Electroglas, Inc. F1Q09 (Qtr End 08/30/08) Earnings Call Transcript

Electroglas, Inc. (EGLS)

F1Q09 Earnings Call

September 18, 2008 5:00 pm ET

Executives

Thomas E. Brunton - Chief Financial Officer

Warren C. Kocmond, Jr. - Chief Operating Officer

Thomas M. Rohrs - Chief Executive Officer

Analysts

[Eric Slade]

Presentation

Operator

Welcome to the Electroglas Q1 2009 results release conference call. (Operator Instructions) At this time I would like to turn the call over to Mr. Tom Brunton, CFO, so that we can begin.

Thomas E. Brunton

I am here today with Tom Rohrs, our Chairman and CEO, and Warren Kocmond, our COO. Good afternoon. Today we are going to discuss the results from our fiscal Q1 2009, which ended on August 30, 2008.

At the conclusion of our comments, Tom, Warren, and I will be happy to answer any questions. We intend to limit today's conference call to about one hour.

By now you should have received our press release as it was sent out a few minutes ago. If you have not received it or haven't gotten it off the web, please feel free to contact Candi Lattyak at 408-528-3801 and she will be happy to send it to you.

Before we begin, I would like to make some cautionary statements. During the course of this conference call, we will make forward-looking statements regarding future events or the future performance of our company. These statements are based on limited information available to us, and these projections are subject to change. Actual events or forecasts could differ materially. No reader or listener of this release should assume later in the quarter that the information that we will provide today will still be current. And we would once again like to refer you to the documents the company files from time to time with the SEC.

Now, more information on the first quarter.

Revenues for the first quarter of $8.4 million, down from $12.0 million in Q4. The revenue for the quarter was short of the bottom end of our range of $10.5 million, as provided in last quarter’s call. Why the miss? We are a turns business and we normally expect to get a reasonable percentage of the quarter’s revenue from bookings during the current quarter.

While bookings for Q1 were approximately $5.0 million, with $1.0 million in the month of August, many customers pushed out their capital buying positions. As you know, we are normally back-end loaded so this hit us hard on the Q1 revenue line.

On a positive note, in the first week of Q2 we booked $3.0 million, including an order of 10 EG6000s.

The revenue mix by geography for the quarter was as follows: 38% for North America; Europe 35%; Asia/Pacific 27%.

GAAP gross margins for the quarter were 15% versus last quarter at 26%. Let me break out the detail variances of the components of the margins. Our margins were negatively impacted by principally four factors. Service margin impact, unfavorable 6.6%. As we said in last quarter’s call that we are below critical mass in the service area. Warren will make some comments on that particular business area in part of this presentation. Mix variance, 5%. We had less upgrades and refurbished systems and software versus Q4. Volume variance, 2.5%. Fixed overhead spread over 30% less volume. And the spending variance of 2.5%. Shipping was 200,000 over normal run rates.

All this adds up to roughly 15%. Without these factors our margins would have been in the 30% to 33% range, as discussed in the last call. When we are at the bottom of the cycle, and we get to these low sales levels, these factors come into play, as they have in the past.

A few comments on operating expenses. In last quarter’s call we discussed the steps that we were taking to lower operating costs. We took those steps in Q1. First quarter R&D spending was $2.0 million, down approximately $300,000 from Q4 levels, primarily due to more vacations taken during the quarter and lower patent legal costs.

SG&A expenses were $2.8 million. This is down $1.0 million from Q4 levels due to lower sales commissions, higher vacations taken during the quarter, and lower salaries and benefits from lower head count.

Our restructuring and impairment costs for the quarter were $300,000. These costs consist of severance costs for employees terminated during the quarter, across all functions.

So in summary for operations, the company reported a net loss for the first quarter of $4.5 million, or $0.17 per share.

Some additional supplemental information that we normally during the call: capital spending was approximately $200,000 for the quarter; depreciation and amortization was $400,000; and stock compensation expense was approximately $200,000.

