艾睿電子 (ARW) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Nu Horizons earnings conference call for fourth-quarter fiscal year 2009 earnings conference call. 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 its conclusion, there will be a question-and-answer session. (Operator instructions.)

And now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corporation. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the Nu Horizons fiscal-year-end and fourth-quarter 2009 conference call. I am Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corporation. With me here today are Arthur Nadata, Chairman and CEO; Kurt Freudenberg, Executive Vice President and Chief Financial Officer; and Kent Smith, Executive Vice President of Worldwide Sales and Marketing.

Kurt will give an overview of the financial results for the 2009 fiscal year and fourth quarter. I will then provide a brief market overview and synopsis of our company's performance, along with some comments on the industry in general. We will then turn the meeting over to questions from our callers. At this point, I would like to turn the call over to Kurt.

Thank you. Sales for the fiscal year ended February 28, 2009 increased to $750.954 million from $747.170 million in the comparable period last year, an increase of 0.5%.

Geographically, year over year sales increased 18.2% in Asia, increased 9.7% in Europe, and decreased 6.6% in North America when compared to the prior year. Asia sales are increasing due to our continued growth and transfer of business to Asia from North America. Europe's growth is primarily related to our acquisition of C-88 in September of 2008 and sales growth in Germany and Eastern Europe, although from a relatively lower base. The North American decrease is due primarily to the economic recession and continued transfer of business to Asia.

Net sales for the fourth quarter ended February 28, 2009 decreased to $150.770 million from $193.683 million last year, a decrease of 22.2%, due primarily to the worldwide economic recession.

Consolidated gross margin was 15.1% in fiscal 2009 as compared to 16.1% for the comparable period of the prior year. The decline in gross margin for the year ended February 28, 2009 is attributable to an increase in lower margin sales in the Asia Pacific markets in order to secure a higher volume business from large contract manufacturers and a change in product mix to include a higher amount of low margin business in North America and Europe. In addition, reduced supplier discounts aggregating $2.6 million, higher freight costs of $1.5 million, and system sales of $13.8 million at a low margin to a large customer of end-of-life product also contributed to the decline in gross profit margin during the year ended February 28, 2009.

Due to the current worldwide economic recession and the related decreased product demand, the Company has recently taken several cost reduction actions to reduce its cost of operations to adjust for lower product demand. In our efforts to right-size the Company cost structure we reduced our workforce worldwide by an aggregate of 100 employees, which represented 12% of our organization on October 31, 2008, and we decreased salaries and commissions. Management estimates that the consequences of these and other cost containment actions should result in a fiscal 2010 cost savings of approximately $10 million to $12 million, not including severance of $890,000.

Additionally, early in the first quarter of fiscal 2010 a one-week furlough was implemented, which provided a one-time cost benefit of approximately $600,000. Finally, we expect to incur lower professional fees in fiscal 2010. We are prepared, particularly if revenues do not improve over those reported in the fourth quarter of fiscal 2009, to take additional cost cutting actions.

As a percentage of sales, selling, general and administrative expenses decreased to 15% from 15.1% in the comparable period of the prior year. Selling, general and administrative expenses increased $537,000, or 0.5% over the prior period, primarily due to an increase of $1.1 million in severance related to the reductions in work force and consolidation of the Company's Melville, New York warehouse into the expanded Mississippi warehouse, also an increase of $987,000 of operating expenses attributable to our newly-acquired C-88 operation, and a $975,000 increase in professional fees related to the Vitesse matter, primarily offset by a decrease of $2.8 million in the expenses due to the reduction of workforce salaries implemented in the fourth quarter of fiscal 2009.

In the fourth quarter of 2009 the Company conducted the required evaluation of its goodwill for potential impairment, which indicated that the fair value of one reporting unit was below its carrying value as of the end of the fourth quarter of fiscal 2009, resulting in a non-cash impairment charge to the active component's segment of $7.443 million, or $0.41 per basic and diluted share for the year ended February 28, 2009. While the goodwill impairment charge reduces reported results under US generally accepted accounting principles, since the charge is non-cash in nature, it does not affect the Company's liquidity or cash flow from operating activities and will not have any impact on future operations.

