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Executives

Richard S. Schuster - President and Chief Operating Officer

Kurt Freudenberg - Executive Vice President and Chief Financial Officer

C. David Bowers - President of Nu Horizons' Distribution Division

Arthur Nadata - Chairman of the Board and Chief Executive Officer

Analysts

Matt Sharon – Thomas Weisel Partners

Mike Neary – Neary Asset Management

Russ Silvestri - SKIRITAI Capital.

Nu Horizons Electronics Corp. (NUHC) F1Q09 Earnings Call July 9, 2008 4:15 PM ET

Operator

Welcome to the Nu Horizons’ first quarter fiscal year 2009 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 contain 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 Nu Horizons’ industry and competitive landscape.

(Operator Instructions) Now for opening remarks and introductions, I would like to turn the conference over to Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corporation.

Richard S. Schuster

Welcome to the Nu Horizons first quarter of fiscal year 2009 earnings conference call. I am Richard Schuster, President and Chief Operating Officer of Nu Horizons Electronics Corp. With me here today are Arthur Nadata, Chairman and CEO; Kurt Freudenberg, Executive Vice President and Chief Financial Officer, and Dave Bowers, President of Nu Horizons’ distribution division.

Kurt will give an overview of the financial results for the first quarter of fiscal year 2009. I will then provide a brief market view 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 would like to turn the call over to Kurt.

Kurt Freudenberg

Net sales from continuing operations for the first quarter of 2009 increased to $200,152,000 from $175,232,000 in the comparable period last year, an increase of 14.2%. Sales in our core global electronics components distribution division were up $23,808,000 or 14.7% for the first quarter of fiscal 2009 compared to the prior year.

Geographically, sales for Q1 of fiscal ’09 were up 63% in Asia, up 52% in Europe, and down 1% in North America when compared to the same period of the prior fiscal year. Systems sales increased 8.5% to $14,230,000 for the first quarter of fiscal 2009. Sequential quarterly sales increased $6,469,000 or 3.3% over the fourth quarter of fiscal 2008. Design revenue increased 12.1% of the first quarter of the prior fiscal year to $44,234,000. The number of design registrations is up 65% for the same periods.

The gross profit margin for the first quarter of fiscal ’09 was 15.5% as compared to 16.9% for the same period of the prior year. The decline in gross margin resulted primarily from lower supplier discounts, increased freight costs, product mix; lower margins associated with increased order size, as well as increased sales in the Asian-Pacific market which require lower selling prices due to secure high volume business from large Asian contract manufacturers.

As a percentage of sales, operating expenses decreased to 14.1% compared to 14.6% in the prior year. On a dollar basis, operating expenses for the current quarter ended May 31, 2008, increased $2.5 million to $28,147,000 compared to the prior year first quarter. This dollar increase in operating expenses was primarily related to the increased professional fees related to the SEC investigation entitled “In the matter of Vitesse Semiconductor Corporation,” and the related internal investigation being conducted by our audit committee and personnel related costs relating to increased staffing levels to support our start-up operations in Germany.

Operating margins in our North American and Asian businesses have improved this quarter when compared to the same quarter last year. While the European operating margins are down due primarily to our continuing investment in Europe, primarily in Germany as well as new sales agents in central and eastern Europe, our results in Germany were on target for the first quarter.

In connection with our ongoing focus to improve operating operations and cost efficiencies, we plan to consolidate our Melville, New York warehouse into our expanding Mississippi warehouse which we expect to yield an estimated annual savings of $1.1 million starting in January 2009, excluding approximately $400,000 of one-time severance cost. As a percentage of sales for the first quarter fiscal 2009, interest expense is flat when compared to the prior period.

