Gerry Perkel – President and CEO
Scott Hildebrandt – VP and CFO
Jim Ricchiuti – Needham & Co.
Planar Systems, Inc. (PLNR) F3Q08 (Qtr End 06/27/08) Earnings Call Transcript August 6, 2008 5:00 PM ET
Good day, ladies and gentleman, and welcome to the third quarter 2008 Planar Systems earnings conference call. My name is Heather and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's conference, Mr. Gerry Perkel, President and CEO. Please proceed, sir.
Thank you. Good afternoon and thank you for joining us for Planar's third quarter earnings conference call. With me this afternoon is Scott Hildebrandt, Planar's Chief Financial Officer.
Before I begin, I do need to say that the press releases we issued today contain forward-looking statements. On this conference call, we will comment on our strategic business and financial outlook and make other forward-looking statements based on our current expectations, estimates, assumptions and projections. Words such as expects, anticipates, intends, plans, believes, sees, estimates, and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. I refer you to the press releases we issued earlier today and to our periodic filings with the SEC for a description of factors that could cause actual results to differ materially from those forecasts. The forward-looking statements we make today speak only as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.
With that behind us, let me briefly review some of the key highlights from our announcements made earlier today. First, we announced that today we have sold our Medical Business Unit to NDS Surgical Imaging, a leader in the hospital surgical imaging space for $34.25 million in cash, $30 million of which was delivered at closing with the remaining $4.25 million to be paid no later than September 25, 2008. The cash proceeds from the sale of this business will enable us to pay off our existing line of credit, with the excess being available for our ongoing working capital needs. The sale of our Medical Business Unit is structured as the sale of all of the outstanding capital stock of Dome Imaging Systems, Inc., formerly a direct, wholly-owned subsidiary of Planar, and includes all of our medical grade diagnostic imaging and patient monitor products, but does not include other products sold by other Planar business units in medical applications, such as our specialty EL displays sold through our Industrial Business Unit and our commercial grade displays sold through our Commercial Business Unit. As part of the sale agreement we will be working with NDSsi over the next several months to ensure that our customers in this segment are supported in the transition.
Second, when we spoke to you a quarter ago, our expectations were to begin the process of reducing costs while we expected to see both sequential improvement in revenues and earnings. We are pleased with the 10% year-over-year revenue growth we saw during Q3 and also the improvement in our non-GAAP earnings to approximately break-even. Additionally, net cash improved as well as our efforts to drive down inventory began to show results.
Sales in our Industrial Segment, IBU, grew 11% over the last year to $16.4 million for the quarter. As we have discussed previously, new investments made in our higher-margin Industrial Unit have resulted in a strong and growing funnel of opportunities, some of which are starting to result in increased sales for the company. For example, we recently won an opportunity to supply Thompson's Premier Retail Networks, Inc., digital display solutions for their targeted advertising networks at some of their largest retail network installations. Under the agreement, we will provide several customized displays to be used in a large percentage of the in-store networks operated by PRN. This is a great example of the type of opportunity our industrial business focuses on, providing custom expertise and designing specialized displays. While we cannot specifically comment on the overall size of this business opportunity, it is financially significant and further supports our strategy to grow this business over time.
In our other business segments, our Medical Business Unit experienced revenue decline of 6% compared with the third quarter a year ago, primarily related to certain lower margin patient monitoring products reaching end-of-life status. Sales at our Commercial Business Unit increased 7% compared to the previous year as the pricing environment continued to be positive. Finally, while both the Control Room & Signage Business Unit and Home Theater segments grew revenues sequentially in the third quarter, they continue to underperform compared to our earlier expectations. In our Control Room & Signage Business Unit we have struggled at the revenue line driven by the current economic situation. In the Home Theater Business Unit, we have continued to experience some internal execution challenges related to the transition of the Runco business, along with weak demand related to the economic situation. In both units, we are not waiting for economic recovery and instead are planning to implement actions in Q4 to improve earnings performance going forward.
With that, I'll now turn the call over to Scott who will review our financial performance in a bit more detail. Scott?
Thanks, Gerry. Let me start by briefly reviewing our income statement results. Third quarter gross margin was 25.3% of sales on a non-GAAP basis, down from the 27.2% recorded in the third quarter of 2007, and down slightly from the 25.9% recorded in the second quarter. Gross margins were down primarily related to an unfavorable business unit mix with more sales from our CBU and HTBU, which have lower gross margins than our other businesses. Operating expenses on a non-GAAP basis were 24.9% of sales for the quarter, down from 27.2% in the second quarter. The sequential reduction in our operating expense was primarily due to headcount reduction from which we previously announced and expense controls implemented early in the quarter. Non-operating expenses were primarily generated from interest expense on our short-term borrowings.
