Nu Horizons Electronics Corp. F3Q10 (Qtr End 11/30/09) Earnings Call Transcript

Jan. 7.10 | About: Nu Horizons (NUHC)

Nu Horizons Electronics Corp. (NUHC) F3Q10 Earnings Call January 7, 2010 4:30 PM ET

Executives

Richard Schuster - Interim President, Senior Executive Vice President & Chief Operating Officer

Arthur Nadata - Executive Chairman & Interim Chief Executive Officer

Kurt Freudenberg - Executive Vice President & Chief Financial Officer

Ken Smith - Executive Vice President of Worldwide Sales and Marketing

Chris Winslow - Senior Vice President, Systems Distribution

Analysts

Steve Anderson - Venator Capital Management

Russ Silvestri - SKIRITAI Capital LLC

Operator

Good day and welcome to the Nu Horizons third 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. During the presentation your line will be in a listen-only mode. (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 Schuster

Thank you. Good afternoon and welcome to the Nu Horizons Electronics Corp., third 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 of Systems Distribution.

Kurt will give an overview of the financial results for the third 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 have.

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

Kurt Freudenberg

Thank you, Rich. Good afternoon everyone. Sequential quarterly consolidated sales increased $22,846,000 or 14.6% over the second quarter of fiscal 2010. Consolidated net sales for Q3 in the fiscal year 2010 are $179,446,000 million compared to $188,219,000 million in the comparable period last year.

Sequential quarterly sales in the active components segment were up 8.3% in North America, up 27% in Asia and up 9.8% in Europe. Sales in our active electronics component segment were down 4.8% for the third quarter of fiscal 2010 compared to the prior year.

Sequential sales in our passive component segment for Q3 of fiscal 2010 increased 25.6% and were down 2.9% compared to Q3 of the prior year. Our consolidated book-to-bill ratio was 1.1 to 1 in the third quarter of fiscal 2010 and 1.2 to 1 in December. The consolidated gross profit margin for the third quarter of fiscal 2010 was 14% as compared to 15.1% in the same period last year, which is primarily due to a higher volume of low margin business in Asia and North America.

Selling, general and administrative expenses decreased $5,832,000 or 20.4% 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 and freight expense as a result of lower sales, as well as decreases in repairs, maintenance, supplies, bank charges, foreign exchange expense, professional fees, and travel and entertainment expense. These savings were partially offset by payroll expenses associated with the ramp up of our new supplier Alcatel-Lucent.

For the nine months ended November 30, 2009 consolidated net sales decreased to $483,805,000 from $600,184,000 in the comparable period last year. For the nine months fiscal period selling, general and administrative expenses decreased $18, 711,000 or 21.7%, due primarily to savings associated with previously discussed cost reduction actions, as well as lower professional fees, commissions, freight and travel, entertainment expenses. These savings were partially offset by expenses associated with our C-88 acquisition in a third quarter of fiscal 2009.

As a percentage of sales for the three and nine month periods ended November 30, 2009, net interest expense decreased to 0.2% and 0.3% of sales to 0.4% sales in each of the prior year comparable periods. Interest expense decreased due to lower average loan balances outstanding. Notwithstanding the increase in our effected interest rates to 8.3% and 6.3% for the three and nine month periods ended November 30, 2009 respectively.

The effective tax rate difference significantly from tax rate to 35% for the three and nine months ended November 30, 2009 primarily due to the reversal tax benefits taken in prior quarters and increase in valuation allowance of certain foreign net operating losses and foreign income earned tax rates to lower than the U.S. tax rates.

Additionally, due to volatility in estimating income for the remainder of the year, the method of allocating incomes taxes to interim periods was changed this quarter, resulting in a decrease of approximately $255,000 to income tax expense in Q3 of fiscal 2010. Under this alternative method, interim period income taxes are based on each discrete quarter’s pretax income instead of applying us annual effective rate.

Net income for the third quarter of fiscal 2010, was $650,000 or $0.04 per diluted share, compared to $150,000 or $0.001 per diluted share in the third quarter of fiscal 2009. For the nine months ended November 30, 2009, net income was $249,000 or $0.001 per share, compared to net income of $1,497,000 or $0.08 per share diluted share in the comparable period of last year.