The consolidated tax rate for the three months ended May 31, 2008 is 31% as compared to 41.3% for the three months ended May 31, 2007. The consolidated effective rate was higher in the first quarter fiscal 2008 due to the penalties and interest associated with the ’07 financial statement restating. The fiscal ’09 consolidated effective tax rate was lower than the [s/l United States specialty rates] due primarily to lower foreign income tax rates resulting from our election to permanently reinvest foreign income in the operations of the respective foreign countries.

Net income for the first quarter decreased to $1,155,000 compared to $1,688,000 in the prior year period. Diluted earnings per share are $.06 per share for the first quarter of fiscal 2009. The decrease compared to the same period last year is primarily contributed to increased professional fees of $970,000 due to the Vitesse related SEC inquiry and related internal investigation for the three months ended May 31, 2008 as well as personnel costs in Germany.

On a pro forma basis, excluding professional fees mentioned above, diluted earnings per share would have been $.10 for the first quarter of fiscal ’09 and ’08. Our balance sheet is strong and liquid with $208 million of working capital and our current ratio is 3.2:1 at May 31, 2008. Our days’ sales outstanding was 68.7 and our inventory turned 5.85 times on average.

On May 31, 2008, our outstanding debt was $75 million and we had an unearned of $56 million on our bank credit lines. In the first quarter of fiscal ’09, approximately $1,338,000 of our cash flow was generated by operations.

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

Richard S. Schuster

First quarter of fiscal year 2009 represented a significant improvement for us on several fronts. We continued to gain operating leverage in Asia-Pacific generating over 4% operating profit in our distribution business in the largest semiconductor market in the world. Further, we gained ground in the United Kingdom with growth and improved profitability and we substantially reduced our operating losses in central Europe with a 9% improvement in top-line revenues from our fiscal year 2008 Q4.

We did experience the effect of a market slowdown which has begun in North America, experiencing flat sales in this key territory during the quarter both versus last year Q1 and Q4.

During the quarter, we announced key supply-to-franchise extensions as both Linear Technology and Marvel began to extend our partnership to Europe. We engaged with Xylark, a leader in microcontroller technology throughout the Asia-Pacific region and in the Americas, and we strengthened our solid-state lighting initiative with the announcement of several new solution partners in this rapidly growing business.

Without a doubt, the most exciting news for us on an ongoing basis is the rapid growth and improved profitability of our Asia-Pacific distribution operations. We recorded year-over-year same-quarter revenue growth of 78% in Q1 fiscal year 2009 coming on top of our 79% full-year fiscal year 2008 growth versus fiscal year 2007.

As we all know, China has become the largest market in the world in our industry. We were excited to announce in just the past 30 days, that we have been named for the third consecutive year as Most Preferred Distributor in China by Electronics Supply and Manufacturing China magazine. ESMC is the leading electronics industry publication in China.

In Europe, we grew 57% year-over-year same quarter. We began to get traction in Germany and we expanded into the fast-growing eastern European market with new hires in Poland and Hungary. In particular, Linear Technologies and Marvel’s moves to authorize us in Germany and Austria were major positive achievements for us as our new suppliers have substantially strengthened our offering in the central European market, one which accounts for nearly half of the semiconductor spend through distribution in all of Europe.

We again achieved market share gains in North America but saw this market begin to soften in the latter part of Q1. We reduced our operating costs in the Americas in December 2007 and this helped us to offset flat sales and reduce gross margin results through the Q1 period. While we remain strongly committed to the North American market and continue to invest here, we see the trend to outsourcing as a steady shift.

Also during the quarter, we began to see improvement in our systems distribution business. Revenue in Q1 was up 16% from the previous quarter and up 8.5% over Q1 of a year ago due to the acquisition of several new customers and growth in our core Sun Microsystems market.

Gross profits grew even more dramatically with gains of 24% over the previous quarter and 50% over Q1 a year ago. This improvement was due to a better mix of value-oriented customers, an increase in integration services and a renewed emphasis on driving higher margin programs. Our passive components business was a positive contributor to gross margins and while top sales lines were relatively flat, gross profit percentages did increase.

