Nu Horizon Electronics Corp. F4Q09 (Qtr End 02/28/09) Earnings Call Transcript

Apr.29.09 | About: Nu Horizons (NUHC)

Nu Horizon Electronics Corp. (NUHC) F4Q09 (Qtr End 02/28/09) Earnings Call April 29, 2009 4:30 PM ET

Executives

Richard Schuster - President and COO

Kurt Freudenberg - EVP and CFO

Kent Smith - EVP of Worldwide Sales and Marketing.

Analysts

Matt Sheerin - Thomas Weisel Partners

Michael Neary - Neary Asset Management

Operator

Welcome to the Nu Horizons fourth quarter fiscal year 2009 Earnings Call. (Operator Instructions).

For the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 our statements today may include certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Such statements are based upon, among other things, assumptions made with information currently available to the management including managements own assessment of the Nu Horizon’s industry and competitive landscape.

During the presentation your line will be in a listen only mode. At conclusion there will be a question-and-answer session. Instructions on how to signal for a question will be given at that time. (Operator Instructions).

Now, for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Schuster, President and Chief Operating Officer of Nu Horizon Electronics Corporation. Please go ahead sir.

Richard Schuster

Thank you. Good afternoon and welcome to the Nu Horizons' fiscal year end and fourth quarter 2009 conference call. I am Richard Schuster, President and Chief Operating Officer of Nu Horizon Electronics Corporation. With me here today are Arthur Nadata, Chairman and CEO; Kurt Freudenberg, Executive Vice President and Chief Financial Officer; and Kent Smith, Executive Vice President of Worldwide Sales and Marketing.

Kurt will give an overview of the financial results for the 2009 fiscal year and fourth quarter. I will then provide a brief market overview and synopsis of company's performance along with some comments on the industry in general, we will then turn the meeting over to questions from our callers. At this point I would like to turn the call over to Kurt.

Kurt Freudenberg

Thank you. Sales for the fiscal year ended February 28, 2009, increased $750,954,000 from $747,170,000 in the comparable period last year, an increase of 0.5%. Geographically year-over-year sales increased 18.2% in Asia, increased 9.7% in Europe and decreased 6.6% in North America when compared to the prior year.

Asia sales are increasing due to our continuing growth in transfer of business to Asia from North America. Europe's growth is primarily related to our acquisition of C-88 in September of 2008. And sales growth in Germany and Eastern Europe, although from a relatively lower base. The North American decrease is due primarily to the economic recession and continuing trends for business in Asia.

Net sales for the fourth quarter ended February 28, 2009, decreased to $150,770,000 from $193,683,000 last year, a decrease of 22.2%, due primarily to the worldwide economic recession. Consolidated gross margin was 15.1% in fiscal 2009 as compared to 16.1% for the comparable period of the prior year.

The declining gross margin for the year ended February 28, 2009 is attributable to an increase in lower margin sales in the Asia Pacific markets in order to secure high volume business from large contract manufacturers and a change in product mix to include a higher amount of low margin business in North America and Europe.

In addition, reduced supplier discounts aggregating $2.6 million, higher freight cost of $1.5 million and system sales of $13.8 million at a lower margin to a large customer and [to buy product] also contributed to a decline in gross profit margins during the year ended February 28, 2009.

Due to the current worldwide economic recession and a very decreased product demand. The company has recently taken several cost reduction actions to reduce its cost of operations to adjust for lower product demand. In our efforts to right size the company cost structure we reduced our work force worldwide by an aggregate of a 140, which represented 12% of our organization on October 31, 2008. And we decreased salaries and commissions.

Management estimates, the consequences of these and other cost containment actions should result in fiscal 2010 cost savings of approximately $10 million to $12 million, not including severance of $890,000.

Additionally, early in the first quarter of fiscal 2010, a one week furlough was implemented, which provided a one time cost benefit of approximately $600,000. Finally, we expect to incur lower professional fees in fiscal 2010.

We are prepared particularly of revenues that now improved over the results reported in the fourth quarter of fiscal 2009 to take additional cost cutting actions. As a percentage of sales; selling, general and administrative expenses decreased to 15% from 15.1% in the comparable period of the prior year.

Selling, general and administrative expenses increased $537,000 or 0.5% over the prior period, primarily due to an increase of $1.1 million in severance related to reductions in workforce and consolidation of the coverage Melville, New York warehouse into the expanded Mississippi warehouse.

Also an increase of $987,000 of operating expenses attributed to our newly acquired C-88 operation. And $975,000 of increase in professional fees related to the Vitesse Matter, primarily offset by a decrease of $2.8 million in expenses due to the reduction in workforce, salaries implemented in the fourth quarter of fiscal 2009.

