Richardson Electronics Ltd (RELL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FY '10 fourth quarter and year-end earnings conference call. (Operator instructions.)

I would now like to turn the conference over to your host for today, Mr. Edward Richardson, Chairman, CEO, and President. Please proceed.

Thank you and welcome to our fourth quarter and fiscal 2010 conference call. Joining me on the call today are Kathy Dvorak, Chief Financial Officer; Greg Peloquin, Executive Vice President and General Manager of the RF, Wireless, and Power Division; and Wendy Diddell, Executive Vice President, Corporate Development, and General Manager of Canvys.

During the conference call, we'll be making forward-looking statements, including those regarding the anticipated outlook for our business. These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties. Therefore, we encourage you to review the Safe Harbor Statement found in our press release and to review the detailed description of risk factors in our SEC filings.

Today's call will begin with a brief discussion of our fourth quarter and the entire 2010 fiscal year, followed by Kathy's discussion regarding the details of our financial performance. Greg and Wendy will then provide commentary on RFPD and Canvys. And finally, I'll conclude with a few comments on EDG and our outlook for the new fiscal year. After that, we'll be happy to take your questions.

Our fourth quarter performance represents another quarter of improvement for Richardson Electronics. We achieved strong double-digit growth, with sales up 26% compared to the prior year's fourth quarter.

Backlog continues to strengthen, and there are many positive indications that we've turned a corner both for our Company and the industry.

We have experienced some margin pressure, but it reflects both our mix of business as well as some strategic decisions that will contribute to long-term growth.

While sales grew, we held the line on operating expenses, which dropped to 17.6% of sales in the fourth quarter.

We generated over $24 million of cash from operations, and our balance sheet is in great shape.

We called the remaining portion of our convertible bonds last month, and financed them under a revolving credit facility at much lower interest rates.

These accomplishments were made because of the continued dedication of the Richardson Electronics' employees around the world.

As I mentioned, sales were up 26%, reaching a $145.1 million in the fourth quarter. This is typically the strongest quarter of the year, reflecting the seasonality of the business.

The focus for our senior management team continues to be on improving our operating leverage. We're working hard to increase our margin dollars while continuing to reduce our cost structure.

SG&A in fiscal 2010 was down about $15 million from fiscal 2009, and almost $30 million from fiscal 2008. We clearly have become relentless in pursuing operating efficiencies. We believe we can hold expenses at these levels for fiscal 2011 and realize improved operating leverage as we grow our business.

During the quarter, we incurred about $1 million of severance expense. Our headcount continues to decline as we pursue efficiencies in every area of the business.

Our largest business unit, which serves the RF, Wireless, and Power Conversion market, is currently experiencing extremely strong growth. We're somewhat cautious in our assessment of the opportunities for continued growth at this level.

RFPD's growth is broad based, indicating that the supply pipeline was depleted in the downturn and lead times have been extended. Many customers appear to be placing protective orders to ensure they have the components they need for their projects. However, we're confident that the majority of RFPD's growth is the result of new infrastructure build outs, and the fact that the alternative energy market is presenting some interesting opportunities.

The business is good right now, and our visibility indicates that this will continue to be good at least for the near term. We're cautiously watching the supply chain to assess whether or not we are in a sustainable recovery. At this point, we're experiencing renewed optimism as potential opportunities turn into solid orders.

The electron device group is enjoying top line growth as well. We recently entered into an expanded distribution agreement that capitalizes upon our capability as the strongest channel to market in the tube industry. This agreement is providing the incremental volume, although at lower margins.

We are seeing many customers in various market segments around the world buying again after buying virtually no replacement tubes for the past 12 months. In addition, we're seeing overall demand improve in the semiconductor wafer fabrication industry.

Canvys continues to struggle, as customers have been slow to resume capital spending. Sales in the quarter were down about 7%. However, this division actually turned in improved results on lower sales as a result of reduced cost structure.