The company has a strong balance sheet. At November 30, 2009, the company had $167,390,000 in working capital, our current ratio was 3.1 to 1, and our bank debt to equity ratio was 0.24 to 1. Additionally, the company had $39,850,000 in cash available under all of these bank facilities.

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

Richard Schuster

Thank you, Kurt. For the third quarter of fiscal year 2010, we continued to see a strengthening in the Active Electronics Components’ distribution segment with sequential revenue growth of 13.8%; sequential design revenue growth of 6.5%; and 1.1 book-to-bills for the quarter.

All geographies experienced both sequential growths in a positive book-to-bill. The first month of the current quarter December, indicated continued strength in the market with a 1.24 book-to-bill for the segment. There was an increase in activity in both customer design and customer supply chain efficiency improvement efforts as our customers appear to position themselves per revenue growth in the coming year.

Our supplier partnerships continued to develop and expand through targeted marketing, vertical market solution selling and design in logistics differentiated support with a particular emphasis on new customer engagement. In North America, Active Electronics Components revenue increased 8.3% sequentially and the book-to-bill was positive for the quarter at 1.1.

Customer design activity remained strong with registrations increasing 19%. Improvement continued to be seen in multiple customer tiers and customer vertical markets, were continuing our strategy to drive our sales team to identify new customers, particularly, those that are participating in rapidly expanding market segments including energy management, medical, and security surveillance.

In addition to North American indigenous design in revenue success, we are working to increase the number of suppliers that support design tracking to other parts of the global with APAC representing the primary geography, the tracking design to production demand. We believe our seamless support of design and fulfillment utilizing our single global IT platform remains a competitive advantage.

In Europe, top line revenue increased 9.8% sequentially and the book-to-bill was positive for the quarter at 1.05. Customer design activity remained extremely strong with registration activity up 51% quarter-over-quarter. The U.K.’s top line revenue increased 4.2% sequentially, Germany increased 15.4% sequentially, and Nordic Region increased 22.7% sequentially.

APAC demonstrated the most significant quarter-over-quarter strength with top line revenue increasing 27.1% sequentially, and the book-to-bill for the quarter of 1.1%. Design activity remains strong with the sequential registration increase of 39%. Our second line card expansion continuous as Origin Electronics, opened new offices in South East Asia, and Korea and as expected contributed positively to the bottom line by the end of the fiscal quarter.

Q3 once again represented an improved quarter in both bookings and billings for the Americas, APAC and Europe. Supplier lead times although extended, appear to have stabilized with a number of suppliers becoming current with delinquencies during this quarter. Customer expedite activity increased during the quarter, which we believe indicates that suppliers in general have made progress in meeting customer demands and builds are becoming more depended on a small number of gating items.

While managing inventory, we have increased pipelines with our suppliers through replenish our inventory levels due to the increasing customer demand and to support supplier accelerated new product introductions. We intend to continue to expand our value proposition to suppliers by introducing new technologies and ultimately by increasing our value to the customers design community.

We will also seek to continue to enhance our supply chain tools as customers automate and increasing percentage of their transactions and we quickly deployed those enhancements throughout our single global IT platform. Our supply chain enhancement efforts were recently recognized with an award for excellence and service, and support by one of the world’s largest EMS providers Sanmina-SCI.

We believe that closure engagement with suppliers in the Americas, continued development of the second line card in APAC, the expansion of supplier franchises in Europe, and our design support and supply chain enhancement efforts will position the active electronics component segment for continued growth.

Revenue for the systems group was down 8% from quarter two, fiscal 2010 and down 17% from quarter three, fiscal year 2009. A significant amount of backlog however, existed at the end of the quarter due to product availability issues generating a book-to-bill ration of 1.2 to 1.

During the third quarter, we focused on expanding our business model by watching a significant new supplier and expanding the markets that we serve. We began to rollout of our previously announced distribution relationship with Alcatel-Lucent’s Enterprise Products Group and so a bookings and revenue increased over the course of the quarter.

To do so, we hired a number of new industry specialists and made investments in direct sales activities. A number of the existing Alcatel-Lucent value-added resellers in North America became customers of Nu Horizons during the quarter and the team signed a number of partners that are new to both Nu Horizons and Alcatel-Lucent. The addition of this expanded partner base of is long term opportunities for additional revenues through supplier additions.