Turning to the balance sheet, our cash investments at the end of the quarter were $11.4 million. On last quarter’s call we forecasted cash usage of $1.0 million to $2.0 million. The usage of cash was higher, principally for two reason: our revenue was short of forecast by $2.5 million to $3.0 million because of slow bookings, as I discussed, hence the operating cash usage was higher than forecasted; and our receivables were higher by approximately $1.5 million due to back-end loaded revenues. I will point out that we collected about $800,000 of these receivables in the first few days of the second quarter.

In our receivables area the trade receivables were $7.8 million with DSOs ending at 84 days. Again, I mentioned that we were back-end loaded.

The ending inventory balance was $5.9 million, up $400,000 from Q4, and some of the shipments at quarter end did not reach the customers at the end of the quarter because the terms were DDU. And that’s that the title passes to the customer when we received the destination and we’re cleared through customs.

I will also note what we see for the second quarter. Our guidance for the second quarter, that’s for the months of September, October, and November, are that revenue will be in the range of $7.0 million to $8.5 million. We expect our book-to-build to be positive for the quarter but visibility at this time is extremely limited. We expect cash usage to be in the $2.0 million range for the second quarter.

However, we are implanting a plan which will allow us to operate at these depressed revenue levels with a plan to maintain our cash levels at $10.0 million as we exit the year. Warren will cover additional details on these plans. We expect gross margins in Q2 to improve from Q1 levels with a more normal product mix.

So in summary, we continue to focus on our business model. We are continuing to be focused on growing our customer base and winning evaluations.

This concludes my remarks and now I will turn the call over to Warren.

Warren C. Kocmond, Jr.

Obviously it was a very tough quarter. This is a cycle that has been deteriorating for well over a year and has recently begun to hit our largest customers, even more so than in previous quarters. We’ve been carefully watching the market and continuously talking with our customers and the severity of the bookings drop was unexpected. Though unexpected, it was not entirely surprising as our competitors continue along at a depressed rate of business.

As we mentioned last quarter, while specific prober segment data is not available, it looks as if the revenue for both our competitors is now down over 50%. Some semi companies’ customers continue to call the bottom. I’ll leave the prognostication to others as our visibility based on customer input does not yield an improved forecast in the near future.

While an up-tick may be possible, we need to plan a course based on current economic conditions. That means a further tightening of our expenses in order to be better prepared for the inevitable upturn.

Tom Brunton discussed the cash position at length. This is clearly front and center for the company. I will provide additional details as to our course of action later in the call.

In the meantime, the ray of brightness in the story is that our entry into other motion-control applications is paying off. The strategy has been to invest in non-semi growth industries that would over time match the potential of our prober business and yield technology improvements that could be utilized in tighter space. I will talk further about that in a few moments.

Now a few words about our progress in the prober business. As we discussed last quarter, we have continued to invest in key account evaluations and penetrations. On the 300 mm front, as we have discussed on previous calls, we have sold the EG6000 to over two dozen customers and in production at about three dozen sites. Our adoption rate continues to be close to 100%. The technology continues to be validated and there’s no doubt that we have a very competitive product.

At a recent trip to Taiwan, where I visited with many of our customers, the repeating theme was the acknowledgment of a great product and when an uptick occurs a willingness to engage EG in volume orders.

One of the key evaluations in Taiwan that we alluded to last quarter is progressing well and we are confident this will ultimately represent an opportunity for volume orders. We just don’t see that occurring in the near term for all the reasons I’ve already described.

Based on customers who have already qualified the EG6000, we are now well positioned to see a share of available market several hundred units over the next couple of years. The bottom line however, is that very few of any customers are adding capacity at this time. While EG technology differentiating is compelling, the economic climate is not robust enough to generate volume orders.

After a series of quarters of strong, stable performance in our 200 mm market, we are beginning to see a large number of internal re-deployments by customers. There are clearly high-turn wafer requirements still out there, there are a sufficient number of idle 200 mm lines that can accommodate those improving businesses, so we experienced a drop in our 200 mm business in Q1.

