Richardson Electronics Ltd (RELL) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the year-end conference call for Richardson Electronics for 2007. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to our host, Mr. Ed Richardson, Chief Executive Officer of Richardson Electronics. Please go ahead, sir.

Thanks, Eric. Good morning. Well, as you know, we released earnings for the fourth quarter and year-end last night after the close of the market. The good news is we reported record earnings of $2.30 per share. I guess what that says is that we are very good at investing in businesses and also real estate.

Hopefully the restructuring plan that we have in place is going to dramatically improve the operating income for the coming year. We will tell you about where we are on that restructuring plan. We are just about the year into it and hope to have it completed in September.

During the year, we completed the sale of the Security Systems Division that we call Burtek. This sale was actually completed on May 31. The division was sold to Honeywell for $80 million. The net proceeds from the sale will be approximately -- or are $76 million. We had a very substantial gain on the sale of $41.6 million, net of tax.

So far, we have used the majority of the proceeds to pay down outstanding debt under our credit agreements. It has also allowed us to invest and focus on our Engineered Solutions business. We estimate our interest expense will decrease approximately $5 million on an annual basis.

The sale is really important to the future of the Company. Not only has it allowed us to improve the balance sheet dramatically; it has allowed us to repay a portion of the intercompany debt. This allows us to eliminate the majority of our foreign exchange gains and losses that have affected or impacted our quarterly performance now for several years.

Sales and earnings in the fourth quarter, without SSD -- without the sales from the Security Systems Division -- the fourth-quarter sales were $146.2 million. They were up about 2% form the prior year.

The fourth-quarter gross margin was 22.5% versus 23.4% a year earlier. To give you some benchmark for comparison, the product margin in the fourth quarter was 25.8% versus 26.1% a year ago, so just about flat. The difference between the two numbers is primarily inventory reserves and warranty expense, which had a greater impact as you can see this year.

On the SG&A side, a substantial amount of extraordinary SG&A both in the quarter and the year. In the total year there is approximately $7 million worth of extraordinary SG&A. That has to do with severance and the restructuring; and we will talk about that in more detail.

In the quarter there was $1.1 million of incremental payroll-related expenses. There was $1.1 million of restructuring and severance expense. A substantial amount of additional bonus expense during the year. A portion of our bonuses are paid out on earnings per share. Of course, with a $2.30 per share earnings during the year, that impacted a number of these bonuses, which were extraordinary as well.

There was also about 40.1 million of compensation expense related to stock options in the fourth quarter.

Including Burtek sales, fourth-quarter sales would have been $173.1 million, just up slightly from the prior year. Fourth-quarter gross margin actually declined again from 23.7% to 22.7%, although the product margin was about flat.

By strategic business unit, the RF and Power division, the sales were up about 7%. Greg Peloquin is with me this morning; he is Executive Vice President of the RF and Wireless group. I will let him tell you about some of the highlights. Greg and his group actually as a gross number exceeded $100 million in sales for the first time in the fourth quarter, but after -- which was up about 7%. After revenue recognition, the net number was $99.4 million, but a remarkable achievement for the quarter.

The gross margin was about 22% versus 21.5% a year ago. The product margin was 24.6% versus 24.4% for a year ago. Within that, infrastructure had the largest increase. They were up 23.8% on sales of $28.4 million.

Power conversion was up substantially. As you may recall, we restructured about a year and a half ago, and moved power conversion from the Electron Device Group into the RF and Power division. That has really been a successful transition. Again their business was up 36.3% in the fourth quarter with sales of $14.4 million.

Geographically for RFPD, Asia was up 13.7%, led by China. Europe was up 7.1%, so they really had an excellent quarter. Greg, maybe you want to take a minute and talk about some of the highlights both for the quarter and the year.

Yes, there was a lot of highlights in the fourth quarter, as it continued to show strong growth quarter-on-quarter in our fiscal year. Every part of the world had great success stories, in addition to the fact that, as we continue to increase our sales but also improve our profitability, both product margin and gross margin were up in the quarter.

As we said in the prior three quarters, our design wins in China in the implementation of that infrastructure, TD-SCDMA was strong; and we're starting to see more and more shipments going there. In the fourth quarter, we had a very strong shipment revenue for China from that program.