Looking ahead, we believe that sales for the first quarter of fiscal 2011 will be in the range of $120 million to $125 million, representing double-digit growth over the prior year and reflecting the seasonality of the business relative to our strong fourth quarter.

Now I'll turn the call over to Kathy to present our financial highlights.

Thank you, Ed, and good morning, everyone.

Fiscal 2010 was a year of many significant achievements that laid the foundation for continued success in our new fiscal year. We produced cash from operations of over $24 million, ended the year in a net cash position, and paid down $32.8 million of convertible bonds.

The highlight of the quarter was the fact that our operating margin rose to 5.2%. We increased our operating margin in each quarter as we progressed through fiscal 2010. We are confident that as we grow our sales, we will continue to see the benefits of operating leverage.

Highlights of our fourth quarter include sales of $145.1 million, up 26.6% from the prior year. This was a strong finish to a better than expected year, and well above the upper end of our range of guidance.

Gross margin was 22.8% this quarter compared to 24.2% last quarter. Our gross margin rate was impacted by a number of factors which include the mix of business between business units and the mix of business by geographic region.

SG&A was $25.5 million, or 17.6% of sales, compared to 19.5% of sales in the third quarter, 20.4% in the second, and 21% of net sales in the first quarter. Included in the $25.5 million is approximately $1 million of severance expense. Our SG&A is down $900,000 when comparing this quarter to last year's fourth quarter.

Headcount of 744 employees is down slightly from last quarter and compares to 780 employees at this time last year. As I've mentioned before, we have made great strides in making process improvement a way of life. This is allowing us to automate, simplify, and permanently reduce our cost structure.

Operating income for the fourth quarter was $7.6 million, or 5.2% of net sales.

One of the areas that experienced the greatest year-over-year impact was in foreign currency translation, as we transact business in many currencies. In the quarter, we saw the dollar strengthen significantly relative to foreign currencies.

Therefore, this year's fourth quarter earnings were favorably impacted by a $194,000 foreign currency gain. Our foreign exchange gain was primarily related to the timing of repatriating US denominated cash from our foreign bank accounts.

During the fourth quarter of 2010, net income was $6.6 million and EPS was $0.36 per diluted common share.

Sales for fiscal 2010 were $491.8 million, down about 1% compared to the prior year. Overall, we were pleasantly surprised to end the year with relatively flat sales, given the economic challenges we faced early on in the year.

Gross margin remained flat at 24% after adjusting for the inventory reserves taken in the prior year.

Operating expenses were $95.8 million, or 19.5% of sales. Achieving this operating expense ratio represented another milestone for us, as our goal was to exit the year at an expense ratio that was under 20%.

Operating income was $22.2 million, and operating margin reached 4.5% during fiscal 2010. Income from continuing operations was $17.3 million, and diluted EPS for fiscal 2010 was $0.95.

We continue to focus on our balance sheet, which includes cautiously investing in working capital and minimizing our debt levels. Consequently, we had no borrowings outstanding under our revolving credit facility at the end of the fourth quarter. We had $19.5 million of convertible bonds outstanding at year-end, and a cash balance of $29 million.

Therefore, we ended the year in a net cash position of approximately $9 million. Subsequent to year-end, we redeemed the remaining outstanding 7.75% bonds and refinanced them under a revolving credit facility that is currently at an interest rate under 2% and has a maturity date in October 2013.

As a result of the redemption of the convertible bonds, our share count for fiscal 2011 will be approximately 17.9 million shares.

Our accounts receivable balance as of May 29th was $98.7 million versus $92.5 million at the beginning of our fiscal year. Excluding the impact of foreign exchange, our receivables increased by about $8 million during the year.

On a positive note, our allowance for doubtful accounts declined to 1.6% of accounts receivable at fiscal 2010 year-end, compared to 2.6% of accounts receivable in the prior year. And our days sales outstanding declined 13 days since the start of our fiscal year.