Now to return to the cash and expenses. To add some color to the comments that Tom Brunton made earlier, I wanted to describe some of the steps that we were taking to preserve our cash and improve our expense line.

As Tom noted, we lowered our overall expense line from Q4 to Q1 by $1.1 million. We see further opportunities this quarter and let me go over some examples. Outsourcing our IT function will be complete in Q2 and will save us $400,000 annually. The G&A tied to our accounting and audit function is expected to drop by another $100,000.

Now that FLEX is coming up to speed and we should be able to further streamline our operations. Eventually as the 6000 platform continues to mature, we expect to see measurable improvements in the warranty costs. Also with the transition of FLEX behind us, we expect to reduce our [inaudible] further and will wring out several hundred thousand more dollars over the next year.

We expect inventory to drop $4.0 million to $4.5 million by year end. Finally, as we continue our move toward a virtual model, we should be able to shrink the expense line by $200,000 to $300,000 in near quarters and by $1.0 million in out quarters.

In previous calls we’ve talked about the access and profitability in our service business. I am pleased to report that this week we hired a service executive with experience running service businesses anywhere from tens of millions of dollars to half a billion dollars. [Aaron Silberman] has joined EG and has experience with such industry leaders as Applied Materials and SYS Technologies.

Switching gears now, a little less than a year ago we began to look at ultimate uses for our technology. We have in that past referred to this our OEM business. But actually, more appropriately, it will be the industrial motion control market, or IMC. Due to a confluence of technology events, whether they are in life sciences or manufacturing or assembly, we are well positioned to benefit from our patented motion-control technology.

We have made significant progress in the last quarter toward enabling several of our partners to generate solutions to nano-level problems. Our new market, IMC hypothesis, is beginning to play out. We believe we can significantly grow our revenue by actively marketing motion control technology.

In fact, while we have had great success with our evaluations in the EG6000 as a prober, we have actually seen a larger portion of our bookings come from the EG6000 as a motion control platform.

In FY2008 we booked over $5.0 million in our IMC business. In Q2 we have already booked an additional $2.3 million in our IMC business. We have been encouraged by the applicability and rapid adoption of our technology and going forward we will be dedicating a great portion of our resources to the IMC business.

Technical challenges that our partners face are engineering issues that we have unique ability to solve. Our customers are using our engineers on an NRE basis, which accomplished three things. First, it obviously improves our P&L, secondly, it improves our cash position, and perhaps most importantly, third, it gets the high-margin products to market faster.

I am also pleased to report that I recently hired an expert in multiple-engineering disciplines, our CTL. [Jonathan Halderman] will be responsible for developing our future technology roadmap, investigating new opportunities for commercializing technologies and pursuing new alliances to companies where there will be benefits to sharing our licensing technology. Jonathan has many years of experience with semiconductor equipment design and has worked at companies such KAL and AMD. Initially Jonathan has made significant contributions in many industries including semiconductor, bio-technology, nano materials, and alternative energy.

So to close, we will continue to position ourselves for the return of the prober market, but in the meantime we will also dedicate our resources to our partners’ applications and helping to accelerate their time to market.

Even more encouraging is that this business has higher ASPs and gross margins than the prober business. Customers are willing to pay more because we can help them solve entrenched technical issues with our technology and engineering expertise.

We also believe that due to the nature of these businesses that we can more easily match up our lead times and delivery times, thus reducing cash requirement. The market has been validated and the sales cycle for adding new partners is encouraging.

With that I will turn the call over to Tom Rohrs, Chairman and CEO.

Thomas M. Rohrs

Tom and Warren have described the current conditions in which we are operating as well as our planned response. I have no doubt that the restructuring which Warren described will be difficult, yet effective. We do not know how long this downturn in the semiconductor capital equipment markets will last. This might begin to recover in the first quarter of calendar year 2009, or it may not recover until the end of 2009.