Year-over-year interest expense decreased 31.3% or $1.4 million and quarter over quarter decreased 59.6% or $742,000. Interest expense for both periods decreased primarily due to decreased average bank borrowings and reduced interest rates.

Our effective tax rate was a benefit of 8.5% for the year ended February 28, 2009. The effective tax rate is lower than the statutory rate of 35% primarily due to income earned at tax rates lower than the US tax rate, and tax benefits derived from foreign tax credits. There was no income tax benefit recognized for the non-cash goodwill impairment charge of $7.443 million recorded for the period ended February 28, 2009. Also, in preparing our fiscal 2008 tax return, we determined that certain tax adjustments for permanent items to the Company's tax provision were required, resulting in the recording of an additional tax benefit of $662,000 for the year ended February 28, 2009.

The net loss for fiscal 2009 is $9.235 million compared to net income of $2.5 million in the year-earlier period. The net loss per share is $0.51 per diluted share for fiscal 2009. The net loss is driven principally by the $7.4 million non-cash goodwill impairment charge; $3.5 million of professional fees related to the Vitesse matter; $1.1 million of severance cost; and lower sales due to the economic recession.

The net loss for the fourth quarter was $10.732 million or $0.59 per diluted share as compared to net income of $424,000 or $0.02 per diluted share for the fourth quarter of last year.

The Company's results in fiscal 2009 include a number of items that impact comparability with fiscal 2008. On an adjusted basis, excluding the non-cash goodwill impairment charge, professional fees related to the Vitesse matter, and severance charges, diluted earnings per share would have been $0.06 for the year and diluted loss per share of $0.14 for the quarter ended February 28, 2009 as compared to diluted earnings per share of $0.28 and $0.06 in the comparable periods in the prior year.

We continue to make substantial progress in growing our design win opportunities by offering OEM customers not only advanced technologies, but also engineering expertise that facilitates state-of-the-art design solutions. Year to date, [revenue] increased nearly 11.6% to $185.4 million compared to $166.2 million in the same period of 2008. Although total design win revenue decreased 4.5% to $38.2 million in the fourth quarter of fiscal 2009 compared to $40.0 million in the same period of 2008, the decrease was less than the 22% overall drop in revenue for the similar period. Design win registrations rose 25% for the fourth quarter of 2009 and 19% for the 12-month period over the comparable periods of the prior year.

In fiscal 2009 the Company generated $56.088 million of cash flow from operations. Approximately $46.5 million of debt was repaid, and at February 28, 2009 the Company had $147.141 million in working capital. For the year ended February 28, 2009 the inventory turns and daily sales outstanding improved to 5.6 turns and 54 days, respectively.

Total bank debt was down to $23.4 million at February 28, 2009. At February 28, 2009 the Company was not in compliance with certain covenants under its US credit line and subsequently received an amendment and a waiver of such covenants from its US bank lending group. In connection with this amendment the amount of the US credit line was reduced to $120 million from $150 million. The interest rate payable under the US revolving credit line was increased to the US prime plus 1.75% or LIBOR plus 3.5% at the option of the Company. And the commitment fee was increased from 0.25% to 0.5%.

After giving effect to the reduction in the unused fee payable due to the decrease in the amount of the credit line and the increase in the interest rate and commitment fees, based on the Company's average borrowings during fiscal 2009 the amendment is expected to increase interest and related bank expense during 2010. At February 28, 2009, after giving effect to the amendment, the Company had $79.35 million in aggregate available under all of its bank credit facilities.

The Company is continuing to fully cooperate with the investigation by the SEC in the matter of Vitesse Semiconductor Corporation. The Company also conducted its own related internal investigation under the direction of the audit committee. On April 9, 2009 the audit committee announced the completion of its internal investigation, which concluded that there is not presently sufficient evidence that the Company or its officers or employees aided and abetted in any alleged violations of the securities laws by Vitesse, that the Company appropriately adjusted its inventory for Vitesse product purchases, returns and sales, and that there was evidence of internal control, inventory management and recordkeeping deficiencies. The Company, in consultation with the audit committee, has remediated, or is in the process of remediating, these deficiencies.