But also the broadcast model that we have both from systems and the components is very, very strong in Southeast Asia and in North America. Our East Coast group did very well in North America with their military communication customers and a couple of broadcast customers in Europe -- was up again. They had a very strong year. All applications have restructured, broadcast and military communications.

Just a couple of highlights in the quarter. From a supplier point of view, ATC had a record quarter. We signed ATC a little over a year and a half ago, and that has been a fantastic relationship and model with our global infrastructure agreement bringing their products to market. We are the exclusive distributor for ATC.

Freescale recognized our Asia team, specifically in China, as their Best International Distributor. That award was given to us in the fourth quarter for Freescale's power transistors.

The [Embago] relationship is strong with the CEMs. As Ed mentioned, the power conversion business, when we aligned it into more of a growth strategy, with alternative energy continuing to be a key market in our ability with Cornell Dubilier, Microsemi, Semikron, to support that market, the health and the business in the fourth quarter was very good for RF and Wireless again.

Well, nice quarter, Greg, and a great year. Congratulations. EDG was up 10.6%. It is ironic; the tube business on a world market is supposed to be declining 6% to 8%, and we continue to gain market share. So in the fourth quarter, EDG did $26.6 million. The highest margin SBU in our business, their gross margin was 33.7%, up from 32.8% a year ago. The product margin was at 35%, up from 34.5% a year ago. The industrial tube business was up 12%, at $19.2 million. The semiconductor wafer fab portion of the business was also up nicely at 11.4%.

The Display Systems Group continues to be a problem area for us, although the bookings for the coming year look to be quite good. DSG's business was down 23.2% for the year at $19.3 million.

Geographically, North America was actually down, just about flat. They were down about 0.5%. That had to do, again, primarily with the Display Systems Group being off. Sales were $58.6 million. The margin was up nicely. It was at 27.7% versus 24.7% a year earlier.

Asia-Pacific, again, did extremely well for the year. They were up 11.2% total -- this was for the quarter. 11.2% for the quarter and sales at $45.9 million. China led the group; they were up 62.9% with sales at $19.7 million. Japan was up 35.4% with sales of $6.6 million. Europe was also up in the quarter, 3.1% over last year, with sales of $37.1 million. Led by France that was up almost 43%; Germany up 13.6%; the UK up 10.1%; Scandinavia up almost 10%.

Latin America was down in the quarter about 14%. This primarily had to do with our restructuring. Last year of course, we closed warehouses both in Mexico and Colombia; and the impact of those warehouses being closed is a result of the business being down there about 14%.

For the year, total sales without SSD for 2007 were $557.3 million, up 5.3% from the prior year. Again the gross margin declined slightly, although the product margin was just about flat year-over-year. Product margin at 26.1% versus 26.4% a year ago. Again the difference there has to do primarily with inventory reserves and warranty adjustments.

Operating income of 2007 decreased from $8.4 million a year ago to $7.8 million this year. Again, we did well during the year as we went through the restructuring program on selling some of the warehouses that have been used for distribution in the past. In 2007, it included the sale of two buildings, one in Lincoln, England; and another one here in Geneva. The combined gain on those two buildings was about $4 million in total.

On SG&A I wanted to go over in detail some of the extraordinary SG&A expense during the year. Again, total SG&A for the year included about $7 million worth of extraordinary expense dealing with severance costs, also other areas of expense. There was $3.2 million of incremental payroll-related expenses. Again, some of this had to do with bonuses that were based upon EPS. $2.9 million of restructuring and severance expense. $0.6 million, $600,000 worth of restatement-related expenses. $800,000 worth of expense that dealt with stock options. And $500,000 was actually a positive, was a gain on the sale of intellectual property related to our joint venture with VConex.

Fiscal 2007 also includes about $2.5 million of costs associated with the retirement of long-term debt. As you know, we bought back about $14 million worth of bonds, our 8% bonds, in September and December of last year. There was about $2.5 million worth of costs related to buying those bonds back.

For the year-to-date period, 2007 income from continuing operations was $1.5 million or $0.09 as compared to a loss in continuing operations of $4 million or $0.23 in 2006. For the year-to-date period, fiscal 2007 net income was $40.7 million including the gain on SSD, or $2.30 a share, compared with a net loss last year of $2.6 million or $0.15 a share.

