Del Global Technologies (OTCPK:DGTC) F1Q09 Earnings Call December 5, 2008 11:00 AM ET
James A. Risher – President & Chief Executive Officer
Mark A. Zorko – Chief Financial Officer
Good day everyone and welcome to the Del Global first quarter 2009 financial results conference call. At this time I would like to inform you this conference is being recorded and that all participants are currently in a listen-only mode.
I will now turn the call over to Mr. [Girard Lobo]. Please go ahead, Sir.
Good morning everyone and thank you for joining us today. Jim Risher, Del Global’s President and Chief Executive Officer and Mark Zorko, Del Global’s Chief Financial Officer will be hosting today’s call.
Before we get started I’d like to remind everyone that statements about future results made in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations in the current economic environment. Del Global cautions that these statements are not guarantees of future performance.
These statements involve a number of risks and uncertainties that are difficult to predict including but not limited to the ability of Del Global to introduce products as scheduled, obtaining necessary product certification, implement its business plan, retention of management, changing industry in competitive conditions, obtaining anticipated operating efficiencies, securing necessary capital facilities, favorable determinations of various legal matters, market and operating risks from foreign currency exchange exposures and favorable general economic conditions.
Actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in the company’s filings with the Securities and Exchange Commission.
I’d now like to turn the call over to Jim Risher, Del Global’s President and Chief Executive Officer.
Thank you and good morning everyone. Thank you for joining the Del Global Conference Call. I hope you all had a good Thanksgiving. I’m going to spend just a few moments highlighting the financials and Mark Zorko is going to go into more detail. I’d like to spend more time talking about some of the milestones we have achieved this quarter.
But I would like to begin by commenting on sales. Sales for the quarter were $22.3 million which was down about $4 million from the previous year. Some of you may recall that during the last fiscal year we were in the midst of completing a very large tender in Russia. We completed that tender in terms of its shipments prior to this first quarter and as a result our international results on the medical sector were somewhat down. The business was actually somewhat ahead of last year on a sort of non-tender basis if you will, excluding the Russian tender. But at the same time I wanted to say in that same period of time the elections were going on in Russia and that tends to be a very strong market for us and was slowed somewhat by the electoral process.
We noted in this quarter our orders and backlog and shipments to Russia have begun to increase again, not on the scale of what we did in this large tender but certainly are beginning to pick up somewhat over that in the first quarter.
So sales for the medical group are down about 18.8%, down just slightly for the reasons I mentioned. Our RFI subsidiary was relatively flat with last year which tends to be the trend during the first quarter because of the little bit of cyclical nature of that business. We have had very strong performance from a gross margin standpoint and also profitability.
Our expenses were relatively flat. We did have about $100,000 of restructuring and travel associated with some of our outsourcing activities we have had going on in the Far East which I will comment on in a minute.
Operating income was $1 million versus $2.2 million last year which is almost totally the medical business due to that decline in volume of roughly $4 million which resulted in a decline of operating income of approximately $1 million. The backlog ended at $23.4 million versus $25.7 million again reflecting a little bit of that down drop from the large tender.
I’d like to comment more on some of the activities that have been going underway. We are continuing with our cost reduction activities especially in terms of outsourcing. We have begun getting components in and sub-assemblies from far eastern sources, which in many cases are saving us as much as 25% on material costs. We are ramping up those programs. Obviously it takes some time to get people trained and get our components over there and make sure they meet our quality standards but we are beginning to ramp up fairly significantly there and we expect to see some good cost reductions as a result of those outsourcing programs. In some cases we are outsourcing some of their components that we are making to our subsidiary, RFI, one of our generate probes we announced. We announced a new generator line called the Anthem in this quarter and that product is actually being manufactured at RFI which tends to add competency more in line with building electrical parts like generators and capacitors, filters, etc. We will be experiencing some cost reduction over what we would be able to do it for in Chicago. That is kind of symptomatic of the kinds of programs we have been doing.
We are also in the process of identifying a new location. Our current facility is roughly 66,000 square feet. Given the downsizing of the operation due in large part to the change in strategy of the business model where we are buying more of our components we are passing them through and in some cases just a miniaturization of electronic componentry we really need a facility today of about 25,0000 to 30,000 square feet. We have tried unsuccessfully to renegotiate our lease even in these times here in Chicago in the building we are in so we are actively seeking a new location.
We believe a new location and we have identified a couple now and hope to be signing a lease here very quickly. Starting in the first quarter of next year we begin saving an annual rate of about $250,000 a year on facility and related costs. So we are very excited about that.
On November 26 most of you know we announced a buy back program. We estimated to buy back up to about 10% of remaining shares of Del. The program really got launched last week just right before Thanksgiving. As you can imagine there wasn’t too much activity but on a current basis we actually bought something in excess of 200,000 shares.
The most exciting things we have been doing have really been on the medical side even though we have also done some very interesting things at RFI which I will comment on. We did announce last week a new line of total digital products that will be Del products and will include Del software. We have announced a product win number one that gives us conversion capability not only for the analog tables and systems installed previously by us but also it has the capability to go to other systems with a digital panel and convert those to a digital system. So, it gives us now a new capability to not only sell a total system but more importantly to be able to convert some of the existing analog systems both our own and competitors into a full digital system.
What is the advantage of that? Of course it is that we can do that at a dramatically reduced price over a new room. Typically a mid-sized DR room runs in excess of $200,000. We can do this conversion somewhere in the $150,000 kind of range so we are seeing a great deal of excitement in the market about that.