The key point is that we cannot afford to plan for a ramp in orders and be wrong. We will limit our spending and put ourselves on a course that allows us to succeed without the benefit of a significant turn-around. Fortunately, our strategy has paved the way for us to pursue this course.

First, we have made significant progress in positioning our prober products with literally dozens of customers. We will benefit when they begin to add meaningful capacity. Second, we have recast Electroglas as a virtual company with much lower fixed costs. Third, and finally, we have leveraged our motion-control technology into new markets and applications which are starting to pay dividends.

It has been disappointing to see the recent slowdown of the prober market. We estimate that the worldwide sales of probers have dropped over 50% from fiscal year 2007 to fiscal year 2008. We have further evidence based on public results reported by our competition that the market dropped again by significant amounts this summer.

Nevertheless, we remain optimistic. We know that the semiconductor capital equipment markets are cyclical. We know that better times will follow. We are well structured to withstand the downturn. We also know that you gain market share during the downturn and you reap the reward of the downturn activity during the upturn, which is sure to follow.

And so to summarize, our game plan for this fiscal year is as follows. First, assume minimal, if any, recovery from semiconductor capital equipment markets. Second, reduce variable expenses in line with market reduction. Third, use our resources to accelerate the revenue potential of the motion-control markets. Fourth, keep and maintain cash balances at approximately $10.0 million. And fifth, leverage our relationship with partners, specifically FLEXtronics and our manufacturing representatives to facilitate a product ramp when the prober business turns around.

I am confident we will emerge from this difficult period as a strong profitable company with newly diversified market opportunities which will establish a new growth trajectory for Electroglas.

Now I would like to open the phone lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Eric Slade].

[Eric Slade]

You are talking about the end of the year, having $10.0 million cash. This quarter, I guess you guide $7.0 million to $8.5 million.

Thomas M. Rohrs

In revenue.

[Eric Slade]

In revenue, right. Is that because some of the receivables were back-end loaded?

Thomas M. Rohrs

Right. There are a number of elements, but I think Tom mentioned that receivables will drop and we also believe that inventories will drop so there will be some cash coming off the balance sheet during the quarter.

[Eric Slade]

My next question is, what do you think you will get your costs to break even by not this quarter, but the following quarter, approximately.

Thomas M. Rohrs

We have been kind of, in a sense, trying to catch a falling knife here in terms of lowering the break-even costs as the downturn continued. We will not be at break-even at an $8.0 million level, although there are a certain degree of non-cash expenses associated with that. It’s our feeling that we can successfully lower the break-even point on a GAAP basis to the $10.0 million level through this year. And with that, when you add in the non-cash expenses, we will be in fine shape vis-à-vis cash flow.

[Eric Slade]

One thing that puzzled me a little bit was it seems like you’re, with Warren, who gave an excellent presentation, sounds like you’re really hiring some real heavy weights in the industry. This one guy I guess that you’re hiring for service, how can you get your break-even that low and still pay these guys? Are these guys taking mostly stock, or options, or how does that work?

Warren C. Kocmond, Jr.

As I mentioned, on the service front, Aaron is a seasoned veteran that has a lot of experience in terms of improving conditions. And so we’ve talked about this probably in the last couple of earnings calls where we indicated that we thought there was some real opportunity in the service business and we just didn’t have the right experience to put in place. And with Aaron coming on board, I think that in spite of having to add a person to the payroll, we will certainly be able to put into place the improvements that will be required to improve that bottom line.

And one other thing I meant, Eric, relative to the CTO, this is a guy that has an enormous amount of experience, at least in terms of the types of markets that we’re trying to get into. And when you think about it, at the end of the day we are still primarily a technology company. Our value-add comes from adding technology solutions and we need to continue to invest in that. So my expectation is that while these are high-dollar people, they are people that can really develop the business. One other thing relative to Aaron, in addition to the service responsibility, he will also be focused on what I was describing as the IMC business development arena. These are areas that the investment is going to pay off.

[Eric Slade]

On the new business, the wafer probe business, you sold, it sound like, about $7.0 million into those markets, between the first half of the year and this last quarter? Is that correct?