In the fourth quarter of 2009, the company conducted a decline in valuation of its goodwill from potential impairment, which indicated that the fair value of one reporting unit was below its carrying value as of the end of the fourth quarter of fiscal 2009, resulting in a non-cash impairment charge to the active components segment of $7,443,000 or $0.41 per basic and diluted share for the year ended February 28, 2009.

While the goodwill impairment charge reduces reported results on the US Generally Accepted Accounting Principles. Since the charge is non-cash in nature it doesn’t affect the company's liquidity or cash flow from operations and will not have any impact on future operations. Year-over-year interest expense decreased 31.3% or $1.4 million and quarter-over-quarter decreased 59.6% or $742,000.

Interest expense for both periods decreased primarily due to decreased average bank borrowers and reduced interest rates. Our affective tax rate was a benefit of 8.5% for the year ended February 28, 2009. The effective tax rate is lower than the statutory 35% primarily due to income earned and tax rate lower than the US tax rate and tax benefits derived from foreign cash growth.

There was no income tax benefit recognized for the non-cash goodwill impairment charges of $7,442,000 recorded for the period in February 28, 2009. Also, in preparing our fiscal 2008 tax return, we determined that certain tax adjustments for permanent items to the company’s tax provision were required resulting in recording of an additional tax benefit of $662,000 for the year ended February 28, 2009.

The net loss for fiscal 2009 is $9,235,000 compared to net income of $2.5 million in the year-over-year period. The net loss per share is $0.51 per diluted share for fiscal 2009. The net loss is driven principally by the $7.4 million non-cash goodwill impairment charge, $3.5 million of professional fees related to the Vitesse Matter, $1.1 million of severance cost and lower sales due to the economic recession.

The net loss for the fourth quarter was $10,732,000 or $0.59 per diluted share as compared to net income of $424,000 or $0.02 per diluted share for the fourth quarter of last year. The company results in fiscal 2009 include a number of items that impact comparability with fiscal 2008.

On an adjusted basis excluding the non-cash goodwill impairment charge professional fees related to Vitesse Matter and severance charges diluted earnings per share would have been $0.06 for the year and diluted loss per share of $0.14 for the quarter ended February 28, 2009. As compared to diluted earnings per share of $0.28 with $0.06 in the comparable periods of prior year.

We continue to make substantial progress in growing the design win opportunities by offering OEM customers not only advanced technologies, but also engineering expertise to facilitate state-of-the-art design solutions. Due to the revenue increase nearly 11.6% to $185.4 million compared to $166.2 million in the same period of 2008.

Although, total design win revenue decreased 49% to $38.2 million in the fourth quarter of fiscal 2009, compared to the $40 million in the same period 2008, the decrease was less than a 22% overall drop in revenue for similar period. Design win registrations rose 25% for the fourth quarter of 2009 and 90% for the 12-month period over comparable periods in the prior year.

In fiscal 2009, the company generated $56,088,000 of cash flow from operations, approximately $46,503,000 of debt was repaid, and at February 28, 2009, the company had a $147,141,000 in working capital. For the year ended February 28, 2009, the inventory turns and daily sales outstanding improved to 5.6 turns and 54 days, respectively.

Total bank debt was down to $23,400,000 at February 28, 2009. At February 28, 2009, the company was not in compliance with certain covenants under its US credit line and subsequently received an amendment and a waiver of such covenants from the US bank lending group.

In connection with this amendment, the amount of US credit line was reduced to $120,000,000 from $150,000,000. Interest rate payable under the US revolving credit line was increased to US prime plus 1.75% or LIBOR plus 3.5%, at the option of the company. And the covenant fee was increased from 0.25% to 0.5%.

After giving effect to the reduction in the unused fee payable due to the decrease and the amount of credit line and the increase in interest rate and commitment fees, based on the company's average borrowings during fiscal 2009, the amendment is expected to increase interest and related bank expenses during 2010. At February 28, 2009, after giving effect to the amendment, the company had $79,350,000 in aggregate available under all of its bank credit facilities.

The company is continuing to fully cooperate with the investigation by the SEC in the matter of Vitesse Semiconductor Corporation. The company also conducted its all related internal investigation under the direction of the Audit Committee. On April 9, 2009 the Audit Committee announced the completion of its internal investigation, which concluded that there is not presently sufficient evidence that the company or its officers or employees aided and abetted in any alleged violations of the securities laws by Vitesse.

