Richardson Electronics Ltd (RELL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal-year '13 second-quarter earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ed Richardson, CEO and Chairman of the Board of Richardson Electronics. Please proceed, sir.

Good morning, and welcome to our second-quarter 2013 conference call. Joining me today are Kathy Dvorak, Chief Financial Officer; Wendy Diddell, Executive Vice President of Corporate Development, and General Manager of Canvys; and Sandeep Beotra, Executive Vice President of Mergers and Acquisitions. As a reminder, this call is being recorded, and will be available for audio playback on our website.

During the call, we may make forward-looking statements, and based on certain risk factors, our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of our risk factors.

Net sales for the second quarter of fiscal 2013 were $36.6 million, down 6.5% from net sales of $39.1 million during the second quarter of last year, reflecting uncertainty in the global marketplace. Sales in the quarter continued to be hurt by slowing growth in Asia, combined with global financial instability. The year-over-year decline is also attributable to continuing economic issues impacting our European display business.

Gross profit for the second quarter of fiscal 2013 was $10.7 million, or 29.3% of net sales, compared to $11.7 million, or 29.9% of net sales during the second quarter of fiscal 2012. Gross profit during the second quarter was impacted by under-absorbed manufacturing labor and overhead of $300,000, or 0.8% of net sales. During the quarter, we adjusted resources to match demand while maintaining flexibility to address opportunities as the economy strengthens.

Expenses in the quarter were 5.1% more than the prior year, reflecting incremental investments in key initiatives, as well as severance costs and expenses related to a preference claim. As a result of lower revenue and incremental expense, income from continuing operations for the second quarter of fiscal 2013 were $600,000, compared to income from continuing operations of $1.6 million during the second quarter of last year.

With improving global economic conditions, we anticipate sales for the second half of our fiscal year to be up significantly over the first half. We continue to focus on converting sales from OEM customers, the end users, through our expanded service capabilities for lasers and industrial tubes, and we continue to drive the Organization to find new customers and sources of revenue.

In December 2012, we added Sandeep Beotra to our executive management team as Executive Vice President in charge of mergers and acquisitions. Sandeep recently worked for Morgan Joseph TriArtisan, a middle market investment banking firm, where he was Managing Director covering technology and telecommunications. Sandeep has an MBA in Finance and an undergraduate degree in electronics and communications engineering. Our ability to create opportunities to extend our business model into new industries is crucial to the long-term success of the Company, and we look forward to having Sandeep's help and experience to achieve our growth goals.

Now I'll turn the call over to Kathy Dvorak to share the details of our second-quarter performance.

Thank you, Ed, and good morning. Sales in our second quarter of fiscal 2013 were $36.6 million, representing a 6.5% decline in sales volume compared to the second quarter of fiscal 2012. While we are not pleased with our sales performance during the first half of our fiscal year, we are beginning to see backlog increase, and therefore, expect to see sales volume improve significantly during the second half of fiscal 2013.

Gross margin decreased to 29.3% from 29.9% in last year's second quarter. This decrease reflects about $300,000 of unabsorbed labor and overhead expense related to the significant volume decline within our manufacturing operation.

In response to the declining volume, we have reduced some of our fixed costs while we wait for the anticipated rebound in demand from manufactured products within the semiconductor wafer fabrication market. Our customers are acting and ordering cautiously, but we are beginning to see quoting activity pick up. Adjusting for the absorption hit, gross margin would have been 30.2%, or a 30-basis point improvement compared with the prior year.

Our operating expenses were up about $300,000 during the second quarter of fiscal 2013, compared to last year's second quarter. Included in the second quarter of fiscal 2013 operating expenses were over $400,000 of expense related to severance, a preference claim, and unusually high product-development costs. Adjusting for these expenses, operating expenses were slightly below the prior year's second quarter. We are closely monitoring our spending, and we believe we are well positioned to leverage a relatively fixed expense base as sales volume improves.