Thomas M. Rohrs

That is correct. So, in essence, this calendar year, to date, I think we can think of it that way. We bumped over $7.0 million.

[Eric Slade]

The OEMs who you sold to, have they sold to end users or are these guys just playing around with it in the lab or have they sold it to their end customers?

Thomas M. Rohrs

No, they have sold their applications to end users. We referred to them a couple of times in past calls. One of the uses is to assemble [winzas] for cell phones. The end user is Sharp, who sells them to Nokia. It’s a very, obviously, large opportunity. Within that there is a second use, which is in essence a singulation, in semiconductor terms you would call it dicing, but it’s a laser singulation opportunity to take these same [winzas] and singulate them from their fabricated wafer, if you will.

Another use is to do a very sophisticated assembly step for a procard manufacturer. Another OEM that we’re working with has developed a use for electronic printing using our platform to move the substraits.

And so these OEMs that we speak of have, in fact, sold their applications to large and significant end users.

[Eric Slade]

So two of the end users are Sharp and Nokia?

Thomas M. Rohrs

Well, Sharp actually then sells to Nokia.

[Eric Slade]

Now could we be pleasantly surprised and see volume orders out of that in the next six months, while we’re waiting, hopefully, for this chip cycle to turn.

Thomas M. Rohrs

Well, that’s the point. And I think Warren did a great job explaining that opportunity. And in fact, it’s our view that, number one, we can help accelerate that with some of our know-how, and through that these OEMs are willing to pay NRE, if you will, for some of our engineering.

So, as Warren stated, it helps us, number one, to get these products moving faster, and number two, it helps our P&L, and number three, it helps our cash flow. So it’s something that we believe not is something we would be surprised, but we have some control over making it happen.

[Eric Slade]

The other question I have, and I’ve always asked Tom Brunton for, but on your line of credit with Comerica, it’s a $7.0 million line. As business conditions are rough right now, I think Tom answered it for me, that probably you could count on $4.0 million to $5.0 million if you had to tap that line at all, right?

Thomas E. Brunton

Yes. It’s a $7.5 million line. As we state in our public documents there is a $3.0 million compensating balance, if you will, to extend in that. So I think you summarized it well, the borrowability is obviously less than the $7.5 million, it’s more like $4.0 million.

[Eric Slade]

So really, you guys, by the end of the year, we could tell our clients that $14.0 million of working capital seems pretty reasonable.

Thomas E. Brunton

This isn’t a working capital line. It’s our intention, through the actions that we stated, not to use it and it’s not included in any of the discussions that we presented today.

[Eric Slade]

Okay. I just have two other questions. One is you guys have come so far in the technology it’s just a shame that this market is just unforgiving. Wouldn’t there be plenty of players in the, not only the prober industry, but these new markets, that would have an interest in you. I mean, it just doesn’t seem that you will disappear, that type of thing.

Thomas M. Rohrs

That is correct. Obviously, especially with these OEM customers, where these aren’t day-to-day transactions, these are design wins. We are designed in. And obviously they have a very strong interest and they’re aware of that, we’re aware of that. And we feel very good about it.

[Eric Slade]

So if thinks got really tough as we went into let’s say, next summer, and we’re just in a nasty recession, someone probably would step up and give you an infusion to have a piece of the action, so to speak. You’re pretty confident with that?

Thomas M. Rohrs

Well, obviously, Eric, that’s not a question we can answer on this call. But I think you’re connecting the dots.

[Eric Slade]

And the last question. I wanted to ask Tom this and if he tries to qualify it as well as anyone could, but you have how much now in lost carry forwards after this quarter?

Thomas E. Brunton

It’s about, tax-affected, about $100.0 million.

[Eric Slade]

Can you equate that in how much per share, if someone did acquire, what would that be worth to someone? Wouldn’t that be worth a buck or so?

Thomas E. Brunton

You and I have talked about this multiple times and obviously it depends on the, there’s a number of factors. Acquisition costs and price being the first one. And also the tax position of the acquirer, if that would happen, just theoretically, but half a buck to a buck is a fair number.