For our server lines, we focused on those markets that are showing growth potential. We saw a new design rollouts for solutions in the homeland security and defense sectors, digital video and wireless network applications. These sectors should provide significant upside potential for fiscal year 2010. The delayed acquisition of Sun Microsystems by Oracle as had an impact on our business over the past six months, as customers and potential customers have delayed design decisions until the deal is close.

Our passive component business has rebounded strongly in quarter two and quarter three of fiscal year 2010. NIC is now profitable for the nine months of fiscal 2010. Bookings in quarter three were up dramatically, coming from our OEMs, EMS customers and distribution network. Book-to-bill was an impressive 1.25 to 1 and encompassed all geographic regions.

Due to factory capacity restraints, lead times have stretched out and we have seen spot shortages in the passive component market. NIC has pipelined additional product inventory in an effort to keep up with the expected demand. Consumption of passives has been driven by improvements in the automotive, telecom, security, video, laptop computer, and industrial market segments.

Margins are stable as demand has either outpaced or stayed even with production capacity. Distribution has rebuilt inventories and OEM projects that were not funded in 2009, appear to be coming onboard for 2010 production. NIC supply base is steadily, albeit carefully, expanding capacity and we believe we will be sufficient to support our increased sales. Overall based on current bookings and industry trends, we are optimistic about future demand.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Anderson - Venator Capital Management.

Steve Anderson - Venator Capital Management

I was just wondering if you could run through the taxing for me one more time, I miss that?

Kurt Freudenberg

Sure, typically you look at taxes throughout the year, and the allocation between quarters is based on projected full year rate, 0.09. However, if your future quarters, we’re not sure what the forecast is going to be, because of the economy, the recession. You get these swings between quarters, so there’s another method available, which is called the cut-off method, which you just take the period you’re in, which for us is the third quarter and you measure the actual taxes for the third quarter period actually booked. On an estimate, on a full year base, you come out with the same number.

Steve Anderson - Venator Capital Management

So what’s estimate for full year tax rate?

Kurt Freudenberg

I can’t say that right now.

Steve Anderson - Venator Capital Management

What would be a normalized tax rate for you guys?

Kurt Freudenberg

In normal conditions, I would say it would be in the low 30s.

Steve Anderson - Venator Capital Management

That shouldn’t change and this is just the quarter thing, because of lack of visibility.

Kurt Freudenberg

Correct.

Steve Anderson - Venator Capital Management

The second thing, can you just run through the book value, or is that around $7 a share right now?

Kurt Freudenberg

A little over that.

Steve Anderson - Venator Capital Management

The debt went up…?

Kurt Freudenberg

70 to 80, the exact and intangible book are 734.

Steve Anderson - Venator Capital Management

734 is your tangible book?

Kurt Freudenberg

Yes.

Steve Anderson - Venator Capital Management

Your debt went up, is that just financing?

Kurt Freudenberg

Yes, that is just become of the increase in business, which is obviously good thing.

Operator

Your final question comes from Russ Silvestri - SKIRITAI Capital LLC.

Russ Silvestri - SKIRITAI Capital LLC

Quick question, could you talk a little bit about lead times and a little more specific what you’re seeing in terms of deliveries?

Ken Smith

We saw lead times go out as we reported previously earlier in the year. What we’ve seen and what we described here is that lead time has stabilized, so they’re still out there. We have some individual components, some instances where lead times have come in believe it or not, but in most cases, I would describe it more as they’ve stabilized at an extended lead time.

Suppliers have caught up or a number of suppliers have caught up with delinquent deliveries and what we defined or what I am describing as a delinquent delivery is a delivery that they committed to as opposed to our customer request date. So they’ve stabilized but they’re still extended.

Russ Silvestri - SKIRITAI Capital LLC

So when you say extended, I mean are we talking 12 weeks, nine weeks, 15 weeks, eight weeks, what’s the number?

Ken Smith

Eight to 12 weeks.

Operator

It appears we have no further questions. I’d like to turn the conference back over to these speakers for any additional or closing remarks.

Richard Schuster

Thank you. I’d like to thank everyone for participating on this conference call. Welcome your questions and look forward to the next conference call. Thank you all and have a good day.

Operator

A replay of today’s call will be available today beginning at 7.30 pm Eastern Time and will be available until January 14, by dialing 888-203-1112 or 719-457-0820 and using pass code 5014730. That concludes today’s presentation. Thank you for your participation.

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