That the company appropriately adjusted its inventory for Vitesse product purchases, returns and sales and if there was evidence of internal control, inventory management and record keeping deficiencies. The company, in consultation with the Audit Committee has remediated, or is in the process of remediating, these deficiencies.

The company's cooperation with the SEC investigation and its own internal investigation has required the company to incur significant expenses for professional fees and related expenses. The company has incurred approximately $3.5 million in fiscal 2009 for professional fees related to Vitesse Matter. Cumulatively, $6.2 million of expense for professional fees has been incurred from fiscal 2007 to-date eventually in Vitesse Matter.

Management believes that as a result of the completion of the internal investigation, the company's expenses will decline in future fiscal periods. However, management is presently unable to determine the outcome or duration of the SEC investigation and related costs to be incurred by the company.

In addition when the internal investigation is completed, if any new or additional evidence becomes available the Audit Committee will consider such additional evidence to determine whether the further investigation or action is warranted.

In the fourth quarter of fiscal 2009, the company reevaluated its accounting policy for operating segments and identified two operating segments on the requirements of FAS 131, titled Disclosures about Segments of an Enterprise and Related Information. The two segments consist of active electronic components and passive components.

Now I will turn the call back over to Rich.

Richard Schuster

Thank you, Kurt. The fourth quarter of fiscal year 2009 represented an adjustment period for all geographies and a broad base of customers. Top line revenue in the fourth quarter was sequentially up 26.3% in Europe, down 24.2% in Asia, and down 22.7% in the Americas, which equates to an overall decline of 19.1% for the active component segment.

System sales were down 23.9% sequentially. Year-over-year, the active component segment was up 0.6% in total revenue and demand creation revenue for the segment was up 11.6%. Quarter four registration activity was up 19% year-over-year and 11% sequentially versus quarter three and design wins increased 15% year-over-year as a result of many demand creation programs such as customer training and education for Field Programmable Gate Array Design, PCI Express products and microcontrollers.

On the manufacturing and fulfillment side, there was continued hesitance by both OEMs and EMS providers to commit to material pipelines and inventory, although forecast accuracy at the aggregate customer level and the devise level did improve towards the end of the quarter.

In North America, year-over-year total revenue was down 8.3% as mentioned earlier, but demand creation revenue was essentially flat increasing the percent of revenue represented by demand creation and contributing to overall margin stability. Demand creation activity remained strong for quarter four, with a sequential increase of 9% in design registrations in North America, although design wins were down 13% sequentially as project transition to production slowed.

An area of focus for the segment continues to be LCD displays, power products and single board computers with power products sales growing 67% year-over-year, which we believe we'll have continued growth. In an effort to drive productivity and to reduce costs in North America the service center structure was expanded.

Service centers are centralized insight sales and customer support teams that are designed to increase efficiency through shared learning, training, expert development, and support backup. Additional customers are now supported in the EMS service center in Florida and in OEM customer service centers. Bookings in North America were flat for all three months of the quarter, ending the quarter with an approximate one-to-one book to bill.

In Asia, year-over-year revenue was up 22.8%, with continued growth and the tracking of transfer business from North America. Having said that, Asia was sequentially down 24.2% in quarter four with the most significant decline in the Southeast Asian nations due to fulfillment EMS partner reduce forecast.

Greater China and India, where we have developed more significant indigenous business had much lower declines. Demand creation revenue was sequentially down over 20% was up as a percent of overall sales resulting in a slight improvement in margin. We have started to see Set Top box business improve especially for export markets and the local Chinese infrastructure projects continued to stabilize China.

Europe with 26.3% sequential and 10.8% year-over-year growth obviously was a positive contributor to the segment. Registrations, design wins, and design win revenue all increased over 200% year-over-year.

In the UK, we continue to see softness, the Nordic region was essentially flat quarter-over-quarter, with the completion of the integration of the C-88 organization into Nu Horizons Europe and with the expansion of global franchise agreement into the Nordic region offsetting the general market decline.

In Germany, we gained market share with new customer engagements and designs moving to production, growing sales 20.6% sequentially with an all time high of 42% of the revenue in Germany coming from designs in quarter four.

Eastern Europe, grew over 200% quarter-over-quarter through recently developed EMS customer engagements and the ongoing development of OEM relationships. Nu Horizons Europe successfully completed the integration of C-88 in the Nordic region continued to see design efforts result and design revenue reaching 32% of total revenue and demand creation regions and saw a substantial upside in fulfillment revenue due to expanding coverage of fulfillment in manufacturing locations.