Our inventory was approximately $78.7 million compared to $81.2 million at prior year-end. Excluding the effects of FX and inventory provisions, our inventory decreased slightly at year-end.

As our inventory turns improve, a larger portion of our inventory is funded through accounts payable. Excluding the effects of foreign exchange, our accounts payable balance increased by approximately $9 million.

Cash flow generated by operating activities for fiscal 2010 was $24.3 million compared to $11.1 million in fiscal 2009. This reflects our improved bottom line performance combined with effective working capital management.

Capital spending for the fourth quarter was $650,000 and approximately $1.3 million for all of fiscal 2010. Depreciation for the full year was $4.1 million, or about $0.5 million less than the prior year.

We believe we have demonstrated our ability to show continuous improvement in our overall profitability. We have identified new areas that will allow us to continue on this path of cost reduction through fiscal 2011 and beyond.

Our fourth quarter results have certainly demonstrated the expense leverage that we can realize if sales recover. From a balance sheet perspective, we are cautiously investing in inventory so that we are able to take advantage of opportunities as the economy improves.

While sales momentum clearly has increased, we are taking somewhat of a wait and see attitude. We have built our plan for fiscal 2011 based on a modest 4% to 5% sales increase, reflecting varying degrees of optimism regarding all of the different markets we serve.

While there are areas of uncertainty, there are many encouraging indicators relative to accelerated sales growth. Our concern, of course, is whether or not we are in a sustainable recovery.

We anticipate that gross margin will be slightly below the prior year and expense dollars should only increase modestly. As I mentioned before, our goal is to maintain an expense ratio below 20% for fiscal 2011. Operating margins should continue to improve and be around 5%.

Capital expenditures for fiscal 2011 will be in the range of $2.5 million to $3 million, while depreciation and amortization should be about $3.7 million, which is slightly down from depreciation of $4.1 million incurred in fiscal 2010.

Guidance from a tax perspective is somewhat difficult, as we believe we may need to release a portion of our tax valuation allowance on specific deferred assets during fiscal 2011. This would create a significant tax benefit that would most likely be recorded sometime in the first half of the year.

What this means is that cash tax and GAAP tax will no longer be the same. We expect to pay around $2.5 million to $3 million for taxes on a cash basis. However, our tax provision or benefit recorded to our income statement may show significant fluctuations.

We, like most companies, faced unprecedented challenges in fiscal 2010. As a result, we set our course and made many sustainable improvements in working capital management and cost management that are clearly providing benefits. As we enter a new fiscal year, we are well positioned to capitalize on an improving economy, and therefore our confidence continues to grow.

Our performance during the fourth quarter demonstrated our ability to both grow our sales and improve our bottom line. The Richardson team clearly deserves the credit for the significant strides that we have made in expense control and working capital management. As a result, we are well positioned to take advantage of new opportunities in both established and emerging markets as the global economy recovers.

On that note, I would like to turn the call over to Greg to discuss RFPD's performance and outlook.

Thank you, Kathy. Good morning, everyone.

On the revenue side, RFPD captured the momentum developed in Q3, and ended Q4 with record quarter, the sales just over $106 million, up 26% over prior year.

Even more encouraging is the strength of our backlog, which is always a good indicator of the health of the business. Our backlog is also at a record high.

We believe this strong backlog is a reflection of a number of underlying market factors. First, starting in Q3, we experienced an inventory adjustment period as our customers depleted their inventories to extremely low levels in 2009.

Second, the increase in backlog caused capacity issues with our suppliers and extended lead times. This triggered additional bookings.

Third, because of our global engineered-focused strategy, we were able to take advantage of this period and grab market share from our competitors.

And finally, we did see some market growth in various pockets of the world in our two key business units, RF Wireless and Energy Power Management.

Gross margin for RFPD was 20.8% in Q4. Our margin percentage is down slightly in the quarter due to competitive pressure and geographic product mix.

