Planar Systems F4Q08 Earnings Call Transcript

Planar Systems Inc. (PLNR)

F4Q08 Earnings Call

November 19, 2008 5:00 pm ET

Executives

Gerry Perkel - President and Chief Executive Officer

Scott Hildebrandt - Vice President and Chief Financial Officer

Analysts

Jim Ricchiuti - Needham & Company

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008, Planar Systems earnings conference call. My name is Amid and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Gerry Perkel, President and CEO; please proceed, sir.

Gerry Perkel

Good afternoon and thank you for joining us for Planar’s fourth quarter and fiscal year 2008 earnings conference call. With me this afternoon is Scott Hildebrandt, Planar’s Chief Financial Officer.

Before I begin, I do need to say that the press releases we issued today contain forward-looking statements. On this conference call, we will comment on our strategic business and financial outlook and make other forward-looking statements based on our current expectations, estimates, assumptions and projections. Words such as expects, anticipates, intends, plans, believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements.

All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. I’ll refer you to the press releases we issued earlier today and our periodic filings with the SEC for a description of factors that could cause actual results to differ materially from those forecasts. The forward-looking statements we make today speak only as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

With that behind us, let me start by saying fiscal 2008 was a challenging year for Planar. We dealt with difficult economic conditions as well as numerous challenges integrating our newer Home Theater business. Given these challenges we shifted our strategy earlier in the fiscal year. Since that time we’ve been working to improve our balance sheet fix and/or fix and sell our underperforming and/or non-strategic businesses and continue to work to grow our core and profitable industrial business. We have been making progress towards our new goals.

First, we have sold our medical business for cash. Second, as we announced earlier today, we have sold a portion of our digital signage business for cash to Bally Gaming. Under the agreement with Bally, Planar retains the Coolsign business and products for all fields of use other than the gaming field, which Bally has the exclusive rights to pursue. Third, we have been growing our highly profitably industrial business and believe we can continue to grow this business into fiscal 2009.

Finally we have been working to restructure operations and improve our video wall and Home Theater businesses in an attempt to increase profitability. We believe these cost reduction actions taken over the last few months, will act to improve the go forward profitability of our business and thereby continue to help improve our cash flow and shareholder value.

Turning to our business results, during the quarter, sales and our industrial segment grew 31% to $21.4 million in the fourth quarter compared to the fourth quarter in fiscal 2007. With this fourth quarter performance, growth in this profitable segment of our business reached 18% for the full 2008 fiscal year. Sales in the fourth quarter were positively impacted by the previously announced new custom retail display products developed for PRN, which began shipping during the fourth quarter.

Sales in the Commercial Business Unit were flat sequentially, as the pricing environment for desktop monitors was relatively stable. Sales for both the Control Room & Signage business unit and Home Theater business segments declined sequentially. Both of these businesses were impacted by the global economic slowdown, with the Home Theater business negatively affected by lower consumer spending as well as continued contraction in new higher-end home construction starts.

With that I’ll now turn the call over to Scott who will review our financial performance in a bit more detail. Scott.

Scott Hildebrandt

Thank you, Gerry. Let me start with the brief summary of our reported earnings. As you know we announced a fourth quarter GAAP loss per share of $1.6 earlier today. This was both positively impacted by the sale of the medical business reported under discontinued operations and negatively impacted by a number of GAAP charges I will review later.

Adjusting for these items we reported a $0.37 loss per share on a non-GAAP basis. It’s important to note that the non-GAAP loss of $0.37 per share was negatively impacted by additional charges primarily relating to inventory warranty and other adjustment in our Home Theater business. Therefore our base business, non-GAAP EPS would have been a loss of $0.12 per share adjusted for these charges.

Relating to our base business income statement performance excluding all charges, non-GAAP gross margins were approximately 17% of sales in the fourth quarter. Our gross margins were negatively impacted by unfavorable product mix and cost absorption within the industrial business and higher than expected cost and unfavorable product mix in our Home Theater segment.

Non-GAAP operating expenses excluding all charges were approximately 22% of sales, a decrease from the third quarter do impart to lower spending in all functions in response to the company’s need to reduce cost.