The Company's cooperation with the SEC investigation and its own internal investigation has required the Company to incur significant expenses for professional fees and related expenses. The Company has incurred approximately $3.5 million for fiscal 2009 for professional fees related to the Vitesse matter. Cumulatively, $6.2 million of expense for professional fees has been incurred from fiscal 2007 to date related to the Vitesse matter. Management believes that as a result of the completion of the internal investigation, the Company's expenses will decline in future fiscal periods. However, management is presently unable to determine the outcome or duration of the SEC investigation and related costs to be incurred by the Company. In addition, although the internal investigation is completed, if any new or additional evidence becomes available, the audit committee will consider such additional evidence to determine whether the further investigation or action is warranted.

In the fourth quarter of fiscal 2009 the Company reevaluated its accounting policy for operating statements and identified two operating statements under the requirements of FAS 131 titled, "Disclosure About Segments of an Enterprise and Related Information." The two segments consist of active electronics components and passive components.

Now I will turn the call back over to Rich.

Thank you, Kurt. The fourth quarter of fiscal year 2009 represented an adjustment period for all geographies and a broad base of customers. Top-line revenue in the fourth quarter was sequentially up 26.3% in Europe, down 24.2% in Asia, and down 22.7% in the Americas, which equates to an overall decline of 19.1% for the active component segment. System sales were down 23.9% sequentially. Year over year the active components segment was up 0.6% in total revenue and demand creation revenue for the segment was up 11.6%. Quarter four registration activity was up 19% year over year and 11% sequentially versus quarter three, and design wins increased 15% year over year as a result of many demand creation programs such as customer training and education for field programmable data rate design, PCI Express products, and microcontrollers.

On the manufacturing and fulfillment side, there was continued hesitance by both OEMs and EMS providers to commit to material pipelines and inventory, although forecast accuracy at the aggregate customer level and the device level did improve toward the end of the quarter.

In North America year over year total revenue was down 8.3%, as mentioned earlier, but demand creation revenue was essentially flat, increasing the percent of revenue represented by demand creation and contributing to overall margin stability. Demand creation activity remained strong for quarter four, with a sequential increase of 9% in design registrations in North America, although design wins were down 13% sequentially as project transition to production slowed.

An area of focus for the segment continues to be LCD displays, power products, and single board computers, with power product sales growing 67% year over year, which we believe will have continued growth.

In an effort to drive productivity and to reduce costs in North America, the service center structure was expanded. Service centers are centralized inside sales and customer support teams that are designed to increase efficiency through shared learning, training, expert development and support backup. Additional customers are now supported in the EMS service center in Florida and at OEM customer service centers. Bookings in North America were flat for all three months of the quarter, ending the quarter with an approximate one-to-one book-to-bill.

In Asia, year-over-year revenue was up 22.8%, with continued growth and the tracking of transfer business from North America. Having said that, Asia was sequentially down 24.2% in quarter four, with the most significant decline in the Southeast Asia nations, due to the fulfillment EMS partner reduced forecasts. Greater China and India, where we have developed more significant indigenous business, had much lower declines.

Demand creation revenue was sequentially down over 20%, but was up as a percent of overall sales, resulting in a slight improvement in margin. We have started to see set-top box business improve, especially for export markets, and the local Chinese infrastructure projects continue to stabilize China.

Europe, with 26.3% sequential and 10% year-over-year growth, obviously was a positive contributor to the segment. Registrations, design wins and design win revenue all increased over 200% year over year. In the UK we continued to see softness. The Nordic region was essentially flat quarter over quarter, with the completion of the integration of the C-88 organization into Nu Horizons Europe, and with the expansion of global franchise agreements into the Nordic region offsetting the general market decline. In Germany we gained market share with new customer engagements and designs moving to production, growing sales 20.6% sequentially, with an all time high of 42% of our revenue in Germany coming from designs in quarter four. Eastern Europe grew over 200% quarter over quarter through recently developed EMS customer engagements and the ongoing development of OEM relationships.

Nu Horizons Europe successfully completed the integration of C-88 in the Nordic region, continued to see design efforts result in design revenue, reaching 32% of total revenue in demand creation regions and saw a substantial upside in fulfillment revenue due to expanded coverage of fulfillment and manufacturing locations.

