Nu Horizons F2Q10 (Qtr End 8/31/09) Earnings Call Transcript

Oct. 8.09 | About: Nu Horizons (NUHC)

Nu Horizons Electronics Corp. (NUHC) F2Q10 Earnings Call October 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

Ken Smith - Executive Vice President of Worldwide Sales and Marketing

Arthur Nadata - Executive Chairman of the Board

Chris Winslow - Senior Vice President, Systems Distribution

Analysts

Chuck Bennett - IBC

Matthew Sheerin - Thomas Weisel Partners

Ted Alacoa - Trident Partners

Operator

Good day and welcome to the Nu Horizons second 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, Interim President, Senior Executive Vice President, and Chief Operating Officer of Nu Horizons Electronics Corporation. Please go ahead, sir.

Richard S. Schuster

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

With me here today are Arthur Nadata, Executive Chairman and Interim Chief Executive Officer; Kurt Freudenberg, Executive Vice President and Chief Financial Officer; Ken Smith, Executive Vice President of Worldwide Sales and Marketing; and Chris Winslow, Senior Vice President, Systems Distribution.

Kurt will give an overview of the financial results for the second 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. Sequential quarterly consolidated sales increased $8,841,000, or 6% over the first quarter of fiscal 2009. Consolidated net sales for Q2 of fiscal 2010 are $156.6 million compared to $211.8 million in the comparable period last year. Sequential sales in the active electronics components segment were up 11.9% in North America, up 1.3% in Asia, and down 17.1% in Europe. Europe is down primarily due to a large no-recurring Q1 fiscal 2010 fulfillment transaction.

Sales in our active electronics component segment were down 25.5% for the second quarter of fiscal 2010 compared to the prior year. Sequential sales in our passive component segment in Q2 of fiscal 2010 increased 22.1% and were down 32.7% compared to Q2 of the prior year.

Our consolidated book to bill ratio was 1.06 to 1 in the second quarter of fiscal 2010 and 1.2 to 1 in September. The consolidated gross profit for the second quarter of fiscal 2010 was 14.4% as compared to 14.6% in the same period last year, which is primarily due to a higher volume of lower margin business.

Selling, general, and administrative expenses decreased $6.4 million or 22% over the prior three month fiscal period, primarily due to previously announced reductions in workforce during the third and fourth quarters of fiscal 2009, a salary reduction program implemented in the fourth quarter of fiscal 2009, lower commission expense as a result of lower sales, a mandatory one-week furlough program evoked during the second quarter of 2010, as well as decreases in professional fees related to our ongoing SEC investigation entitled In the Matter of the [Test] Semiconductor Corp., and decreases in trial and entertainment expense. These decreases were partially offset by operating expenses attributable to our acquisition of C88 in the third quarter of fiscal 2009 and severance costs.

For the six months ended August 31, 2009, consolidated net sales decreased to $304,360,000 from $411,965,000 in the comparable period last year. The decrease in sales in the current three and six-month periods ended August 31, 2009 compared to their respective prior year periods is largely attributable to lower demand due to the worldwide economic recession and the acceleration of end-of-life Sun Microsystem products into the comparable periods of the prior year.

For the six month fiscal period, selling, general, and administrative expenses decreased $12.9 million, or 22.4%, due primarily to savings associated with the previously discussed cost reduction actions. These savings were partially offset by the expenses associated with the C88 acquisition in the third quarter of fiscal 2009 and severance costs.

As a percentage of sales for the three and six month periods ended August 31, 2009, net interest expense decreased to 0.2% of sales compared to 0.4% of sales in the prior year. Interest expense decreased due to lower average loan balances outstanding; however, effective interest rates increased to 7.8% and 5.4% for the three and six month periods ended August 31, 2009 respectively.

Our effective tax rate for the three and six months ended August 31, 2009 was a benefit primarily due to tax benefits generated as a result of U.S. net operating losses, foreign income earned in tax rates lower than U.S. tax rates, lower state and local income taxes, and a tax benefit derived from foreign tax credits, partially offset by an increase in the valuation allowance of certain foreign net operating losses.

Net income for the second quarter of fiscal 2010 was $543,000, or $0.03 per diluted share, including a tax benefit of $0.07 per diluted share compared to $192,000 or $0.01 per diluted share in the second quarter of fiscal year 2009.

For the six months ended August 31, 2009, the net loss was $401,000, or $0.02 loss per diluted share, including a tax benefit of $0.80 per diluted share compared to net income of $1.3 million or $0.07 per diluted share in the comparable year earlier period.