Including the sales for Burtek, fiscal 2007 net sales were just about $665 million, up 4.2% from the prior year.

By SBU, growth again was led by Greg's group, the RF and Power division, up 10.7%, just right at $370 million in total. Margins were about flat; gross margin was 22.8% versus 22.7% a year ago; and product margin was 24.6%, which was the same as last year.

Again, within RFP, infrastructure was up 30.2% at $104.9 million. The power conversion group was up 32.2%, and they finished the year right at $50 million in total.

Geographically for RFPD for the year, Asia was up about 14.7% with total sales of $143.5 million. Europe was up 16.9% with sales at $89.8 million.

For the year the Electron Device Group was up 7.1%. For the first time they crossed the $100 million mark; they finished the year at $101.2 million with total margin of 32.6%. Greg, when is RFPD going to get a 32.6%?

Thursday-ish.

Next Thursday? Okay. We are ready. Anyway, again, the Electron Device Group is the most profitable business we have and doing very nicely. The tube business was actually up. The semiconductor wafer fab business was up 30% during the year with sales at $22.3 million and gross margin at 36%.

The Display Systems Group again for the year was down 13.6% to $82.1 million. We have gone through a complete restructuring with DSG and are implementing a very focused strategy at the moment. Bookings seem to be up nicely, so we are hopefully we can turn that around in this fiscal year.

Geographically for FY 07, North America was about flat; they were up 6/10 of a percent at $229 million, with nice margin at 27%. Asia-Pacific was up 11.6% at $165.2 million in total. China led that growth, up 36.3% at just under $60 million. Japan was up 23.5% at $6.1 million. Nice margin at 27.2%. Taiwan was up 7.8% at about $12 million in sales with margin at 26.6%.

Europe was up; they were 11.3% increase in sales. Led by Germany that was up 23.3%; total sales in Germany last year were $41.4 million. UK was up 16.5% with sales of $20.5 million. France was up 15.9% with sales just under $20 million.

Again, Latin America was down with the closing of the warehouses that we mentioned. Total Latin American business last year was $17 million, so that is getting to be rather a small portion of our geographic sales.

With that, I would like to turn it over to Dan Fujii. Dan has sort of volunteered, reluctantly, to be interim CFO for us, with Dave DeNeve deciding that he wanted to work for a private company a couple of months ago. Dan has sort of been filling in and getting combat pay at the moment to do that; not much.

So we are going to let Dan tell you a little bit about the balance sheet highlights. Dan?

Thanks, Ed. A couple of highlights on the balance sheet. Cash and cash equivalents has increased slightly from last year to $17.4 million. The real highlight on the balance sheet is restricted cash of $61.9 million. This relates to our proceeds from the sale from SSD/Burtek.

It's restricted because, under our credit agreement existing at June 2, these proceeds need to be paid towards our credit agreement. As we receive this cash right at the end of the fiscal year, the timing of involved with getting through the banks just does take some time. So in Q1 we will see the full benefit of that on our debt.

Debt in total has decreased slightly to $3.1 million. But again in Q1 we would expect to see that decrease as the restricted cash goes towards the debt.

Looking at the cash flow statement, depreciation and amortization was relatively flat at $6.1 million versus $6.2 million last year. Cash used in operating activities was $9.7 million, really due to the increase in inventory to support our business sales increase.

Cash provided in investing activities was $80.3 million due primarily to the SSD sale. Capital spending for the year was relatively flat at $6.4 million versus $6.2 million last year, primarily for our IT projects. Cash used in financing activities was $71.1 million, again really due to the restricted cash and any payments on debt to date.

Those are the highlights on the cash flow and balance sheet. Back to Ed.

Thanks, Dan. All right, we wanted to give you a little update on the restructuring plan and where we are. We feel that the plan is right on track. We have now been through about a full year, going from 25 or 26 warehouses and shipping locations to three hubs located in Amsterdam, then centrally here in LaFox, and the third in Singapore.

Amsterdam is fully up and running. We have closed about eight warehouses in Europe. Sold several, as you can see by the capital gain. The program, of course, in the US is fully implemented and up and running. We actually have just started to work with the Singapore hub in May, primarily utilizing UPS World Ease, which allows us to ship from anyone of the hubs to any location in the world in three to five days.