Operating income for the second quarter of fiscal 2013 was about $500,000, or 1.4% of sales, compared to $1.7 million, or 4.4% of sales in the second quarter of last year. Adjusting for the items I noted that affected gross margin and operating expenses, operating income would have been about $1.2 million, or 3.3% of net sales for the second quarter of fiscal 2013.

Interest income for the quarter was $352,000, and FX was a $300,000 loss. The loss on FX was primarily driven by the strengthening euro over the US dollar during the second quarter. As I have mentioned in the past, we do hold US dollars in some of our foreign subsidiaries where the euro is the base currency. We continue to monitor foreign currency exchange rates relative to the many currencies we hold overseas.

Income from continuing operations were $609,000 before tax. Our tax provision from continuing operations for the quarter was $28,000. So, income from continuing operations was $581,000, or $0.04 per share.

For the first half of fiscal 2013, sales were $72.3 million, and gross profit was $21.4 million, or 29.6%. SG&A was $20.4 million, and operating income was just over $1 million. On a year-to-date basis, our tax rate from continuing operations was 15.3%, reflecting our geographical distribution of taxable income, as well as our forecasted cash available to distribute back to the US in each of our foreign jurisdictions. We expect our tax rate for fiscal 2013 to be just under 20%.

Cash and investments at the end of the second quarter were $147.3 million. During the second quarter, we spent approximately $6 million on share repurchases, and working capital was a source of cash of $4.2 million. The $4.2 million source of cash reflects a decrease in inventory of $2.3 million, combined with an increase in accounts payable of $2.7 million, offset by an $800,000 increase in receivables. Just to clarify, this is cash flow net of any effects from foreign exchange rates and acquired businesses.

While our economic environment clearly remains fragile on a number of fronts, we remain excited about opportunities for growth. We are carefully evaluating potential areas for growth that will allow us to leverage our global infrastructure and customer base. We believe the market environment is showing signs of improvement as we move into the new calendar year. Our outlook for the second half of this fiscal year is for sales to be significantly better than the first half of fiscal 2013.

Capital spending for the year will be about $1 million. Our GAAP tax rate will be about 20%, and, as we have noted in the past, we currently have a $6.4 million income tax receivable. We have been active in our share repurchase plan. To date in fiscal 2013, we have repurchased about 964,000 shares, using approximately $11.5 million of cash. Our total share repurchase authorization remaining is about $35 million, and shares outstanding are 15 million.

In conclusion, we are confident in our ability to reduce our costs and achieve our operating margin target. Our long-term objective is to grow the business, allowing us to leverage our support function costs and achieve an operating margin above 5%.

Now, I would like to turn the call over to Wendy, who will discuss Canvys.

Thank you, Kathy. Good morning, everyone, and Happy New Year. Canvys sales for the second quarter were $10.4 million versus $10 million during the first quarter, and $11.1 million in the second quarter of FY '12. Sales in the North America custom OEM segment were above prior year, while sales in healthcare and in Europe were below prior year. On a year-to-date basis, revenues in both North American segments continue to exceed prior year.

Gross margin in the second quarter for Canvys was 27%. This is an improvement over 26.4% realized in the first quarter, but still below 28.3% during the second quarter of FY '12. The decline over prior year continues to reflect the impact of euro exchange rates on fixed-price contracts in Europe, and to a lesser degree, higher freight costs in both of our custom OEM segments. Gross margin in our healthcare segment exceeded prior year during the second quarter, and on a year-to-date basis.

As a result of the ongoing challenges we face in our European custom OEM segment, we restructured the team and reduced head count from 40 to 32 during the quarter. Severance expense associated with these changes was recognized in the second quarter. On a positive note, our book-to-bill ratio in Europe was well above 1 in both November and December, and backlog is building as the team benefits from a full year of focus on new customer and new project acquisition.