Our passive component segment continued to see weak sales in all regions, but most significantly in Asia. Aside from the global recession and low demand, pricing remained an issue in Asia. We believe local manufacturers have kept pricing low to keep or expand market share. EMS customers are aggressively seeking low costs and overcapacity still exists.

Several of NICs large customers have curtailed their orders and there have been some cancellations. In addition we believe that distribution customers are under pressure to keep inventories lean and therefore have canceled or pushed out stocking packages.

NIC continues to promote and design higher reliability components geared towards the telecom infrastructure, industrial security, power management and medical markets. New higher ASP components are in the process of being released and NIC intends to aggressively market them.

We believe that many design wins are awaiting funding and expect that as the credit markets open up these programs will go into production. We are starting to see some lead times increase and spot shortages occur.

Inventories are reducing in the field and factories worldwide are continuing to cut production. We believe that capacity/demand equilibrium could be achieved in the second half of 2009, which could stabilize pricing and increase purchases.

NIC has also implemented cost cutting strategies and will continue to watch overheads in relation to market performance.

Revenues for the systems division grew 17% in fiscal year '09 due in part to the efficient of over 20 new customers with the bulk of the increase due to Nu Horizons ability to take advantage of a discontinuation of the Sun Microsystems product group during our second quarter.

Gross profit percentages for the systems unit grew from 9.2% fiscal year '08 to 11.1% in fiscal year '09 due to a deliberate strategy to service more business directly as well as increase the overall services delivered. Our mix has moved from less than 50% direct two years ago to over 60% direct in the second half of fiscal year 2009.

In fiscal year 2009, we sold over 3.4 million in integrated solutions at an average gross margin of 12.5%. Revenue for the systems division in quarter four of fiscal year 2009 decreased 35% from quarter four of 2008 and 25% from quarter three of fiscal year 2009, due to the absence in those periods of the last time buys made in quarter two of fiscal year 2009.

Regarding new design opportunities the pipeline of potential Sun opportunities grew during the second half of fiscal year 2009 with over $25 million in new revenue and the sales cycle. In the case of IBM significant progress have been made with designing IBM technology into the defense and homeland security markets.

Although visibility remains limited and customers are hesitant to commit to material pipelines and inventory, we believe that we will have opportunities in the future, by providing design support differentiation targeting stable or growing vertical markets and focusing on a variety of under penetrated supplier product areas.

As an example Origin Electronics, which was in development at Nu Horizons over the last few quarters was formally announced at the beginning of April. Origin has a second line card in Asia permits Nu Horizons Asia to office suppliers an additional channel alternative while maintaining its limited complementary supplier line card and go-to-market strategy.

We intend to continue to introduce programs that are designed to manage costs, increase productivity and allow us to enhance the revenue opportunities to Nu Horizons.

Thank you and now we would like to open the conference call to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question Matt Sheerin with Thomas Weisel Partners.

Matt Sheerin - Thomas Weisel Partners

So first question, looking to the May quarter, I know you talked about book-to-bills in February. We are two months already into the quarter. How are things shaping up in terms of bookings trends you both [Ar] and I have talked about North American sort of flattish and Europe down sequentially in their June quarters, it sounds like Asia is mixed out there. So, what are you seeing right now?

Kent Smith

Yes, Matt this is Kent. From a book-to-bill standpoint, as we mentioned in the case of the Americas, we are seeing, we ended up the last quarter at approximately one-to-one book-to-bill. We had a positive book-to-bill in Europe and essentially positive book-to-bill in APAC. In the case of Europe, I'm not sure that we are representing the market in the sense that we are expanding and growing as an organization in that marketplace. So we are not necessarily trending with the market.

In the Americas, we have seen essentially stabilization staying around one-to-one is what we had again seen at the end of February and again seen relatively consistent book-to-bill or positive book-to-bill and APAC we expect the same trends to continue.

Matthew Sheerin - Thomas Weisel Partners

So, are you getting a sense that your sales have bottomed out here then?

Kent Smith

So stabilize, I think is the word that I will use.

Matthew Sheerin - Thomas Weisel Partners

Okay. I know the one of the weak areas has been the fulfillment business with EMS in Asia and that's helped your gross margin. When that starts to come back perhaps later this year, is that going to hurt your margins again? Are you going to have some design activity that’s going to offset that.

Kent Smith

Yes. So from the fulfillment and demand creation standpoint, demand creation continues to be a larger part of our business and those margins had held up. So I'm expecting essentially consistent gross profit percentage and or margins for both positions.

Matthew Sheerin - Thomas Weisel Partners

Okay. And then on the SG&A I know Kurt you talked about some of the various cost cutting programs and the reason why your SG&A was actually on a year-over-year basis flat even though revenue was down almost 20%. Are expenses going to come down further?