Our passive components segment continued to see weak sales in all regions, but most significantly in Asia. Aside from the global recession and low demand, pricing remained an issue in Asia. We believe local manufacturers have kept pricing low to keep or expand market share. EMS customers are aggressively seeking low costs and overcapacity still exists. Several of NIC's large customers have curtailed their orders and there have been some cancellations. In addition, we believe that distribution customers are under pressure to keep inventories lean and therefore have cancelled or pushed out stocking packages.

NIC continues to promote and design higher-reliability components geared towards the telecom infrastructure, industrial, security, power management, and medical markets. New higher ASP components are in the process of being released, and NIC intends to aggressively market them. We believe that many design wins are awaiting funding and expect that as the credit markets open up, these programs will go into production. We're starting to see some lead times increase and spot shortages occur. Inventories are reducing in the field and factories worldwide are continuing to cut production. We believe that capacity/demand equilibrium could be achieved in the second half of 2009, which could stabilize pricing and increase purchases. NIC has also implemented cost-cutting strategies and will continue to watch overheads in relation to market performance.

Revenues for the systems division grew 17% in fiscal year '09, due in part to the addition of over 20 new customers, with the bulk of the increase due to Nu Horizons' ability to take advantage of a discontinuation of a Sun Microsystems product group during our second quarter. Gross profit percentages for the systems unit grew from 9.2% fiscal year '08 to 11.1% in fiscal year '09, due to our deliberate strategy to service more business directly as well as increase the overall services delivered. Our mix has moved from less than 50% direct two years ago to over 60% direct in the second half of fiscal year 2009.

In fiscal year 2009 we sold over 3.4 million in integrated solutions at an average gross margin of 12.5%. Revenue for the systems division in quarter four of fiscal year 2009 decreased 35% from quarter four of 2008 and 25% from quarter three of fiscal year 2009 due to the absence in those periods of the last-time buys made in quarter two of fiscal year 2009.

Regarding new design opportunities, the pipeline of potential Sun opportunities grew during the second half of fiscal year 2009, with over $25 million in new revenue in the sales cycle. In the case of IBM, significant progress had been made with designing IBM technology into the defense and homeland security markets.

Although visibility remains limited and customers are hesitant to commit to material pipelines and inventory, we believe that we will have opportunities in the future by providing design support differentiation, targeting stable or growing vertical markets, and focusing on a variety of under-penetrated supplier product areas.

As an example, Origin Electronics, which was in development at New Horizons over the last few quarters, was formally announced at the beginning of April. Origin, as a second line card in Asia, permits Nu Horizons Asia to offer suppliers an additional channel alternative, while maintaining its limited complementary supply of line card and go-to-market strategy. We intend to continue to introduce programs that are designed to manage costs, increase productivity and allow us to enhance the revenue opportunities for Nu Horizons.

Thank you. And now we would like to open the conference call to any questions you may have. Again, we're going to open the conference call now to any questions you may have.

(Operator instructions.) Matt Sheerin; Thomas Weisel Partners.

Thanks. Hi, Rich and Kurt. So first question -- looking to the May quarter, I know you talked about book-to-bills in February. We're two months already into the quarter. How are things shaping up in terms of bookings trends? Both (inaudible) have talked about North America sort of flattish and Europe down sequentially in their June quarters. Sounds like Asia is mixed out there. So what are you seeing right now?

Yes, Matt. This is Kent. From a book-to-bill standpoint, as we mentioned in the case of the Americas we're seeing -- we ended up the last quarter at approximately a one-to-one book-to-bill. We had a positive book-to-bill in Europe and essentially a positive book-to-bill in APAC. In the case of Europe I'm not sure that we're representing the market in the sense that we're expanding and growing as an organization in that marketplace, so we're not necessarily trending with the market. In the Americas we've seen essentially stabilization and staying around one-to-one is what we had again seen at the end of February, and, again, seen relatively consistent book-to-bill or positive book-to-bill in APAC. We expect the same trends to continue.

So are you getting a sense that your sales have bottomed out here then?