Last quarter, we talked to you about prospecting for new business being the number one priority for Canvys, and working on new base models which can be easily and rather quickly modified to specific customer requirements, such as our True Flat monitor series. During the quarter, we initiated a much more concerted effort to share project and customer wins between Europe and North America. This not only reduces development time, it gives us leverage in accessing different divisions of global customers, and will ultimately drive costs down on components.

While we are all breathing a collective sigh of relief that the fiscal cliff, for the most part, has been averted, we were disappointed to see that the 2.3% medical excise tax went into effect on January 1. For our customers, this is basically a price increase, and therefore, we fully expect that our customers will be looking for ways to further cut costs.

Nothing, however, changes our approach to the market. We continue to focus on finding new opportunities for custom displays, not only in the medical field, but industrial applications as well. We remain confident that our ability to understand customer requirements and craft a long-term unique solution that is cost effective is more relevant than ever, particularly with a focus on cost containment and the release of new technologies, such as Windows 8.

End customers, such as patients in hospitals, want to see the latest technology at work. As a result, our OEM customers rely on us to help redesign and update the displays, often long before the equipment itself is redesigned. We continue to work on growing our sales of image systems PACS monitors, as well as replacement displays for other healthcare requirements. PACS stands for Picture Archiving and Communications Systems. The monitors we sell are used in diagnostic imaging for viewing highly sensitive images where precision is critical in diagnosing a patient.

At the end of November, we participated in RSNA, the largest medical trade show in the world, hosted by the Radiological Society of North America. We had good interest from customers throughout Latin America, as well as North America. As we learn more about healthcare trends and changing legal regulations in Latin America, and more actively promote the Image Systems brand, we anticipate our sales will grow and will provide a nice base for the Company's expansion in healthcare outside the US.

In summary, we'll continue to focus on new business acquisition and revenue growth, while carefully controlling expenses and managing resources. We are hoping that 2013 brings economic recovery in Europe, and a more stable political and economic environment in the US.

Thank you again for joining us this morning. Ed will now provide an update on EDG.

Thanks, Wendy. EDG sales were $26.2 million in the second quarter, down 6.5% from $28 million in the second quarter last year. Gross margin was 30.3%, down slightly from 30.5% in the prior year, due to under-absorption in manufacturing associated with a drop in demand for semiconductor wafer fabrication components. Sales in Europe and Latin America strengthened over the prior year, while sales in Asia-Pac region continued to lag. Given the decline in demand for several manufactured products, we reduced head count and working hours in our manufacturing facility. ¶ During the quarter, sales in marine and broadcast tubes increased over the prior year by 6.6% and 19.8%, respectively. One of our most significant growth areas is consumable parts for laser equipment. This includes products such as lenses and bellows, and most recently the addition of rebuilt driver stages. We're confident that laser consumables, coupled with our expanded service offering, ensure that we offer greater value to our end user customers, and a cost effective alternative to the OEM for replacement power grid tubes. In November, we had a record month for laser tubes sold to end users, and margins continue to strengthen appreciably year over year as we replace OEM business with end user sales.

Another highlight for EDG in the second quarter was Powerlink, a service company we acquired at the beginning of the second quarter in FY '12. Sales and margin were up significantly over the second quarter of last year. We continue to invest in the Power Link team as we seek to expand sales in microwave service and traveling wave tubes. Powerlink continues to be extremely valuable in expanding our laser and industrial tube service capabilities, and is poised to play a key role in the servicing of replacement parts for the medical market in the future.

While we are disappointed in the revenues, EDG continues to provide a solid base upon which we can grow Richardson Electronics. We'll continue to work with our key suppliers to expand distribution and create new demand. We're more convinced than ever that providing highest quality replacement parts and services in the industry is what's made us successful in an industry where 20 years ago experts told us demand for power grid tubes would not exist today.

Today we're actively pursuing several companies in the diagnostic imaging replacement parts and service market, which would provide a global platform from which we can expand the range of products and services we offer. We believe there is a real need for a global independent provider in the medical replacement parts market, and we intend to fill this void. We will also continue to look for opportunities to acquire companies which can expand EDG's product range and service capabilities. The addition of Sandeep Beotra to our team gives us an added resource to focus on acquisitions while managing our core business.