The company has a strong balance sheet. In the six months ended August 31, 2009, the company generated $18.3 million of cash from operations, approximately $3.2 million of debt was repaid, and there was [$146,944,000] of working capital as of the end of the period.

For the quarter ended August 31, 2009, the inventory turns improved to 6.0 while days outstanding were at 63.1.

At August 31, 2009, cash on hand was $19 million, total bank debt was down to $20.3 million, and the company had $78.5 million cash available on their [inaudible] bank facilities.

Now I will turn the call back over to Rich.

Richard S. Schuster

Thank you, Kurt. We believe that the second quarter of fiscal year 2010 performance reflects a continued stabilization and strengthening for the active component distribution segment with sequential growth of 5% and a 1.07 to 1 book to bill for the quarter. Improvements were observed in multiple market segments, customer tiers, and geographies. Just as we reported last quarter, the first month of the current quarter, September, supports stabilization and strengthening with a 1.17 book to bill for the segment.

We are working closely with our supplier partners to support new product introductions and customer targeting as design activity and new product development remains strong. Internally, we will continue to drive programs that are designed to support new customer development and solution selling in an effort to maximize the number of suppliers that we represent and the products that we sell to both existing and new customers.

In North America, for the active components group, revenue increased 11.9% sequentially and the book-to-bill was positive for the quarter at 1.07 to 1. Customer design activity remained steady with registrations essentially flat from the previously strong quarter one of fiscal 2010 and design win revenue up 8% sequentially. We continue to see OEMs as the bright spot with a noticed revenue improvement in tier one EMS North American customer locations this quarter. As mentioned previously, a sequential improvement was seen in most vertical markets, including industrial instrumentation, networking, telecom, and consumer. Along with our aggressive sales effort in North America, we of course continue to look for ways to improve efficiency and reduce costs. We recently expanded our service center support model with the integration of Mexico support into our existing EMS service centers.

In the European market, top line revenue decreased 17.1%, primarily due to a large quarter one fiscal 2010 fulfillment transaction in Eastern Europe. Offsetting the fulfillment revenue decline, design win revenue increased over 100% sequentially and Europe’s book-to-bill was positive for the quarter at 1.09 to 1.

With higher profit design win revenue representing a much larger portion of the revenue in quarter two, we not only increased our gross profit percentage in Europe but we also increased Europe’s total gross profit contribution to the division. The primary contributor to the design win revenue increase was the United Kingdom where we more than doubled design win revenue. In addition, Germany increased design revenue more than 17% sequentially.

APAC revenue was flat sequentially, as was design win revenue. The book-to-bill for the quarter was positive at 1.08 to 1. Design activity remained strong with slight growth in registrations and year-over-year fiscal year-to-date design revenue up 15%.

Tier one EMS remained soft in APAC with only a slight improvement quarter over quarter, with strength in local EMS and OEMs offsetting that weakness.

Our new line card, Origin Electronics, continues to expand into Hong Kong, Taiwan, China and India and represented over 3% of bookings in APAC for quarter two, the first full quarter of operation.

We believe that Origin Electronics revenue growth is on track to provide a positive bottom line contribution to the segment this quarter.

Quarter two of fiscal 2010 represented an improvement in both bookings and billings for North America. APAC showed considerable strength towards the end of the quarter, and Europe remained stable. Supplier lead times have extended and there was considerable unfilled backlog at the end of the quarter. We believe that many of the suppliers that have extended their lead times expect to become current with delinquencies this quarter.

Although we remain cautious regarding inventory levels, we anticipate there will be a need to replenish inventory levels due to increased customer requirements, more supplier new product introductions, and higher turns for a number of supplier products.

We will continue with what we believe are our successful strategies for development of a second line card in APAC, the targeting of demand creation components to both growing and under-penetrated vertical markets, and the development of selling tools.

Once again, design and value-add services represented a higher percentage of our total revenue. We believe that the ability to support global design and manufacturing with best-in-class process and systems ensures that we bring needed and desired value to suppliers and customers.

Our passive component segment, consisting of our subsidiary, NIC Components Corp., returned to profitability in the second quarter of fiscal 2010. Sales were up 22% sequentially and book-to-bill was 1.3 to 1 for the quarter. The book-to-bill or September was 1.35 to 1.

We saw a continued strong sales and booking month in September. Sales and bookings were up in all regions and encompassed all our major product families. We believe that this improvement is due to a number of variables, including inventory replacement, seasonal increases in manufacturing, and more new designs being funded. NIC’s distribution network increased their POS and consequently replenished their inventories.