Thank you and now I 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 Matt Sharon - Thomas Weisel Partners.

Matt Sharon - Thomas Weisel Partners

Regarding the demand picture, you said things in North America at the end of the first quarter started to slow a little bit. Here you are, almost halfway through your second fiscal quarter. Are things getting worse in North America or are they stable?

C. David Bowers

We’re on track with our plan through the first part of this quarter. So that’s positive. We’re a little concerned about the summer months, about the latter part of July and August, so far, so good.

Matt Sharon - Thomas Weisel Partners

And what’s the book to bill at right now?

Kurt Freudenberg

It’s parity.

Matt Sharon - Thomas Weisel Partners

Is that the same thing in Europe and in Asia, or is it higher in those areas?

C. David Bowers

It’s a little better in those and Asia would be the highest, but it’s still under 1.1 in all territories.

Matt Sharon - Thomas Weisel Partners

Rich, on the passive business, on the NIC, it sounds like margins are up but business is still flat. Is that just a mix issue?

Richard S. Schuster

Yes, it’s basically a mix issue. We’re selling more of our specialty high technology components but the sales environment is still very, very challenging globally, actually.

Matt Sharon - Thomas Weisel Partners

Are you seeing some of the more commodity areas that you play, are you seeing pricing competition and has it been getting any worse over the last few months?

Richard S. Schuster

I have to say while there’s still some heavy competition in Asia, pricing for even the commodity products has started to stabilize with raw material costs and transportation costs going up. The erosion, I see, has slowed down. It’s still relatively competitive in the Asian market.

Matt Sharon - Thomas Weisel Partners

Regarding the warehouse consolidation, you said it was $1 million or so kicking in at the beginning of 2009. When is that actually going to take place, the transfer of the inventory?

Kurt Freudenberg

It will start in January 2009. That’s when we expect to be shipping out of that warehouse.

Matt Sharon - Thomas Weisel Partners

How many jobs are you going to eliminate?

Kurt Freudenberg

I don’t know the number of heads but I can tell you the severance is $400,000.

Matt Sharon - Thomas Weisel Partners

And is that mostly Long Island?

Kurt Freudenberg

The heads is probably around 20. That’s an estimate.

Matt Sharon - Thomas Weisel Partners

Will there be any, since you have all the inventory under one roof, will there be any opportunities to keep inventory turns at a faster rate or inventory days lower as a result or no?

Kurt Freudenberg

We hope so. Yes.

Matt Sharon - Thomas Weisel Partners

Regarding the legal fees that’s related to the Vitesse investigation, I didn’t get that exact number and what do you expect it to be this quarter and the next couple of quarters or can you tell?

Kurt Freudenberg

It was $970,000 for this past quarter and we expect it to be the same going forward for at least the next quarter going forward.

Matt Sharon - Thomas Weisel Partners

Do you have any visibility into when this thing is going to go away and will you know when it goes? Will someone tell you when it’s over?

Kurt Freudenberg

Unfortunately, no to that, we’ve not been communicated to nor at this point do I expect we will be communicated to by the SEC. It will be over when they stop asking questions.

Matt Sharon - Thomas Weisel Partners

Is that what your attorneys are telling you?

Kurt Freudenberg

Right now, that’s the best information we have.

Matt Sharon - Thomas Weisel Partners

But is there anything to suggest that there’s going to be any issues in things that you’ve produced so far that there could be issues or problems for Nu Horizons as a result of this investigation?

Kurt Freudenberg

I’m not aware of anything.

Operator

Your next question comes from Mike Neary - Neary Asset Management.

Mike Neary – Neary Asset Management

Can you give a little more history of the Vitesse investigation, when exactly did it start, and just overview that for me please?

Kurt Freudenberg

I don’t have the exact date in front of me but I can tell you it’s been a little bit over a year ago. We have been asked to produce information related to the transaction of Vitesse by the SEC and that’s it. We’ve been producing anything they’ve asked for related to that, to the SEC for their investigation of Vitesse.