On the expense side, RFPD expenses are below prior year as we continue to strive toward lowering our operating expenses while reinvesting in target growth areas.

With our strong third and fourth quarter, we ended FY '10 with increased top line growth over FY '09 and an extremely strong improvement in profitability. These two factors, in the midst of a global recession, is a true testament to our strategy and people.

Now let's turn to our key markets, RF Wireless and Energy Management. RF and Wireless experienced market share growth in each of its major growth areas, infrastructure, broadband, ISM, and defense.

Looking ahead into the next two quarters, our backlog indicates continued strength in these areas. In the first part of FY '11, we have seen this growth continuing. As the data traffic increases the need for LTE or 4G, this will strengthen, thus improving the demand for our microcell and repeater business, and the continued need for backhaul networks.

And our second growth market is the Energy and Power Management group. In Q4, we saw a major uptick in the rollout of wind and solar applications, primarily in China and India. Going into FY '11, one of our main goals will be to stay ahead of the curve in product delivery for power semiconductors and ultracapacitors as we continually win projects for hybrid drives, invertors, and battery chargers.

Overall, we were very pleased with RFPD's sales and operational execution in fiscal year 2010. We are entering fiscal year 2011 with cautious optimism, yet growing confidence.

We have grown to become the leading global RF, wireless, and energy management distributor and design support Company in the industry. With that distinction, we are committed to bringing continued growth opportunities to our customers and suppliers.

As an engineering service Company, we also distribute the product worldwide. We cannot lose our focus on inventory management, and we haven't. We continue to maximize our global visibility and to strategically use our inventory to gain market share, support our customers, and help our suppliers.

We know our global strategy of engineered-focused distribution is valued by our customers and suppliers. Our global sales engineers and product marketing managers are working every day to help in gaining market share and maintaining our position as the world leader in the marketplace.

We are deeply involved in two key growth areas, mobile communications and energy management. These markets are growing and are showing continued signs of investment.

We are committed to sustaining our cost redeployment strategy within RFPD. This strategy will again lead to increased profitability with top line growth in FY '11.

And now, I would like to turn the call over to Wendy.

Thank you, Greg.

Sales for Canvys, our Visual Technology division, were $12.4 million in Q4. This is a slight increase over Q3, but a 6.8% decline over the same period last year. Sales were softer than anticipated due to healthcare reform and uncertainty over reimbursements, creating a virtual freeze in healthcare spending.

Spending in our other display segments was also held in check by concerns that the economy has not yet stabilized, although our OEM customers in North America and Europe are indicating stronger demand.

Year-over-year, our sales declined by 17.3%. At least half of this decline is attributable to Canvys terminating its relationship with one of its largest yet most financially challenging customers.

The decline in our healthcare sales in the quarter caused our gross margin to fall from 27.2% in Q3 to 23.4% in Q4. Gross margin for the year was still 25.7%, a significant improvement over prior year gross margin of 21%.

As anticipated, Canvys' expenses were lower in the fourth quarter than the third quarter due to headcount reductions we made in the back half of the year. For the full year, expenses adjusted for severance were down nearly $2.6 million to $10.3 million versus $12.9 million during the prior year.

Direct operating contribution was up over prior year, in spite of the decline in revenue.

While economic conditions and overcapacity in the industry continue to be a challenge for this division, we have been successful, improving our bottom line performance and working capital efficiencies.

We are optimistic that, as the economy stabilizes, we will see revenue growth driven by demand for touch screen integrated custom displays in both our OEM and digital signage business segments.

Canvys is well positioned to deliver the highest quality display solutions using our current infrastructure, which will result in significantly improved operating performance.

And now, I will turn it back over to Ed.

Thanks, Wendy.

Now I'll conclude with a brief discussion of the Electron Device Group, or EDG. Sales for EDG were extremely strong during the fourth quarter. Sales increased by 56% compared to the prior year's fourth quarter.