Now, let me turn to the charges we took in the fourth quarter. First we recorded a $15.3 million non-cash GAAP impairment charge for intangible and other long-lived assets associated with our Home Theater business unit, partially as a result of the decision to reduce the number of brands being marketed and to focus our resources on the Runco Brand.

Second, we recorded a $6.4 million non-GAAP charge related to excess inventory and warranty costs, again some of which was driven by the Home Theater brand consolidation strategy. Third, we recorded a $1.4 million allowance for bad debt, resulting from both the poor economic climate affecting some of our businesses and the change in strategic direction in the Home Theater segment.

Finally, we recorded a $1.1 million GAAP charge related to restructuring plans made during the fourth quarter, some of which related to cash severance to be paid over the next few quarters.

As a part of the year-end closing, we also had some favorable impacts to the income statement. We reduced some historical purchase accounting liabilities booked as a result of prior acquisitions. In addition, we recorded the gain on the sale of the medical business along with the stub period results within discontinued operations.

Turning to our balance sheet, we ended the fourth quarter with cash and short-term investments of $14.9 million and no debt. In addition, we were able to reduce inventory $5.1 million before any charges and we’ll continue to focus on working capital management moving forward. Inventory also came down compared to the last quarter due to the medical business sale as well as the inventory write-downs mentioned previously.

Looking forward, we believe the first quarter of 2009 will experience a sequential revenue decline followed by a sequential growth in the second quarter. As a result total sales are expected to be $47 million to $50 million in the first quarter of 2009.

Now, we are going through the current transition. Near-term earnings are difficult to predict and may continue to result in modest losses on a non-GAAP basis over the next few quarters. We also believe, we will end the first quarter of 2009 with $8 million to $10 million in net cash, partially driven by the timing of certain tax and restructuring payments.

We currently believe that the cash flow and non-GAAP profitability should turn positive in the second half of 2009, as we implement our previously stated objectives. Finally, we expect to incur additional restructuring charges to improve future profitability and cash flow in the first quarter of which no more than $1.5 million is expected to be in cash.

Shifting to some additional forward-looking information, fully diluted shares outstanding should be approximately $18.2 million for the first quarter of 2009. Also we are projecting capital expense of $500,000 in the first quarter and depreciation should be in the range of $1 million to $1.2 million in the first quarter of 2009.

With that I’ll turn it back over to you Gerry.

Gerry Perkel

Thank you, Scott. Let me summarize by saying that we are very pleased with the growth we achieved in our industrial segment over the past year. While as Scott mentioned earlier, we expect Q1 to be a seasonally soft period for our industrial business. We do believe we can grow this profitable segment in FY ‘09. That growth is linked to both new customer relationships we forged last year, continuing to contribute this year, as well as a strong funnel of new opportunities.

We are also pleased with the added balance sheet stability that resulted from the sale of our medical business. Additionally, the just announced digital signage transaction will contribute both to improve profitability and cash to the balance sheet.

Obviously, the last few months, we have all witnessed a somewhat unprecedented level of economic volatility. This economic uncertainty coupled with the loss of profit contribution with the sale of our medical business, has required that we redouble our efforts to restructure our company to improve profitability.

To that end, we have taken a number of significant restructuring cost reduction actions. Beginning in Q4 and continuing into Q1, we are implementing actions particularly aimed at the areas of business where profitability needs to be improved or trying to protect our efforts to continued growth in the industrial segment.

In total, we expect the actions we have taken will reduce the annual cost beginning in the second quarter of fiscal 2009 in excess of $15 million. We are monitoring constantly our order rates in an effort to assist the strength of ongoing demand in these volatile economic conditions. Additionally we are continuing to evaluate a variety of opportunities to monetize non-strategic assets.

Our goal is to return the company of profitability as soon as possible and we’re committed to taking actions to achieve that goal.

With that I will now open up our conference call for questions. Operator, if you’d come back on the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

Gerry, it’s a little surprising to hear that on the industrial side of the business you still feel you can grow the revenues this year given the economic environment? Can you talk a little bit more about where you’re seeing the growth?

Gerry Perkel

Well, I think what we’ve seen is that throughout the year last year Jim, we’ve brought on new customers a new segments that we’ve participating. Some of those are custom designed displays that are into retail and other digital signage basis or military contracts and are just a variety of different segments where people have found the kinds of products we can put together meeting their needs and many of those contracts just started in the later part of the year and we think we’ll continue to generate demand coming into this year.