The basic concept is that we are stocking products in Amsterdam and Europe that are purchased in euro; and products that are purchased in dollars in the US; and products purchased in Asia in the Singapore hub, and then shipping them anywhere they are required in a three- to five-day period of time utilizing UPS World Ease.

As we have done that then, we are going to what is called a limited risk distributor structure. Instead of having to leave a large portion of our profits in each one of the foreign subsidiaries, we are able to reduce that amount. We are hopeful by September that the impact of this will reduce our overall tax structure substantially, as we can bring more and more of the earnings back into the US, where they are fully tax sheltered at this point.

So in any case, we are still targeting about $8 million of saving on the total restructuring plan once it is completely implemented, which should be done now in September of this year. So far, we have about $4.3 million worth of savings that have been realized to date.

We are still targeting that the total restructuring cost will cost about $6 million. We incurred $2.7 million of that in the fourth quarter of FY06 and about $3.3 million in 2007. As part of the total restructuring, we have reduced the workforce by about 60 employees directly. Then we also sold the Ingenium subsidiary in Italy. So in total the workforce from the restructuring plan has been reduced by about 88 people.

So we are, of course, quite a ways through the first quarter and honestly say that we are looking at the typical summer slowdown. Last year, we had a very good quarter in the first quarter; and this year, it seems to be more flat with last year.

I think at the moment we are projecting the quarter to be just about flat with last year, maybe up 1 or 2 percentage points. That would put us somewhere between $130 million to $135 million without SSD. Gross profit somewhere between $24.5 million and $24.7 million. SG&A somewhere in the area of $31 million, which would be about right on our plan. We really put a very structured plan in for this year to hold SG&A down.

So that is about as much visibility as we have for the moment. We do have substantial backlogs both for DSG and, as Greg told you, for the RF and Power division. EDG is doing extremely well.

Our real challenge at the moment is to get DSG back on track. If we could do that, I think we should have a good year. We certainly have a lot of these extraordinary items that are behind us. I think certainly the predictions for the Company in the forecasts going forward are excellent and should be much easier to understand than this very complicated set of numbers from last year.

So Eric, with that we will open it up for questions.

(OPERATOR INSTRUCTIONS) Robert Damron with 21st Century Equity.

Good morning, Ed. Let's see, I wanted to talk a little bit more about the restructuring. What incremental restructuring cost do you expect in fiscal Q1?

Then, if we have now look at the business with three business units rather than four, are there additional opportunities to reduce the corporate overhead, to reduce the SG&A further?

Okay, as far as additional charges in the first quarter, there is some additional severance expense, which you are aware of. I think other than that, there could be, as we close some of these warehouses, there could be a minor amount of additional severance going forward. But I think that is most of it.

How much severance do you think we have in the first quarter? We know that already, don't we?

About $400,000.

About $400,000? So maybe with -- on the outside $0.5 million worth of additional severance. Yes, your question is very good. I keep -- Dan is sitting across the table; I give him the business. We have like 90 people in finance right now. With the sale of Security which is 20% of the business, I would expect that somebody would hold up their hand and say they can reduce their staff 20%. But so far we don't have anybody volunteering.

But we are looking very hard at that. Certainly we should be able to run the Company with less administration based upon 250 employees that were involved in SSD now no longer with us, and the overall revenue being reduced 20% or so.

Okay. I also wanted to find out about the tax rate expectation going into fiscal '08. Obviously after the restructuring there was some plan to I guess get a more normalized or a much lower tax rate. So what kind of guidance can you give us there?

All right, well, for the LRD structure to go in place, we have to physically move the inventory into the hubs. We have done that in Europe. Certainly that is not a problem in the US. We are in process in Asia; we still have to move inventory from Japan and Korea into Singapore and have the hub fully up and running before we can take full advantage of the LRD structure. Which reduces the amount of tax we have to leave in-country from 10% -- or profit in-country from 10% to 15% down to 2%.

We think that will be fully in place by the end of September. So in the first quarter, you're going to have sort of a mixed bag. You are going to have a lower tax rate in Europe, but not in Asia. But as we get into the second, third, and fourth quarter the tax rate should normalize. We are guessing it will be somewhere 30%, 35%. Maybe less than that as we get more and more of the profits back into the US.