This reflects a number of factors which include the market share we gained as we entered into an expanded distribution agreement that will provide approximately $10 million to $15 million in incremental sales in fiscal 2011, although at lower margins. This margin impact was seen in Q4, as gross margin declined to 30.4% from 33.3% in the third quarter.

We're seeing improvement in the industrial markets, as demand for replacement tubes increases. In addition, as I mentioned, we're seeing a significant increase in business from the semiconductor wafer fabrication industry. Bookings in total for EDG were over $10 million in June.

In summary, I'm very pleased with our performance in fiscal 2010 in what started out to be a very challenging economic environment.

We continue to focus on the future and what we do best, engineering solutions. I'm confident that Richardson Electronics' team will continue to deliver profitable sales growth as we enter fiscal 2011. We're a lean and flexible organization that will continue to drive process efficiencies to further improve our financial and operating performance.

Thank you for your support of Richardson Electronics as we continue to build momentum, creating a stronger Company for the future.

With that, Kathy, Greg, Wendy, and I will be happy to take your questions.

(Operator instructions.) Your first question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Please proceed.

Great. Thank you. Guys, do you expect gross margins to remain at this type of level for the remainder of the year, in the 22% and change, or do you see a recovery on some of the possibly mix or different projects that are forthcoming throughout the course of the year? Should we be thinking that gross margins now sit in the high 20% range, 22.5% to 23.5%, or should we assume that they improve from this level throughout 2011?

Good morning, Christian. We think they will improve somewhat. Certainly, there'll continue to be pressure in RFPD as the business continues to be -- the growth, anyway, in Asia where this lower margin is what we saw in the fourth quarter.

EDG's gross margin will improve perpetually as we take on this new business from the expanded franchise, but it'll be slow growth. So, I think somewhere in the 23%, 24% area for the year is probably reasonable.

Great. And then, Greg, as you look into China, I mean, can you give us an idea? There are so many -- so much noise out there regarding the demand in China and a potential slowdown in the back half of this calendar year again. Can you give us an update specifically to China and what you're seeing there?

Yes. Good morning, Christian. On China, we're seeing phase four. We saw the backlog for that increase in -- towards the end of May and in June. We'll be shipping into that at the end of our Q1 and Q2, beginning of Q2.

So, it -- we will definitely see an increase in business in Q1 and Q2 over Q1 and Q2 of last year. And in the back half, as the infrastructure business flattens as phase four is completed, we feel that the large increase in the Power Energy Management group will exceed any decline we see in the infrastructure business.

On a booking side, right now the Energy Management group bookings are at a higher percent than even the infrastructure bookings are for phase four. So, we're very excited with China with both of them. But, I think you're going to see that Power Energy revenue and profitability manage any downturn or slight decline in the infrastructure business.

In the second half of the year?

Yes, second half of our fiscal year.

Second half of the fiscal year. And then, in the Power Energy side, what specific products are you guys putting together and selling?

Well, it's mainly -- from a component point of view, IBGT is going into battery chargers and invertors. And then, from a component side and also an engineered solutions side, it's products that are -- be going into the inverter of the solar and wind power products.

So, similar to the Wireless group where a majority of our business is in the amplifier of the base station, in this business it's mainly in the inverter which converts the wind and solar into energy.

Perfect. Great. No other questions. Thanks.

Thanks, Christian.

(Operator instructions.) And your next question comes from the line of Gary Siperstein from Eliot-Rose Asset Management. Please proceed.

Hi, folks.

Hi, Gary.

Good morning, Ed. How are you?

Doing very well, thanks.

Congratulations to everyone, the whole team, on a spectacular year. I mean, it's --.

Thank you.

Really breathtaking and we really appreciate it.

The team did a fantastic job. It's obvious.