Mike Neary – Neary Asset Management

Except for responding to their request, is your internal investigation of that over?

Kurt Freudenberg

It’s ongoing.

Mike Neary – Neary Asset Management

You mentioned that it would be continuing in this next quarter and you don’t have any visibility past that.

Kurt Freudenberg

Right, because we don’t know how many more requests may come up or questions on data already provided may continue.

Mike Neary – Neary Asset Management

You mentioned you’re moving the warehouse to Mississippi. Is HQ going to stay where it is or what’s happening with your offices?

Kurt Freudenberg

It is. The headquarters will stay here and just the warehouse is moving to consolidate with to make it more efficient.

Mike Neary – Neary Asset Management

CapEx depreciation, what was it for the quarter and then what’s your outlook for the year?

Kurt Freudenberg

Depreciation runs about $250,000 a quarter to $300,000. I don’t expect that’s going to change. CapEx for the quarter was around $475,000.

Mike Neary – Neary Asset Management

Our stock is roughly $5, our tangible book is $8, every acquisition that you have made is more than tangible book, and every acquisition that everyone else has made is over tangible book. What steps have you taken other than working on the operations to try to improve the stock price or to improve the value to shareholders?

Kurt Freudenberg

We are doing everything we can from an operations standpoint to build the business, expand the top line, to be more efficient in terms of our costs and margins, and to bring more returns to the shareholders and increase the bottom line. The warehouse is an example of that.

Mike Neary – Neary Asset Management

Other than operations, have you taken any steps in that regard?

Kurt Freudenberg

What are you thinking of?

Mike Neary – Neary Asset Management

Well, you could buy back stock, you could buy stock personally, you could evaluate whether it would be better to sell the company as opposed to staying independent. There are all kinds of things you could look at.

Kurt Freudenberg

The stock buyback, the Board recently did consider that. We determined that in the current environment that the use of cash would be best suited for expanding the business itself.

Mike Neary – Neary Asset Management

Did you look at any of the other options?

Kurt Freudenberg

At this point in time, we’re not aware of any other positions on the horizon of anyone acquiring us so obviously we have a fiduciary obligation to look at anything that comes our way.

Mike Neary – Neary Asset Management

But you haven’t taken any steps to actively shop the company or anything like that?

Kurt Freudenberg

We have not.

Operator

Your last question comes from Russ Silvestri - SKIRITAI Capital.

Russ Silvestri - SKIRITAI Capital

It looks like your inventory growth in a year-over-year basis is a little bit less than the sales growth. Within the quarter, was there any reserves taken in inventories or just looking at the inventory in general, risk to obsolescence is my question.

Kurt Freudenberg

Inventory in terms of reserves, our inventory, I think, looks super. The inventory turns are up. The reserves have remained consistent. We haven’t used any reserves. From an inventory standpoint, it’s really only building to service the amount of sales we’re doing.

Russ Silvestri - SKIRITAI Capital

Can you just remind me what your inventory reserves at the end of last year were?

Kurt Freudenberg

The inventory reserves were around 3.5 million at the end of the period and it hasn’t changed. We do a quarterly review of analyzing that number to make sure the inventory is at a fair value.

Operator

We have no more questions at this time.

Arthur Nadata

I would like to mention that some of you already are aware, that we have recently retained Connie Chandler who is principal of IR Strategies to work with Nu Horizons and our investor relations. We believe Investor Relations is important and Connie will be working with management going forward as we continue our dialog with the investment community. We will be posting contact information for her in the next couple of days on our website.

With that, I would like to thank everyone participating in our conference call. We welcome your questions and look forward to the next conference call. Thank you and have a good day.

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Source: Nu Horizons Electronics Corp. F1Q09 (Qtr End 05/31/08) Earnings Call Transcript

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