[Eric Slade]

That would include, with the debt and everything, that would just be $0.50 to $1.00?

Thomas E. Brunton

In fact, as we described before, hypothetically, because the company would take, you know, mark any company the company would buy would be basically offsetting their tax expense with the tax carry forward. So it would be value that they would receive, if you will.

[Eric Slade]

And one question for tom Rohrs, or maybe Warren, or both. Is this the worst cycle you’ve seen or does it tie with the 2001 or 1991-1992, coming out of that recession?

Thomas M. Rohrs

Well, it’s certainly the worst I’ve experienced. I have a very good friend who had lunch with Dan Mayden, who is the President of Applied, they had lunch the other day and Dan described to him it’s the worst he’s seen since 1992, so I’ll take that as a pretty good barometer.

[Eric Slade]

And if the prober market has gone from $800.5 million to$ 400.0 million and then you said it’s gone even lower than that, what would your guestimate be? Down to $300.0 million to $350.0 million area?

Thomas M. Rohrs

I actually have been looking at ways to deal with that question. It’s our view that in FY2007 Amper Tech, which is one of our competitors, is a public company in Japan, their business in FY2007 in semiconductor equipment was about $800.0 million.

And it appeared at that time that about half of that was probers and the other half was dicers and grinders. In FY2008, which ended in March for them, they’re a Japanese company, they said the business dropped about 30%, to about $550.0 million, with the bulk of the drop coming in the prober business.

And then they just announced their first quarter, which was April/May/June, that same business dropped to about $80.0 million, which is a run rate of 320. So their semiconductor capital equipment has gone from $800.0 million, of which $400.0 million was probers, down to $550.0 million, down to an annualized $320.0 million, with the bulk of the drop coming in probers.

And so it is our estimation, then that after the $80.0 million last quarter, they probably did $25.0 million, maybe $30.0 million, in the prober business. So if you do the math, annualized, that’s about $120.0 million and they’re probably somewhere close to 50% of the market. So that’s a $250.0 million market right now and that’s about what it feels like.

[Eric Slade]

How long do you think these customers can get by without adding capacity? You said early 2009 to late 2009 is when you think they have to come back?

Thomas M. Rohrs

I said I’m really reluctant to guess, number one. And number two is I can’t afford to guess wrong so we’re going to go on our plan anyway. You know, Eric, I don’t know how far up you go in reading different analysts. I was looking at some analysis from JP Morgan that came out yesterday that says they’re saying, in their view, that 2009 will be plus or minus 15%. They’re saying that they’re now migrating toward the scenario down 15%.

So, it’s hard to say. One thing we know, it will come back. We’ve seen it. We’ve been in this business long enough. We understand it’s cyclical. Number two, it doesn’t always give us good warning signs when it’s going to come back, any more than when it’s going down. And number three, when it comes back, the people I talk to think that it might actually come back with a flourish. Simply because this downturn has been relatively long and very, very deep.

And so that’s all out there in front of us and it will happen, it’s our job to have the company in shape when it does happen.

[Eric Slade]

One last question. When do you think the prober business, specifically, went into the downturn?

Thomas M. Rohrs

I just described Amper Tech’s numbers. I think probably the year end. You know, they’re in this fiscal year that ends in March. But if I back that off, calendar year 2006 was probably about a $800.0 million market. Calendar year was probably a $400.0 million to $500.0 million market. And calendar year 2008, I don’t think it can stay as low as it’s been, but it’s looking like a $300.0 million market. So I would describe it that way.

[Eric Slade]

So you’re almost two years into it right now?

Thomas M. Rohrs

Just about.

Operator

There are no further questions.

Thomas M. Rohrs

I would have to say thanks to Warren’s comprehensive report and Eric’s rather complete list of questions. I’m hoping most of the questions out there have been answered. We certainly thank you for joining us on the call. We look forward to better times down the road and we once again thank you for your support.

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