For the long-term shareholders, obviously everything you've done the last couple years has been wonderful and we've seen an appreciation of the stock. But, now that you've essentially cleaned up the balance sheet, and in light of the historical decision of the Company when we sold the security division to focus the way we're focused now, and with cash flow this past fiscal year at $24 million, assuming cash flow stays robust, can we start to see some of that being given back to the shareholder?

In other words, I don't think you guys want to go out and start building empires again, right? We're going to stay fine tuned, maybe, if anything, perhaps even get a little more pure. But, can we see stock buybacks and maybe dividend increases? I mean, I guess as of today with your great year just finished, we're nine change times earnings of last year, and presumably seven or eight times the new year's possible earnings. Can you talk to that, Ed?

Sure. We just had a Board meeting this week, and one of the discussions we had with the Board was considering increasing the dividend. And the other area, of course, is we'll look at buying stock back. As you know, we've now redeemed all of our bonds.

And so, we'll be opportunistic and watch the price of the stock. And we have a stock repurchase approved plan within -- from the Board. So, we'll just continue to look at it opportunistically.

Super. I appreciate that. I think the long-term shareholders believe you're on a beautiful path. And instead of using the free cash to do other things and perhaps muck things up, just continue the way you guys have been doing it brilliantly and return that cash to the shareholder, and I think we'd all be quite pleased. So, that you for that consideration.

Thanks a lot, Gary.

You have a follow up question coming from the line of Christian Schwab. Please proceed.

Great. Thank you. Hey, Kathy, how do you know -- we just put up $145 million, and your guidance kind of implies a number that, at the high end, would kind of average $129 million a quarter. We just gave guidance to $120 million to $125 million. I'm just trying to figure out how you guys are seeing seasonality this fiscal year.

Christian, let me take a shot at that, and then Kathy can jump in if she likes. What happens in our first quarter of the year, still a substantial amount of our business is in Europe. And southern Europe particularly just closes up in the latter half of July and August. So, we see the first quarter of the year seasonally to be our lowest quarter historically, and that's what we're looking at.

I guess we have fair visibility through Q1 and Q2, and we're pretty optimistic about that visibility. But, we're really concerned about what's going to happen in Q3 and Q4, which is the first two calendar quarters of calendar '11 basically.

So, we're just trying to be -- Kathy has a motto. It's under promise and over perform. And so far, she's been really good at that. So, we're following her motto.

Great. So, in essence, Q1 is the bottom, Q2 bumps up, and then, given her cautiousness, relatively business flat lining or pausing or whatever word you want to choose, Q3 and Q4 until we get kind of closer to the first half of calendar 2011 to see what the world really looks like. Is that fair?

That's right. That's exactly what we're doing. And Greg and his business unit, and to some extent in Canvys, they have enough bookings that they can forecast a little better than EDG, whereas with EDG, a large percentage of our business is shipped the same day the orders come in.

So, we have great backlog right now and we hope it continues. But, right now, we're being a bit cautious.

And then, it's -- and I had to jump on and off the call earlier. You might have said it and I missed it, and I apologize. What do you expect either tax rate or absolute dollar amount of taxes paid in fiscal year '11 to be?

I talked about that. And we anticipate that our cash tax will be $2.5 million to $3 million.

Perfect. For the year?

For the year, yes.

Great. All right. No other questions. Thank you.

Thanks, Christian.

Thank you.

There are no further questions on the line. I will now hand the call back to Edward for closing remarks.

Thanks, Veronica.

Well, Richardson Electronics is beginning our new fiscal year as a much stronger Company. We've proven that we can perform in spite of the most challenging economic environment we've ever seen.

Our team is committed to further improve the operational performance that we delivered this year. And I'd like to thank you for your support in fiscal 2010, and I believe that we'll continue to earn your confidence in the future by delivering strong, consistent financial results.

We look forward to reporting our progress again in July [sic], and we thank you very much for your time today and for your continued support of Richardson Electronics.

Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.