Due to some capacity restraints from [capacitor] manufacturers, prices have stabilized and/or increased for certain items. Our new design initiatives for high technology components geared towards medical, industrial, automotive, and security applications have been converted into a more stable revenue stream. NIC is still concentrating on high reliability long-life components that have received excellent reviews. We expect that these newer products will continue to augment our lower cost commodity components, enabling our margins to stay strong.

For the systems group, fiscal 2010 quarter two revenue grew 32% over quarter one and gross profit increased by 24%. Book-to-bill ratio was positive at 1.06 to 1. Revenue was down 65% from a year ago due to the last time buys recorded in the prior year quarter that was associated with Sun’s product discontinuations.

The pending acquisition of Sun by Oracle is beginning to have an impact on our business. While most customers believe the merger is a positive advancement, the delay in approval has caused customers and prospects to defer any new design decisions based upon Sun technology.

Our IBM business gained traction during quarter two of fiscal 2010 with new design wins gained in the defense and homeland security sectors. Revenue from those wins should be seen in quarter three and quarter four of this fiscal year.

The most significant event for the systems group in quarter two fiscal 2010 was the signing of a new distribution agreement with Alcatel-Lucent. Under the terms of the agreement, Nu Horizons will serve as the massive distributor for Alcatel-Lucent’s enterprise product group. This product line includes enterprise voice solutions such as digital PBXs, voice-over IP systems and call center applications, and data solutions such as switches, routers, and wireless LAN products. Under the program, Nu Horizons will recruit and support value-added resellers throughout North America focused on selling, installing, and supporting enterprise voice and data applications.

Nu Horizons is staffing to support this new program and revenue is expected to begin during quarter three of fiscal 2010.

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’ll take our first question from Chuck Bennett with IBC.

Chuck Bennett - IBC

I have two questions, really -- first question, I don’t know if you can answer this, I’m looking at valuation with your company. It seems to me you’re trading, you have about a $75 million market cap. You are doing a touch over $600 million in revenue and most of the people in your space are trading about 1.2 to 1.5 times book. Is your book value really $8 and change? Is that right?

Kurt Freudenberg

It’s actually a little bit lower -- it’s about 7, $7.40 or so.

Chuck Bennett - IBC

Okay, so for the same question, is there any reason why you are trading at such a discount compared to your peers? Do you know of anything offhand?

Kurt Freudenberg

No, there’s nothing that we can identify for you.

Chuck Bennett - IBC

Second question, I noticed you had a CEO come and go within -- I don’t know, two months? That guy looked like a pretty good acquisition to get, and then it kind of shocked me that he left. Now, what was the reason for him coming and going so fast and does it really matter?

Richard S. Schuster

Well, I think we announced that the reasons were mutual and we are still in the process of finding a new CEO candidate. That’s ongoing at this point. You know, like in any relationship, sometimes things don’t work out to either party’s satisfaction but nothing dramatic. [Just one of those things] that didn’t work out.

Chuck Bennett - IBC

He seemed like a stud of a guy -- I mean, are you guys a little sad that he left?

Richard S. Schuster

Like I said, it was a mutual agreement and we are moving on and we feel there are some other excellent opportunities out there for a new CEO.

Chuck Bennett - IBC

Now I guess when I am looking at the share price compared to your book value and the valuation here, one thing that comes to mind, and I don’t mean to put Art or Richard on the spot but it looks like nobody has really bought any stock in some years and maybe that has something to do with it. Do you have any comment on that?

Richard S. Schuster

Nobody meaning the principals?

Chuck Bennett - IBC

Yes. I mean, it looks like you have about 800-and something thousand shares between Richard and Arthur, which is a pittance and it looks like they have been gifted shares away and no one has really bought anything since 2006.

Kurt Freudenberg

I don’t think we can answer that, in terms of what the shares they own is what they own and it’s not unusual for that situation to exist.

Chuck Bennett - IBC

It’s pretty unusual that you are half book value as well. I appreciate your time.

Richard S. Schuster

Thank you.

Operator

Your next question comes from Matthew Sheerin with Thomas Weisel Partners.

Matthew Sheerin - Thomas Weisel Partners

A few questions -- could you tell me what the revenue number for the systems business was in the quarter? You said it was up a lot sequentially -- what was the number?

Kurt Freudenberg

Matt, why don’t you keep going with your next question and I’ll get back to you by the time you’re done?