So stabilize I think is the word that I would use.

Okay. And I know one of the weak areas has been the fulfillment business with EMS in Asia and that's helped your gross margin. When that starts to come back, perhaps later this year, is that going to hurt your margins again? Or are you going to have some design activity that's going to offset that?

Yes. So from a fulfillment and demand creation standpoint, demand creation continues to be a larger part of our business. And those margins have held up. So I'm expecting essentially consistent gross profit percentage and/or margins for both positions.

Okay. And then on the SG&A, I know, Kurt, you talked about some -- the various cost-cutting programs and the reason why your SG&A was actually on a year-over-year basis flat even though revenue was down almost 20%. Are expenses going to come down further?

You'll see the $10 million or $12 million on an overall full 12-month run rate. That's -- it'll come down for that in --

$10 million off of what base?

Off the fiscal '09 base.

Okay.

You have to consider that we've already reduced, I think it was about $2.6 million already in the fourth quarter. So I would use $10 million as the rough number, further reduction in 2010 over 2009.

Okay. And is that it then or, I mean, given that sales have flattened out here, or is there another plan?

We're evaluating that right now and it is a good possibility we're going to have to do more.

Okay. And just on the balance sheet, I know you reduced inventory, yet the debt was up. Did you pay down debt during the quarter?

Yes. The debt was -- is at like -- it spiked up, but it was, at year end it was down. And then during the quarter we paid it down more.

Okay. So what was it at the end of February then?

Like $23 million, in that area.

$23 million. Okay. And then it was down further then? Okay. And then what -- so if revenue is sort of flattish and you're in an operating deficit, what kind of revenue run rate do you need to get back to breakeven?

You know, at this point it's difficult to answer because of the change in the margin. If the margin mix changes it changes of course the revenue number. But I would say it's probably in the 170 to 180 range per quarter.

Okay. Okay. Thanks very much.

Mike Neary; Neary Asset Management.

He asked most of my questions, but on the inventory side, given our current level of revenues, what should inventory be?

I think where we have it right now it's reasonable. We don't want to bring it down too low. We want to make sure there's plenty of product out there to supply.

Okay. And then on the cost side -- so it sounds like net-net we're roughly currently losing about $1.5 million a quarter once the cost cuts come into effect. Is that about right on an operating basis?

I'm not sure I can answer that question, because we're in the process of evaluating what the current forecast is.

Okay. So, but the $10 million, is that already in the costs?

The $10 million is not in the historical costs. Only about $2.5 million is in the '09 cost reductions already. So most -- because we only put it in effect in the latter part of the fourth quarter. So most of it is yet to come in 2010.

Okay. And so is that a $10 million of incremental cost reductions starting at the beginning of 2010?

It's a reasonable number to use, yes.

Okay.

Spread over the year.

All right. Okay. And does that take into account any additional variable cost reductions? Is that a fixed cost reduction number or is that the total cost?

Most of that is fixed. The reason we said $10 million to $12 million is there is a commission component that brings it up to possibly $12 million, but it depends on the sales level and so on. There's a lot of components that go into it. So there is a small variable piece on commissions.

Okay. And in terms of the waiver, how long is that good for or how does that last if you have additional operating losses? Do you have to keep going back for that or is that -- ?

The waiver waived the loss issue in the fourth quarter cumulatively for the year. And we amended it going forward for the remainder of the agreement, which goes out over a year. I don't have the exact date in front of me. There is a loss component built into it that indicates that if we have a loss for the full fiscal year we'd have to go back and talk to the banks again.

Okay.

But there is an allowance during the year.

Okay. Okay. Thank you.

(Operator instructions.) We have no further questions.

Okay. Like to thank everyone for participating on the conference call. And we welcome your questions and look forward to the next conference call. Thanks and have a very good day.

The replay for today's conference will be available today beginning at 7:30 p.m. Eastern Standard Time and will be available until May 6th by dialing 888-203-1112 or 719-457-0820 and using pass code 3940450. Once again, that phone number is 888-203-1112 or 719-457-0820. And the pass code is 3940450. Once again, that does conclude today's conference. Thank you for your participation.