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Nu Horizons Electronics F1Q10 (Qtr End 5/31/09) Earnings Call Transcript

July 08, 2009 | about: NUHC

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Nu Horizons Electronics Corp. (NUHC)

F1Q10 Earnings Call

July 8, 2009 4:30 pm ET

Executives

Richard S. Schuster - Chief Operating Officer, Senior Executive Vice President, Director

Kurt Freudenberg - Chief Financial Officer, Executive Vice President - Finance, Treasurer, Director

Arthur Nadata - Executive Chairman of the Board

James Estill - President, Chief Executive Officer, Director

Analysts

Matthew Sheerin - Thomas Weisel Partners

Robert Manning - Private Investor

Presentation

Operator

Good day, everyone and welcome to the Nu Horizons first quarter fiscal year 2010 earnings conference call. Today’s call is being recorded. 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 management’s own assessment of the Nu Horizons industry and competitive landscape.

(Operator Instructions) Now for opening remarks and introductions, I would like to turn the conference over to Mr. Richard Schuster, Senior Executive Vice President and Chief Operating Officer of Nu Horizons Electronics Corp. Please go ahead, sir.

Richard S. Schuster

Thank you. Good afternoon and welcome to the Nu Horizons first quarter of fiscal year 2010 conference call. I am Richard Schuster, Senior Executive Vice President and Chief Operating Officer of Nu Horizons Electronics Corp.

With me here today are Arthur Nadata, Executive Chairman; Jim Estill, President and Chief Executive Officer; and Kurt Freudenberg, Executive Vice President and Chief Financial Officer. Kurt will give an overview of the financial results for the first quarter of fiscal year 2010; I will then provide a brief market overview and synopsis of our company’s performance, along with some comments on the industry in general. We will then respond to any questions you may have.

At this point, I would like to turn the call over to Kurt.

Kurt Freudenberg

Thank you, Rich. Consolidated net sales for the first quarter of fiscal year 2010 are $147,759,000 compared to $200,152,000 in the comparable period last year. Sequential quarterly consolidated sales decreased only $3 million, or 2% over the fourth quarter of fiscal 2009. Sales in our active global electronics components distribution segment were down $46.2 million, or 24.9% for the first quarter of fiscal 2010 compared to the prior year. Geographically, sales for Q1 of fiscal 2010 compared to the first quarter of the prior year were down 14.6% in Asia, 35.8% in North America, and up 12.1% in Europe. Asia and North America sales were impacted by the global economic recession and the continued transfer of business to Asia.

Europe’s growth is primarily related to our acquisition of C-88 in September 2008 and the sales growth in Germany and Eastern Europe, although for a relatively low base.

Sales for our [cast and component] segment in Q1 of fiscal 2010 were down 41.7% compared to Q1 of the prior year and sequentially down 13.9%, primarily due to the economic recession. For the sales group, the first quarter continued to be a challenge as the market for the servers and storage continued to have low demand and the replacement of business lost last year due to Sun’s product line discontinuation remain difficult.

Sales were down 50.6% from Q1 of fiscal 2009 and down 11.2% sequentially. Gross margin increased year over year from 11.1% to 12.2% but is lower than Q4 fiscal year 2009’s 15%.

The increased margin was due to a margin enhancement provided by our supplier, as well as evaluated business provided by our integration center. The gross margin in Q4 of fiscal 2009 was enhanced by a higher margin transaction that was not repeated in Q1 of 2010.

We continue to make substantial progress in growing our design win opportunities by offering OEM customers not only advanced technologies but also engineering expertise to facilitate state-of-the-art design solutions. Design win revenue was $41.6 million compared to $44.2 million in the same period of fiscal year 2009. Design win registrations were up 23.8% for the first quarter of fiscal 2010 compared to the prior year period.

Our book-to-bill ratio was one-to-one in the first quarter of fiscal 2010 and has increased to 1.17-to-one in June. The consolidated gross profit margin for the first quarter of fiscal 2010 was 14.2% as compared to 15.5% in the same period of the prior year. The lower gross margin for the first quarter of fiscal 2009 is attributable to an increase in lower margin sales in the Asia-Pacific markets and a change in product mix to include a higher amount of lower margin business in North America and Europe.