Matthew Sheerin - Thomas Weisel Partners

Okay, and Rich, you know, I was -- I had to jump off when you were talking about the semiconductor business and talking about lead times extending for some of the suppliers. Does that mean that you are unable to ship or to meet all the orders that you are seeing? And what areas is that?

Richard S. Schuster

Are you talking active components now --

Matthew Sheerin - Thomas Weisel Partners

Yes.

Richard S. Schuster

I’ll let Ken address that.

Ken Smith

From a -- varied by supplier and technology, so the answer is yes, we did have backlog that we could have shipped based on customer request dates but we couldn’t get the product last quarter. We have some suppliers that are going to 65-nanometers, they are driving down the geometries. We had other suppliers that were looking at lead times in the assembly side of their business. The other point that you may have missed is so we have seen lead times certainly go out -- having said that, we are also seeing or have seen many of our suppliers begin to catch up with respect to customer request dates and/or reduced lead times. And I have a number of suppliers that have told me they will catch up this quarter.

Matthew Sheerin - Thomas Weisel Partners

Okay, so are you concerned at all there might be some double ordering, excess ordering where your book to bill is inflated now and not really real and you will start to see bookings fall off as customers get parts maybe from somebody else?

Ken Smith

No, I’m not seeing that -- it’s one of the good things with respect to our system, and that is that we have visibility by customer by part number, so we can see double ordering or when customers are aggressive with their ordering and I don’t believe we are seeing that.

Arthur Nadata

And Matt, typically in non-commodity products, either [sole] source or second source, you don’t see much double ordering but we are very conscious of that and review that on a regular basis.

Matthew Sheerin - Thomas Weisel Partners

Oh, so these are the non-commodity products that you are seeing the lead times, so you are seeing good demand as opposed to let’s say some memory where more commodity products that you might see that?

Ken Smith

That’s right -- in fact, most of what I was describing was proprietary product.

Matthew Sheerin - Thomas Weisel Partners

And I’m curious as to why Asia was basically just flattish sequentially when all other distributors and suppliers have actually seen very good sequential growth. Why is that?

Ken Smith

We had some business with a supplier that was transitioning to direct support, 3PL direct support.

Matthew Sheerin - Thomas Weisel Partners

Okay.

Ken Smith

That transition has essentially played out.

Matthew Sheerin - Thomas Weisel Partners

Okay.

Kurt Freudenberg

And the answer to your first question, the system sales for the quarter was approximately $9.2 million.

Matthew Sheerin - Thomas Weisel Partners

Okay, and then what was it last quarter? You said it was up what, 70 something percent? It was like what, $5 million or $6 million or something?

And maybe I can just ask, just on the gross margin, which was good, was the gross margin improving, was that also because of -- because Asia didn’t grow as much and the rest of the business did, particularly the demand creation part of the business?

Richard S. Schuster

So it definitely was a mix -- part of it was a mix but even in Asia we saw demand creation, gross profit -- overall gross profit go up, so it -- but it’s a mix, you’re right.

Kurt Freudenberg

Q1 sales for systems was about $7 million.

Matthew Sheerin - Thomas Weisel Partners

Oh, $7 million, okay, so it was up $2 million -- okay, thanks. And Rich, on the NIC components, that 1.35 book to bill obviously looks kind of crazy. I mean, what do you account for that? Is that because business was so bad and now it’s just snapping back?

Richard S. Schuster

That is part of it. As I mentioned, some of it is seasonal. We have some customers who were very busy building for the holiday seasons but also some of our new higher ASP products have really kicked in recently, so it was a combination, as well as some inventory replenishment.

But again, you’re right, some of that has to do with the real lull we’ve seen up until the last three or four months.

Matthew Sheerin - Thomas Weisel Partners

Okay, that sounds good. And then just on -- you talked about -- just on the systems business, so Sun sounds like it has been relatively weak. Are you actually seeing any IBM revenue yet or is it mostly -- do you expect that in coming quarters?

Chris Winslow

We actually have started to see IBM revenue flow through this -- it’s still not where we want it to be yet but we are actually starting to see an upside. Last month was our best month ever for IBM and we are expecting it to -- it continues to [inaudible] in the year. We have some new design wins that should kick in later this year.

Matthew Sheerin - Thomas Weisel Partners

Okay, and then on the Alcatel-Lucent, are you going to have to build some inventory ahead of that as a master distributor, ahead of sales? Or when do you really expect volumes to start coming through?

Chris Winslow

Our inventory expectations, or Alcatel-Lucent’s inventory expectations are fairly modest. It’s basically in line with customer demand. So we are not expecting to take on significant inventory position.