We remain cautiously optimistic that the global economy will show signs of strengthening throughout the first half of calendar-year 2013. Given seasonality, we anticipate sales in the second half of the year to be stronger than the first half, with sales increasing slightly in the third quarter, and more substantially in the fourth quarter. We'll continue to monitor expenses and to reduce costs when necessary during this period of limited visibility.

At this point, Kathy, Wendy and I will be happy to answer your questions.

(Operator Instructions)

Your first question comes from the line of --

Mark Zinski, 21st Century Equity Research.

Please proceed.

Yes. Good morning, everyone. First question. I guess I'll put you guys on the spot in terms of your sales guidance. Obviously this quarter sales came more in line with your guidance than the prior quarter. Are you feeling a little more confident that you have sort of a grip on current sales trends?

Well, November was the best year we've had to date, and we were pleased with that. December is really hard to tell, because it ends up being a two-week month with all the holidays, and many manufacturers took advantage of the holiday this year to shut down for 10 days or so. So I guess we're as confident as we can be. Backlog is good. We've seen more quoting activity. So I would say that we're feeling better now than we were at the end of the first quarter for sure.

Okay. And then in terms of the unabsorbed manufacturing labor and overhead related to the semiconductor vertical, is that kind of a one-time event that you think is behind you, or could this be sort of a recurring problem area going forward?

Well, it's been a problem for us for sometime. As you know, the semiconductor wafer fabrication market is very cyclical. It probably goes up and down more than any other market which we address. What we're trying to do is to diversify more into the medical area and other areas that are more stable and show some good linear growth for the future, and not be so heavily devoted or counting on the semiconductor wafer fab area. So we think we can correct the situation and get back to a normal position, but it's going to take a quarter or so.

Okay. And then next question for Wendy. In terms of Canvys. You guys have stated that healthcare is an important strategic area going forward. You mentioned the medical device tax is being a little bit of a negative. But with the election over now, are you sensing from customers a little more clarity on where they think healthcare is going now?

That's a good question. I can't say that we're sensing that there's a lot of clarity. I think there's still a lot of confusion and challenging going back and forth in terms of some of the new regulations, and for example, the excise tax is a really good example where there's still a lot of pushback by our customers. We've talked a lot about it. We've seen some of our customers who are starting to order more of their products, which again requires more displays, so that's a good thing.

On the healthcare side itself at the hospital level, again I would say it's probably more positive than it's been, but I still think the cost reduction is going -- is really going to challenge how much product they are able to bring in, how much new replacement products they are able to get from us. So we're going to have to sit back and watch and wait. But I would say generally, the market feels somewhat better, but again on the manufacturing side of new equipment, with that excise tax, we're going to have to watch that really closely.

Okay, great. And then just last question, In terms of the acquisition activity and bringing Sandy on board, do you feel like you're getting closer to an acquisition here in the near future? And are you still, I think you mentioned you're still looking at both EDG and Canvys for potential acquisitions. Are those still both viable areas, or are you leaning towards more of an acquisition in Canvys?

No, we are really currently not looking at anything for Canvys. We really want to work hard on the European operation for Canvys and get that stable before we look at any more acquisitions there. No, we continue to work hard at the diagnostic imaging portion of the healthcare space. We're probably looking at three or four companies as we speak. I can't tell you there's anything eminent there, but we're really excited about the opportunity going forward.

Okay, great. That's it for me. Thank you.

(Operator Instructions)

At this time, there are no additional audio questions. You may proceed.

Thanks, Patrick. Well, thank you for joining us and for your continued support of Richardson Electronics. I would also like to thank our employees and our partners for their hard work and commitment. We're more excited about our future than ever, and we look forward to discussing our fiscal 2013 third quarter results and updating you on our growth strategies in April. We wish all of you a very happy new year and the best for 2013. Thank you very much.

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