Kurt Freudenberg

You'll see the $10 to $12 million on an overall full 12 month run rate that's why I was looking down for that.

Matthew Sheerin - Thomas Weisel Partners

$10 million off of what base?

Kurt Freudenberg

Of the fiscal '09 base.

Matthew Sheerin - Thomas Weisel Partners

Okay.

Kurt Freudenberg

After considering that we've already reduced, I think it was about $2.6 million already in the fourth quarter. So I would use $10 million as a rough number, further reduction in 2010 over 2009.

Matthew Sheerin - Thomas Weisel Partners

Okay. And is that it then or I mean given that sales of, [if I now here], was there another plan…

Kurt Freudenberg

We are evaluating that right now and there's a good cost story when I have to do more.

Matthew Sheerin - Thomas Weisel Partners

Okay. Just on the balance sheet, I know you reduced inventory, yet the debt was up. Did you pay down debt during the quarter?

Kurt Freudenberg

Debt was like, it was spiked up, at the year-end it was down and during the quarter we've hit at them more.

Matthew Sheerin - Thomas Weisel Partners

Okay. So what was it at the end of February then?

Kurt Freudenberg

Like $23 million in that area.

Matthew Sheerin - Thomas Weisel Partners

$23 million okay. And then it was down further then, okay. And then what so if revenue sort of flattish and your, you know in an operating deficit, what kind of revenue run rate do you need to get back to breakeven?

Kurt Freudenberg

At this point its difficult to answer because of the change in the margin, if the margin mix changes the change equal to revenue now. But I would say it's probably in the 170 to 180 range per quarter.

Operator

Next we'll go to Mike Neary with the Neary Asset Management.

Michael Neary - Neary Asset Management

He asked most of my questions, but on the inventory side given our current level of revenues, what should inventory be?

Kurt Freudenberg

I think what we have right now, it's reasonable.

Michael Neary - Neary Asset Management

Okay.

Kurt Freudenberg

We don't want to bring it down too low or initially, final product down to the supply.

Michael Neary - Neary Asset Management

Okay. Then on the cost side, so it's sounds like net-net we are roughly currently loosing about $1.5 million a quarter, once the cost cuts come into effect. Is that about right on an operating basis?

Kurt Freudenberg

I am not sure I can answer that question, because we are in the process of evaluating what the current forecast is.

Michael Neary - Neary Asset Management

Okay. So, but the $10 million, is that already in the cost?

Kurt Freudenberg

The $10 million is not in a historical cost, only about $20.5 million is in '09 cost reductions already. So Mike, we only put it into effect in the later part of the fourth quarter.

Michael Neary - Neary Asset Management

Right.

Kurt Freudenberg

So most of it is yet to come in 2010.

Michael Neary - Neary Asset Management

Okay. So is that a $10 million of incremental cost reductions starting at the beginning of 2010?

Kurt Freudenberg

It's a reasonable amount we've used, yes.

Michael Neary - Neary Asset Management

Okay.

Kurt Freudenberg

Spread over the year.

Michael Neary - Neary Asset Management

Okay. Did that take into account any additional variable cost reductions, is that a fixed cost reduction number, is that the total cost?

Kurt Freudenberg

Most of that is fixed, the reason why we said 10 to 12 is the relative commission component that brings it up to a possibly 12. It depends on the sales up on time as market force, so there is a small variable piece on commissions.

Michael Neary - Neary Asset Management

Okay. And in terms of the waver, how long is that good for? How does that last if you have additional operating losses? Do you have to keep going back for that or is that…?

Kurt Freudenberg

The waver, wave the losses here in the fourth quarter, cumulatively for the year and we amended it going forward for the remainder of the agreement, which goes out over here. All these I think in front of me. The reason why was component built in to it, that indicates that if we have a loss for the full fiscal year, we have to go back and talk to the banks there.

Michael Neary - Neary Asset Management

Okay.

Kurt Freudenberg

But there is an allowance during the year.

Operator

(Operator Instructions). We have no further questions.

Richard Shuster

Okay, I’d like to thank everyone for participating on the conference call. We welcome your questions and look forward to the next conference call. Thanks and have a very good day.

Operator

The replay for today’s conference will be available today beginning at 7:30 pm Eastern Standard Time and will be available until May 6th, by dialing 888-203-1112 or 719-457-0820 and using pass code 3940450.

Once again that phone number is 888-203-1112 or 719-457-0820 and the pass code is 3940450. Once again, that does conclude today’s conference. Thank you for your participation.

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