On a GAAP basis, we incurred a goodwill and intangible asset impairment charge as well as a restructuring charge during the quarter. The goodwill and intangibles impairment of $58.4 million primarily resulted from our annual review process that indicated a combination of factors requiring a write-down of some of our intangible assets in our Control Room & Signage Business Unit and the Home Theater Business Unit. These factors included the recent slowdown in the U.S. macro economy, impacting customer spending, as well as slower than planned profit improvement from identified acquisition synergies.
Finally, the current market value of Planar as a whole has made it difficult to support our overall intangible asset carrying value. The restructuring charge of $300,000 incurred in the third quarter was a result of various headcount reductions taken at the beginning of the third quarter in an effort to improve go-forward profitability. The impacts of these and other GAAP charges are included in the supplemental table in our earnings release.
Turning to our balance sheet, we ended the third quarter with cash and short-term investments of $10.6 million, up slightly compared to the end of the second quarter. In addition, we had $24.5 million of short-term borrowings on our line of credit at the end of the third quarter, a decrease of $1.5 million in borrowings from the end of the second quarter. We were able to improve our net cash position, primarily by lowering inventory by more than 8% from the end of the second quarter to $56.9 million. Accounts receivable day sales outstanding was 53 days for the third quarter, down slightly from the 54 days in the second quarter of 2008.
Finally, we entered into an amendment to our credit agreement subsequent to the end of the third quarter due in part to the sale of the medical business segment. The amended facility provides borrowing capacity of up to $20 million with more flexible financial covenants and improved borrowing cost terms. This new facility will act as an additional potential source of future liquidity for the company's ongoing operations. We currently estimate that we will end the fourth quarter with $15 million to $20 million in cash and no debt.
Shifting to some additional forward-looking information, fully diluted shares outstanding should be approximately 18.3 million shares for the fourth quarter. Also, we are projecting capital expense of $500,000 in the fourth quarter bringing total cap spending to $2.6 million for fiscal 2008. Depreciation should be in the range of $1.2 million to $1.4 million in the fourth quarter of 2008.
With that I'll now turn it back over to you, Gerry.
Thank you, Scott. As we've discussed in previous communications, we launched an aggressive growth strategy two years ago with an objective to increase higher margins, especially the display revenue, from around $125 million to over $300 million. Due to a number of reasons, including a slower than anticipated economy our various initiatives have not yielded the intended results. As a result, we've instituted a new direction rather than wait for the current economic conditions to improve. Our first step has been to act, stabilize our balance sheet to improve liquidity and reduce business risk. The second step is to focus our resources in incremental investments on businesses where performance is improving and where we believe value could be increased, while we fix the underperforming businesses.
Regarding the first step, the company has put renewed energy into improving our balance sheet, cash flow and liquidity. Inventory reduction efforts are in place across our company, driven by our new VP of Operations, John Major, and we have seen the initial signs of success. Inventory was reduced more than $5 million from the end of the second quarter and we believe that progress will continue. In addition, accounts receivable management has improved. The sale of our medical business segment has added a significant amount of cash to our balance sheet and has reduced our need to borrow funds in the difficult credit market. The cash generated by these activities has not only taken the immediate pressure off liquidity restraints, but also has provided a more stable and less risky foundation while we proceed to improve our profitability. I am very pleased with the progress we have made towards strengthening our balance sheet and the overall health of the company over the past several months and I am confident that the improvements will continue in the coming quarters.
The second step in our new direction is in short to improve profitability through focusing investments on businesses that are showing signs of improvement and to work to improve those that are not yet delivering. Certainly, as mentioned earlier our profitable industrial business has been experiencing growth and we are looking at additional actions to increase our rate of growth in this business. The new direction put in place a little over two years ago to focus on profits and working capital management in our commercial business has achieved all of our initial objectives. In fact our commercial business has generated a return on invested capital of over 20% year-to-date in 2008, well above our weighted average cost of capital.
In our Control Room & Signage Business Unit we continue to believe there are good opportunities to increase the profitability of this unit and we plan to launch actions in Q4 to see profit improvement going forward.
In the Home Theater Business Unit, our performance has been disappointing. Weak demand based on the U.S. economy has been made worse by some internal execution challenges related to the transition of the Runco operation. We've lost a series of actions to drive improvement in this unit and we are redoubling our efforts to improve the operational performance. We're also making additional changes to reduce costs by narrowing our focus to our core products. Much of that change is being implemented in the fourth quarter and we should begin to see improvement in Q1.
Looking forward, we expect to make decisions in the fourth quarter to realign our resources following the transition of our Medical Business Unit and to continue to take actions to improve earnings performance and cash flow. Some of these actions will drive the need for additional restructuring charges in our fourth quarter. Currently, we do not expect the cash portion of these charges will be in excess of $3 million with the anticipated cash outlay taking place over the next two to three quarters. While we are going through this transition, near-term earnings are difficult to predict and may continue to result in modest losses on a non-GAAP basis. However, we do see revenue growth in a number of our segments in the fourth quarter as compared to the third quarter and as a result, total sales are expected to be $69 million to $72 million with the medical segment included prior to the close of the transaction on August 6th, 2008. Over the long term, we expect to benefit from the restructuring of the remaining businesses and utilization of a stronger balance sheet to drive improved profitability and cash flow.
