with you in the year ahead. Thank you. Good night.

And that concludes today's conference call. Thank you for your participation. Now, there will be a replay of today's conference available today beginning at 7:30 p.m. eastern time and will be available through January 16. You may access this replay by dialing toll free 888-203-1112. Or you may dial 719-457-0820 and please use passcode 4865977. Again, that concludes today's conference call. Thank you for your participation, and have a good day.