In addition, we have numerous new opportunities in our funnel that we are working on and trying to get hose that would contribute to this year. So, it’s kind of the investment and developing that large funnel that we’ve been talking about for many quarters, started to payoff last year and we see continued opportunity to do that going forward.

Jim Ricchiuti - Needham & Company

Now for the commercial display portion of the business, I assume that you are seeing some weakness there just like everyone else?

Gerry Perkel

Yes, a little bit and probably maybe more of the impact for us is what we’re seeing on some of the selling prices. We’ve been attempting to run our inventories as lien as possible to be able to ensure that we can take advantage of cost reductions coming out of Asia, but we do see ASP is going down, which does impact the total dollar volume, but we’re think that while that’s a challenge we’ve really trying to drive our business to be setup to run with those challenges in mind and to be able to react very quickly.

Jim Ricchiuti - Needham & Company

Now on the CSBU unit, how much of an impact are you seeing from the economy in that business in the command and control portion of the business? I assume that’s been more economically sensitive, are you seeing folks push out some of the business, the orders?

Gerry Perkel

Yes, we have seen a slowdown and people differing or delaying certain decisions, in a few places, people putting off those decisions. We also over the last six months have seen a slower government funded projects, slower spending there. We’ve seen a little bit of improvement to the funnel at this point.

Right now, as we look at that business we’re seeing that there’s some good opportunities coming into the funnel, but its hard work to make sure we get all of those orders. So, it has been impacted to some degree by the economics or circumstances, you’re right.

Jim Ricchiuti - Needham & Company

Scott is there any help you can give us on gross margins. I guess the adjusted gross margin for Q4 is 17%. You’re going to still have some absorption issues clearly the next couple of quarters; do you see much in that way of sequential improvement there?

Scott Hildebrandt

Well, maybe not Q1, Jim. For the reasons you’ve indicated, but most of the reasons we had dip down to 17% from what we’ve been, achieving in the past where due to kind of more one of the issue. So we get past to the first quarter and combined with the cost reduction actions that we have talked about. I think we get back up to the 23% to 25% gross margin level that we’ve historically been at.

Jim Ricchiuti - Needham & Company

How about OpEx? Can you give us a sense; I don’t know if you gave your headcount number at the end of the Q4? Can any senses there how you see your operating expense over the next one to two quarters?

Scott Hildebrandt

Sure, again kind of looking out more like the second quarter through the balance of the year is again more in transition on the first quarter. I think if you look at our expenses that we incurred in operating expenses, research development, sales and marketing and G&A, in the fourth quarter that was around $16.5 million. If you take out from that the bad debt impact of that, you really get down to an extra rate of about $15.6 million.

We see that coming down to more or like around $14 million or a little bit less than $14 million per quarter when we get to Q2 and that’s kind of, to go back to what Gerry was saying of the $15 million cost reductions that we see for on an annual basis beginning in the second quarter, about $10 million should impact operating expense and about $5 million will impact the improved gross margins that we were talking about. So I don’t know if that helps at all, but that’s….

Jim Ricchiuti - Needham & Company

It helps. I look at Q2 Scott, cash flow break-even in terms of revenues. Where would you think that would be?

Scott Hildebrandt

Well, it’s hard to look it at like that Jim just because our various businesses have such different gross margin profiles, but we are looking to be kind of somewhere around cash neutral to a little bit of a drain in Q2 just due to actually factors outside of the business including severance and some various tax payments that we’ve got. So, again it kind of this more or like Q3 and Q4. We turn cash positive and hopefully we get the profitability as Gerry was talking about break-even as well.

Operator

(Operator Instructions) I show that there are no further questions at this time. I would like to turn the call back to Gerry Perkel for any remarks.

Gerry Perkel

Thank you for joining us on the call and as we said we’re committed to continuing to drive to improve the profitability and the cash performance within the company. Obviously it’s challenging times, but we’re monitoring everything we can and evaluating every option that we can to be able to continue to drive improvement for the company.

With that I’m going to close the call and we’ll talk to you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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