With that, I will now open up our conference call for questions. Operator, if you could come back on I'd appreciate it.
Thank you, sir. (Operator instructions) Your first question comes from the line of Jim Ricchiuti from Needham and Company. Please proceed.
Jim Ricchiuti – Needham & Co.
Hi. Thank you. Good afternoon. I wonder if you can give us some flavor as to what the gross margin profile of the company is going to look like now with the sale of the medical business.
Well, the gross margins in the medical business have been in the 35 – high '30's – is that right, Scott – 35% to 40% kind of area and you can see what the revenues are, so you can subtract that out. I don't know that we've got a specific number, but obviously they'll come down a little bit as we're taking out a higher gross profit portion of the mix.
Jim Ricchiuti – Needham & Co.
Okay. And just looking at some of the operating expense items, I realize you probably still haven't – you may not be prepared to share a whole lot with us, but can you give us a sense as to how we can see some of the operating expense items, say G&A, on a go-forward basis and what the – amortization of intangible assets, what does that look like going forward as well?
Jim, I'd really like to answer that, but we really haven't got to a point yet where we've kind of sifted through all the actions that we're going to be taking and the ramifications of the stub and all of that. So, I think what I'd prefer to do is update everybody on the call next time as to basically our financial model moving forward. Clearly, there's some sales reduction. We'll still have a stub period in our Q4, but go-forward there's going to be some dilution to our earnings, obviously, because we've got a business that we've sold that does generate a profit.
In addition, we've got several months of transition services to do connected with the transactions, so the timing of when some of the changes and expenses is a little unclear until we conclude the transition services agreement.
Jim Ricchiuti – Needham & Co.
Okay. Gerry, it sounds like as you look at the two units that are underperforming right now, it sounds as though the Control Room & Signage Business you see a somewhat quicker turnaround and it sounds like there are more challenges with the Home Theater business; is that correct?
Well, I think in the Control Room & Signage Business Unit over the time that we've had that since we acquired Clarity, we've made a lot progress on the gross profit line and started to see some real improvement there. And what we've really found is that the U.S. economic situation has really put a damper on revenues, particularly U.S. revenues. We've seen some decent revenues from outside the U.S. So, with that, I think we've got the basis for a strong business and we've also been investing pretty aggressively in the digital signage area and once again, not quite seeing the growth that we had expected there. So, we think there's enough revenue in gross profit to create some good profits. We've just got to get the business model aligned given the realities of the U.S. economy.
In the Home Theater business, the picture is a little different. While revenues are down a bit still as it relates to the economy, we've also got the challenges of not yet having completed a fully – made a full, complete integration of the business and gotten the operations performing properly. We've had some customer satisfaction issues from our dealers in the form of not getting products to them when they wanted to and some of the repair times and stuff and just kind of general operations, things that we need to work through. We've made some real improvements, I think, and we're starting to see some results, but it's going to take a while to get that worked through and once we get that worked through, I'm confident we can see some things there. But we're not waiting. We decided in the Home Theater business we need to get much more focused. We've been trying to do too many things and we're going to be more focused in our efforts going forward, really focusing on the core products and really featuring our Runco products in particular as we go forward versus not – and not putting quite as much effort in some of the other brands as we have in the past.
Jim Ricchiuti – Needham & Co.
Okay. And last question for me is on the industrial business. Clearly, a bright spot in the quarter. Is this a business you think that can sustain this kind of growth rate given the funnel of business – the funnel that you have right now?
Yes, we do expect to see sequential growth as we go into Q4 again and the funnel does look bright and we're seeing lots of opportunities. So, yes, I do believe we can continue to see improvement there and we are trying to make sure we're giving enough fuel to that engine. And so, making sure that what investment dollars we do have we're supplying there so that we can make sure that we can make that growth happen.
Jim Ricchiuti – Needham & Co.
Okay. Thanks a lot.
(Operator instructions) There are no further questions in queue at this time.
Okay. Well, let me just summarize by saying we're pleased with the progress we made this past quarter. We're also pleased with the increased cash that the sale of the medical business brings to us in really solidifying our balance sheet and giving us a much stronger position moving forward. We continue to be committed to taking actions to improve shareholder value by improving the profitability and cash flow of our business going forward. And while we have a number of challenges to deal with related to our current businesses and the transition agreement we've agreed to in regards to the sale of the medical business, we are confident we can take more actions and create more value for shareholders in the future and that's our goal. Look forward to talking to you next quarter. Thanks very much. Bye.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.