In terms of the revenue stream, we are about six weeks into this program. We’ve already started to see revenue materialize through the partner base and we see that ramping over the next couple of quarters to support the business going forward.

So we are right now in the early stages of the ramp period and we expect it to continue that way going forward.

Matthew Sheerin - Thomas Weisel Partners

Okay. Thank you.

Operator

(Operator Instructions) I have Matt Sheerin with Thomas Weisel Partners with a follow-up question.

Matthew Sheerin - Thomas Weisel Partners

Yeah, since no one else is asking questions, I’ll ask some more -- so on the cost side, I saw that the SG&A was up a little bit and just remind us where you are on the legal fees with [Vitesse] and everything and where that’s heading?

Kurt Freudenberg

Legal fees have come way down quarter over quarter. We are in the few hundred thousand dollar range for the quarter and we expect to be that or lower in the future.

Matthew Sheerin - Thomas Weisel Partners

Okay, it’s in the few hundred thousand dollar range, you said? Okay, and then so why was it up and do you expect it to be up? Is that because you are building the sales force for some of the systems business or --

Kurt Freudenberg

It’s up for a few reasons. One of them is we had a few hundred thousand dollars of unfavorable FX that winds up in that line. And we had some severance costs related to our prior CEO. Those are two --

Matthew Sheerin - Thomas Weisel Partners

Okay, so severance was in there and then what was the other one? I’m sorry, I misunderstood you.

Kurt Freudenberg

FX.

Matthew Sheerin - Thomas Weisel Partners

FX, okay -- what were those two combined then?

Kurt Freudenberg

Roughly $450,000, 475.

Matthew Sheerin - Thomas Weisel Partners

Okay, so -- all right, so you take that out, you are almost back to -- just a little bit, okay. And then so do you expect that -- I mean, do you expect to keep SG&A below $23 million then?

Kurt Freudenberg

You know, it’s hard for me to say this because with the initiatives we have underway, we are hiring a few people out in Asia for origin and we are hiring a few people for Alcatel, so I would expect a little bit of a bump. I don’t know if it will be flat.

Matthew Sheerin - Thomas Weisel Partners

Okay, and then do you expect inventories, which were down, I know, do you expect them to start to move up a little bit as demand gets better?

Richard S. Schuster

Yeah, a little bit, although demand continues to pull on the inventories as well, so possibly up a little bit, Matt.

Matthew Sheerin - Thomas Weisel Partners

Okay. And let’s see -- and then lastly, just on the -- any update on the CEO search?

Arthur Nadata

It’s ongoing and we have a number of people that we are interviewing but nothing to speak of.

Matthew Sheerin - Thomas Weisel Partners

Okay. That’s it. Thanks a lot.

Operator

We have another follow-up question from Chuck Bennett with IBC. Mr. Bennett has disconnected his line. We’ll take our next question from Ted [Alacoa] with Trident Partners.

Ted Alacoa - Trident Partners

I just -- sorry if I misunderstood, I just wanted to get a little clarity on the book to bill -- did you say it was 1.6 for the quarter for everything combined?

Kurt Freudenberg

1.06.

Ted Alacoa - Trident Partners

Right, that’s what I’m saying, 1.06 -- that’s -- okay. And the month of September was 1.20, is that correct?

Richard S. Schuster

1.17, wasn’t it?

[Multiple Speakers]

Kurt Freudenberg

Consolidated was 1.2 to 1.

Richard S. Schuster

That’s right, so that includes NIC and all the other divisions.

Ted Alacoa - Trident Partners

I’m sorry, guys, the phone was cutting out -- so for the month of September, what was the total?

Kurt Freudenberg

The consolidated --

Unidentified Participant

1.2 to 1.

Ted Alacoa - Trident Partners

Okay. Thank you very much, guys.

Operator

(Operator Instructions) And that is all the questions we have at this time. I would like to turn the conference back over to you, sir, for closing remarks.

Richard S. Schuster

I would like to thank everyone for participating on this conference call. We welcome your questions and look forward to the next conference call. Thank you and have a nice day.

Operator

Thank you, sir. Available later today beginning at 7:30 p.m. Eastern Time and will be available until October 15th by dialing 888-203-1112, or 719-457-0820 and using today’s pass code of 7400008. Once again, the replay will be available today beginning at 7:30 p.m. Eastern Time and will be available until October 15th by dialing 888-203-1112, or 719-457-0820 and using pass code of 7400008. And that concludes today’s conference. We thank you for your participation. You may now disconnect.

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