As you know, right now we have a $38 million tax loss carryforward in the US that we can use against future earnings. So it will be quite a while before we pay tax on US profit.

Okay, that's helpful. Then just last question on DSG, obviously that has been one of the problem areas in terms of growth. But you mentioned the backlog looks a little better. Could you just give us a little more insight into what you are doing with that business to return that business to growth?

Sure. Well, a year ago as you probably know, we were doing extremely well in DSG. We had, for instance, the New York Stock Exchange contract which was a $10 million contract. When you're running an 80, $90 million business and you've got a $10 million contract going, everybody is working three shifts trying to get it out. Once it dries up, you have a major valley, and that is what we have experienced.

At the time, we had engineering groups in Minneapolis, in Boston, in Pixielink, in Marlborough, Mass., and also at ACT Kern in Germany. All of them fairly busy working in their own direction. As that went dry on us, we found that we had a lot of under-absorption on the engineering and manufacturing side. A lot of additional cost.

So what we are attempting to do now is to streamline and focus those operations where the engineering groups are working on one particular technology on a global basis, rather than having three groups working in parallel and then, at the same time, reducing the redundant expense. So it is a matter of focus and trying to get the whole team to work together as a global operation rather than three or four entities.

Okay, that's helpful. Thank you.

The bottom line is we have taken about $1.5 million worth of -- out of DSG SG&A so far, and we are still working on that. We hope to have the complete plan in place for DSG by October, is what we are working on right now.

All right, thanks.

Amy Norflus with Richardson Electronics.

Actually, I am with Pilot Advisors. You are Richardson Electronics.

Hi, Amy. Welcome aboard.

A few questions. One, how much did the display business lose? Not the -- yes.

During the year?

Yes. No, for the fourth quarter.

I don't know.

The EBIT.

Could you tell us that, Dan?

I would have to look.

Okay, that's fine.

We can get back to you, Amy.

Number two, did I hear you right that everybody profited, all the employees profited from your wonderful investment in real estate? Is that how their bonuses worked?

No, it is only -- we have seven or eight different compensation plans. Most of the salespeople are on incentive that is based upon gross margin, on product margin and sales.

On the administrative side, there are a number of the staff members that a portion of their bonus has to do with earnings per share. So they have individual goals that they are compensated on; and then they have a return on investment as part of their compensation; but they also have EPS.

So the ones that were impacted were the EPS portion of it, because of the -- as you can see, the $2.30 EPS number.

Okay. Why can't you just take a hacksaw and slash that SG&A?

I am not sure I understand you. I'd like to.

I mean, the way you said it is that you're waiting for people to come up. It's like you have all this business, you have 250 employees that are not there. Your revenue is down, and you're not being a little bit more proactive with the SG&A.

I just don't understand why you can even have $31 million of SG&A for the first quarter when you have been talking about all these restructurings that you have been doing and having.

Well, I guess it is sort of a balance. We certainly want to be in a position, for instance, with finance that we no longer have any kind of restatement issues or any material weakness issues, and we have all the staff to do all the proper restructuring. So that is -- you want to make sure you have the staff to get the job done. And at the same time, we want to reduce SG&A. So we are trying to do it carefully.

So like -- I mean, because if you are forecasting $135 million of sales with a 24% gross profit, that is the SG&A.

Well, it is certainly very close, you're right. What we need to do is to get the sales number up and the SG&A down, and that is what we are working on. But at the moment, that is what the first quarter looks like.

So what should SG&A be for the rest of the year?

It should run about 20% of sales. That is our target, and what we have targeted was in the internal business plan. We also were forecasting growth in the first quarter, which we haven't seen. That is why we are seen now it will be somewhere between $130 million and $135 million.

Is 20% the SG&A, and then there is corporate SG&A too, correct? Or that is the total SG&A?

No, the total SG&A is -- 20% is what we are driving towards. We are not there yet, for sure.

Okay, thank you.

(OPERATOR INSTRUCTIONS) I am showing no additional questions in the queue at this time. I would like to turn it back over to Mr. Richardson for the concluding remarks.

All right. Well, thanks very much for joining us. We are all in the office the rest of the week for sure. So if you have any additional questions, please give us a call. Thanks very much.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference. You may now disconnect.