In addition, reduced supplier discounts aggregating $235,000 in higher freight [and costs] also contributed to the decrease in profit margin during the quarter ended May 31, 2009.

Due to the current worldwide economic recession and related decreased product demand in fiscal 2009, the company took cost reduction actions to reduce its cost of operations to adjust for lower product demand. The actions are estimated to result in $10 million to $12 million in reduced annual costs. In the first quarter of fiscal 2010, a one-week furlough was implemented which provided a one-time cost benefit of approximately $600,000. We will also implement a one-week furlough in the second quarter of fiscal 2010. Additionally, we expect to incur lower professional fees in 2010 due to the completion of the audit committee’s investigation of the [inaudible] matter and a continued focus on reducing all professional fees.

Selling, general and administrative expenses decreased $6,454,000 or 22.9% over the first quarter of fiscal 2009, primarily due to the following items; one, a decrease of $5,344,000 in selling and administrative expenses primarily related to a reduction in workforce during the third and fourth quarters of fiscal 2009, a salary reduction program implemented in the fourth quarter of fiscal 2009, and a mandatory one-week furlough program invoked during the first quarter 2010; two, a $700,000 decrease in travel and entertainment primarily attributable to the decrease in sales force as compared to the prior period; three, a decrease of $542,000 in [outgoing freight] expense primarily attributable to a decrease in sales; and four, a decrease of $496,000 in professional fees.

These decreases were partially offset by increases of $523,000 for operating expenses related to our acquisition of C-88 in the third quarter of 2009. Year over year, interest expense decreased 55% from $934,000 to $419,000. This is primarily due to lower average borrowings and lower average interest rates compared to the prior year.

The consolidated effective tax rate for the three months ended May 31, 2009 was 15% as compared to 31% from three months ended May 31, 2008. The effective tax rate is lower than the statutory rate of 35% for the three months ended May 31, 2009, primarily due to foreign income tax earned at tax rates lower than the U.S. tax rate, lower state and local income taxes, and a tax benefit resulting from a foreign tax credit, partially offset by an increase in the valuation allowance for certain foreign net operating losses.

The net loss for the first quarter of fiscal 2010 was $944,000, compared to net income of $1.1 million in the prior year.

The loss of $0.05 compared to the diluted earnings per share of $0.06 per share in the first quarter of fiscal 2009. The decrease compared to the same period last year is primarily attributable to a decrease in sales and gross profit due to the current worldwide economic recession.

The company has a strong balance sheet. In the first quarter of fiscal 2010, the company generated $3,294,000 of cash from operations. Approximately $1,381,000 of debt was repaid and at May 31, 2009, the company had $146,839,000 of working capital. For the quarter ended May 31, 2009, the inventory turns improved to 5.6 turns while day sales outstanding were at 69.7 days.

At May 31, 2009, total bank debt was down to $22,182,000 and the company had $74.9 million cash available under all its bank facilities. On July 6, 2009, as a result of active asset management of our accounts receivable, inventory, and other working capital gains, the company had zero outstanding on its domestic revolving credit line. Additionally, today we have $4.3 million of excess cash being invested.

Now I’ll turn the call back over to Rich.

Richard S. Schuster

Thank you, Kurt. The first quarter of fiscal year 2010 performance reflects a general stabilization for the active component segment in all geographies with a one-to-one book-to-bill for the quarter increasing to a 1.17-to-one book-to-bill in June of 2009. We have continued to develop advanced technology customer training and education programs as a part of our express track, hands-on lab and webinar initiative, application notes and lab cam video tutorials, and preferred engineering support for customer product development teams. These efforts contributed to our continued success in increasing design activity and design revenue with design win revenue for the active component segment globally increasing 8.9%, the number of design wins increasing 18.2%, and registrations increasing 8.1% sequentially.

Finally, on the manufacturing and fulfillment side, we believe that OEM and EMS customers are beginning to increase material pipelines and forecast visibility as demand stabilizes and as lead times extend for many products.