Also I might add on the Del side which we make at [Villa] we have announced a series of digital products on the dental side for dental work and we have a new panoramic system that is out and that has also met with very good market acceptance.
The RSNA show, which is the largest medical show we have here in the United States and in fact probably the largest in the world, was this week and we had a very prominent presence there. It was very, very exciting. We had very high quality people that came through. Our dealers, many of our dealer’s customers, some direct end users, giving us feedback on the new Del Titan product line and I must say that we were very uplifted by that feedback. We received about 20 orders in the show which is higher than normal which is leading to a very strong booking month for the month of December which we are excited about.
So we believe the early indications are that we have got a product that is really going to drive our digital business. We continue to have a great deal of success with the Apollo product line which is used for radioscopic and fluoroscopic applications, designed and manufactured in Italy. We are beginning to have a great deal of success with that in North America, specifically we also have been very successful in Mexico and Canada. Remote control tables have been less accepted here in the United States but are beginning to gain some traction and in fact we installed our first Apollo digital system in Minnesota just two weeks ago. I visited with the head radiologist at the show and they were very excited.
The benefit of this system is they can do not only static x-rays which are the preponderance of x-rays today; chest x-rays and things of that nature. But they can also do dynamic x-rays like colonoscopy and other kinds of fluoroscopy applications on the Apollo. So this dual usage allows a single room to be utilized for both things. One thing I might touch on the Titan product line is most of the panels that we have, the digital detectors, are removable and portable which means in the daytime, for example, they can be used in a traditional radiographic or x-ray room. At night they could be moved on to a portable that could be used in an emergency room setting. So it gives this panel, which is the most expensive component of the system, kind of dual usage.
So it has been a very, very exciting quarter in terms of both new product announcements, the show, I believe we are really getting some good traction in terms of our cost reduction programs and we are still continuing to have success with our very traditional analog product lines and we are maintaining that business at a good clip.
In general we feel good based on the bookings of the quarter that we see so far and the fact we do have some exciting new products to bring into the market.
So Mark I will turn it over to you to discuss the numbers.
Thanks Jim and good morning ladies and gentlemen. Let’s take a closer look at the financial results for the quarter. Net sales were $22.3 million compared to $26.76 million in the first quarter of 2008 driven by decreased international sales volume in the medical business and as Jim mentioned this was due to the completion of a large Russian order that we completed the shipment in the first half of last year.
This was partially offset by increased domestic medical equipment shipments which are ahead of both the prior year quarter and the sequential quarter as well. Sales at RFI during the first quarter were $2.7 million roughly comparable to the same period last year.
Our consolidated gross margin remains stable at about 23.8% as compared to 24.1% in the same period. Gross margin in the medical business was 22.1% comparable to the 22.7% in the prior year quarter and again this was slightly below last year because of the reduced international shipments.
RFI gross margin was 35.7% in the first quarter compared to 36.5% last year reflecting a slight mix change. Our operating expenses in the first quarter were essentially unchanged at $4.3 million or 19.4% of sales. Operating expenses for the quarter did include some restructuring costs and travel related to the sourcing alliances we have developed in the Far East and we are continuing to pursue further growth there.
Our R&D expenditures were essentially unchanged reflecting our continued product investment, primarily in our Apollo product line in Italy. The operating income for the first quarter was $1 million compared to $2.2 million in the same period last year. Our
medical business generated operating income of $900,000 compared to $2.2 million last year. RFI income for the quarter was comparable to last year.
The income tax provision for the quarter was 40% compared to 48% in the prior year due to a better balance of profitability between the U.S. and Italian operations. For the first quarter we reported net income of $600,000 or $0.02 per share compared to $1.1 million or $0.04 per share in the first quarter of the prior year.
Our backlog decreased slightly to $23.4 million from $25.7 million at the end of the fiscal year reflecting slightly weaker international bookings in medical along with a lower backlog at RFI.
Our new product announcement, as Jim mentioned, at the trade show as very well received and we expect an up tick in backlog in the second quarter.
Our balance sheet reflects working capital of $29.4 million which includes cash and equivalents of $9.6 million. We do not have any outstandings borrowings under our existing credit facilities and we are in compliance with all of our bank covenants and have approximately $18 million of borrowing availability under our revolving credit facilities.
We will be having our annual meeting on December 16th in Chicago and we will also be filing our first quarter 10Q that same day.
With that we would like to open the call to questions.
(Operator Instructions) There are no questions at this time. I will now turn the call back to management.
Thank you very much for attending. I’d just like to conclude on comments, obviously the current economic environment is very critical and we are keeping a cautious eye open. We are seeing many of our hospitals get cut backs in their capital expenditures. We have seen, of course, reimbursements continue to have pressures on them due to both the Deficit Reduction Act and just how the reimbursements are occurring under the Medicaid and Medicare programs.
I will say one thing on a positive note, there are many hospitals now instead of buying very large new CT scanners and MRI’s are turning to converting some of their older analog rooms as well as lower-end systems. In some ways we think this could help us a little bit in terms of the overall economic environment.
With that said we are looking forward to the upcoming quarter. We are well into it and as I mentioned it looks like our order backlog will be up fairly significantly over the first quarter so we are very pleased about that.
I’d like to thank you for your support and you’re participating in the call today.
Ladies and gentlemen that concludes your conference for today. Thank you all for participating and have a nice day.
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