In North America, top line revenue decreased 7.6% sequentially, although the book-to-bill was positive for the quarter and for the final month of the quarter. Design activity increased significantly with registrations up 31% sequentially and design wins reversing last quarter’s downward trend with a sequential increase of 40%.

On the fulfillment side, EMS providers in the Americas remain challenged as production continued to transition to low cost global regions, although the rate of transition appears to have slowed in quarter one. Active segment customers in the Americas, which appear less impacted by the economic recession, included medical, military aerospace, networking, and industrial.

OEMs in North America were a bright spot in both bookings and billings with a 1.2-to-one book-to-bill for quarter one.

In EMEA, top line revenue increased sequentially 2.5% with the U.K., the Nordic region, and Germany finishing the quarter with a book-to-bill close to parity. Design activity in EMEA had significant sequential increase with registrations up 20% and design wins up 48%.

Growth in revenue and designs is attributable to investing in new markets for Nu Horizons such as the industrial and medical sectors, as a strategy to drive revenue growth and customer base expansion.

All EMEA regions contributed positively to revenue growth in quarter one with particularly significant growth in central and eastern Europe. The acquisition of C-88 in the Nordic region continued to provide increased activity levels for recently added Nu Horizons supplier partners, providing for both increased design registrations and increased revenue.

After only six months of representing these suppliers in the Nordic region, the design funnel is greater than $10 million.

In APAC, top line revenue increased 13.2% sequentially with the book-to-bill ending at approximately one-to-one, with the final month of the quarter at 1.05-to-one. Design activity in APAC remained strong, with registration activity essentially flat sequentially with quarter four year ’09, both of which were record registration quarters. Design wins were up 24% sequentially.

Quarter one was an exciting quarter for APAC, with the introduction of a second line card, Origin Electronics, and the associated supply of franchise expansion supporting the second line card.

Additionally, electronic supply and manufacturing China, ESMC Magazine, named Nu Horizons one of China’s most preferred 2009 overseas distributors. Along with record registration activity, quarter one represented record demand creation revenues for APAC, with the most significant growth coming from China and India. The global EMS segment, and in particular the EMS providers, [Assion], continued to experience slow demand in quarter one, although indigenous OEM customer development in all of APAC and more than offset the challenges in the global EMS segment.

The systems group is seeing signs of a recovery in quarter two of fiscal 2010. Bookings in June are the highest since June 2008 due to sales from new customers as well as rebounding orders from existing customers. The uncertainty surrounding Oracle’s acquisition of Sun Microsystems has had a negative impact on new business pipeline development but has not yet affected the existing account base.

Finally in quarter one, we designed and shipped our first IBM orders for a significant homeland security company. We are gaining traction in other security defense and airborne applications and expect to see growth in our IBM sector in the second half of the year.

Although we have seen stabilization in demand for many customer segments, the global market for both active components and systems remains a challenges. We will continue our aggressive sales effort, such as our second line card in APAC, the targeting of demand creation components to vertical markets, such as medical, military, lighting, power management, and energy alternatives, the expansion of what we sell to our customer base through solution selling and supplier partnerships, and the focus on bringing increased efficiencies to all aspects of our business for both demand creation and fulfillment.

Design and value-add continues to represent a higher percentage of our total revenue. We believe this demonstrates the value our model brings to our suppliers and our customers.

Our passive component subsidiary has seen improvement in bookings and quote activity in the last two months. Lower sales were somewhat offset by stable margins and continued cost-cutting initiatives. Sales in North America were particularly challenged due to lower distributor purchases and conservative buying from OEM customers.

Recently we see some replenishment of inventory as demand is gradually increasing. European sales were down as well but have leveled off recently. Asia was down due to the lower volume of production from North American transfer business. Many passive component factories have cut capacity and consequently lead times are increasing and some spot shortages have appeared. The equilibrium in supply and demand is close at hand, so we believe that prices will start to increase on a gradual basis.

Sales of more critical components for telecom infrastructure, medical, security, and even some consumer products have been improving.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Matt Sheerin with Thomas Weisel Partners.