Del Global Technologies Corp. F4Q08 (Qtr End 08/02/08) Earnings Call Transcript

Oct. 2.08 | About: DGT Holdings (DGTC)

Del Global Technologies (OTCPK:DGTC) F4Q08 Earnings Call October 2, 2008 9:00 AM ET

Executives

Devin Sullivan – Senior Vice President – The Equity Group, Inc.

James A. Risher – President & Chief Executive Officer

Mark A. Zorko – Chief Financial Officer

Analysts

Joe Pratt – Wachovia Securities

Sam Ribotsky – SER Asset Management

John Francis – Francis Capital Management, LLC

Operator

Welcome to the Del Global fourth quarter 2008 conference call. (Operator Instructions) I will now turn the conference over to Devin Sullivan.

Devin Sullivan

Jim Risher, Del Global’s President and Chief Executive Officer and Mark Zorko, Del Global’s Chief Financial Officer are hosting this morning’s call. Before we get started I’d like to remind everyone that statements about future results made in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements are based on current expectations in the current economic environment. Del Global cautions that these statements are not guarantees of future performance.

These statements involve a number of risks and uncertainties that are difficult to predict including but not limited to the ability of Del Global to introduce products as scheduled, obtaining necessary product certification, ability to implement business plan, retention of management, changing industry in competitive conditions, obtaining anticipated operating efficiencies, securing necessary capital facilities, [inaudible] matters, market and operating risks from foreign currency exchange exposures and favorable general economic conditions.

Actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in the company’s filings with the Securities and Exchange Commission.

I’d now like to turn the call over to Jim Risher, Del Global’s President and CEO.

James A. Risher

I appreciate your coming on this morning. I know there are many things that you have to attend to now and I’m sure this is probably only one of a lot of things that are on your minds. What I’d like to do is try to be as neat as we can this morning and as concise but clearly we’re prepared at the end to answer whatever questions you might have.

As it relates to the fourth quarter, during the fourth quarter as you know sales declined roughly 12.1%. Sales in the medical group were down in part in Europe. We had a large Russian tender in 2007 that actually we did most of the shipments in and so as we have a comparison between our fourth quarter this year and last year, there was a decline in sales in Europe largely due to the decline in shipments on this particular tender which was an exceptionally large tender. And we also had somewhat disappointing sales domestically here in our digital product line which I’ll have more to comment on in a few minutes.

Our good news was that RFI sales were up approximately 19%. I think that’s attributable to the fact that Roy Torzullo, who we brought on board in December has begun to really leave his footprint on the company. We are beginning to drive some new contracts and new business and we’re looking forward to very good and much improved results during this coming fiscal year.

The gross margins remain relatively flat within the company during the fourth quarter and I guess the most notable thing in terms of expenditure was that R&D expenditures were up about 24%, representing some significant investments that we’re making on the digital product line both in Europe and in the U.S. For the year, sales were up about 4% and although this is consistent with sort of the long term trend for the medical imaging industry, it was disappointing obviously to us I guess compared to some of our large competitors like GE, Philips, Siemens who had massive declines in their revenues. It was not so bad but certainly disappointing to us.

Our medical business was up about 4.5% for the year. RFI sales flat as I mentioned relatively flat compared on year-over-year basis. Gross margins were up slightly from about 24.7% compared to 24% that consisted in part because our medical group in the U.S. had a much more improved mix of product favoring some of our locally manufactured and more traditional product lines that carry better margins so obviously we were quite pleased by that.

Operating income for the year was down $6.4 million to compared to $8.4 million. However, I would like to note that in that $6.4 million we had a $1.9 million charge for non-cash purposes for goodwill impairment. We also had $500,000 of litigation expense almost totally related to the Moeller case so about $2.4 million of extraneous expense. So if you were to throw that back into the earnings basically we had an earnings year that was relatively flat compared to the prior year.

I think the most important thing I’d like to focus on is three areas that were in the press release. One of course that we’re very excited about is we have signed an exclusive agreement with a Chinese manufacturer, NMI, which will provide us with new flat panel technology which is used exclusively almost in digital imaging. The advantage with NMI is the fact that they have extremely good product costs.

The fact that we have an exclusivity with them separates us from people like Canon and others in the marketplace where we’re having to compete day by day and where their dealers are competing frequently with one another. And probably most important is the ability to have significantly improved margins because of the cost and the market price differential on those products versus where we were sourcing panels from Trixell and Canon and others.

I make a second significant development is in our Apollo product line which is for some of you know was manufactured in Italy, used mostly in radioscopic/fluoroscopic applications heretofore has now been converted and does have digital capability called the Apollo DRF. And we installed our first two installations in two very significant hospitals in Italy. They are running very, very successfully and I’m happy to say that we have completed our FDA approval and in fact have shipped the first Apollo DRF to a hospital in Wisconsin here in the United States.

I think the significant thing about this development is that with the advent of the digital capability on the product we now have the ability to move this product to a multipurpose radiographic piece of equipment. And what that means in short is rather than be restricted to simply radioscopic/fluoroscopic exams, we can do traditional exams like chest exams etc. with the same piece of equipment. And what this means of course to the radiologist doctors is the ability to have a multiuse per room versus a single use per room so we’re very, very excited about this product development.

And finally I think and very significantly is that over the last year to 18 months we have really been evolving our business model from a number of perspectives. First of all, as many of you know that we had not for a number of years made any significant investments, particularly here in the United States I would say in R&D and as a result our product lines were beginning to get a little stale.

And during the past 12 to 18 months we’ve done a lot to rectify that not only in terms of introducing digital products but also importantly improving some of our existing products from a cost standpoint as well as a functionality and an appearance standpoint, so we have had broader market acceptance. And I’m happy to say that we’ve actually had a resurgence in our traditional product line and we are beginning to recapture market share there that we had lost due to the fact that we had not stayed pace with what was going on in the marketplace.

We also have focused a great deal on such practices as lean and installing lean manufacturing techniques and lean in other parts of our business in terms of business practices. And what’s that has begun to do is to allow us to significantly address cost issues and also what’s happened is that a result of that, we’re finding in some cases that we’re able to do some Asian sourcing and bringing in of products from other places that will allow us to have a very competitive product portfolio but a lot may not be manufactured by Del anymore.

And the implication of that of course is that we have a facility for example in Franklin Park which is roughly 66,000 square feet and we now have a need of only about 25,000 square feet and obviously the ability then to reduce the overheads that are associated with that much larger space, both in terms of people and electrical consumption and materials and many others things.

So we’re very excited about the fact that as we change our model where we do manufacture some products but at the same time we provide integration capabilities gives us we think a competitive advantage. We have the reputation in the market for great support, great sales organization in terms of our worldwide dealer network and I believe that this strategy helps us take advantage of those capabilities more so than just being a really old line traditional manufacturer. But most importantly it lets us have a lot of innovative new products that would be hard for us to fund by ourselves, such as the products from NMI.

And so this next year in the late spring we will begin actually moving out of the Franklin Park facility into a newer facility that is much more adaptive to the kind of business model that we’re evolving into. And so I think those developments have done a great deal to position us extremely well as we go into the coming year.

And I’d be glad to field some questions about that a little bit later but what I’d like to do now is turn it over to Mark to go through the numbers in a little more detail.

Mark A. Zorko

Let’s take a closer look at the operating results for the quarter and for the year. In Q4, the net sales were $27.2 million compared with $31 million in the fourth quarter of the prior year, driven by the completion of this large Russian tender offer that Jim had mentioned which positively impacted the prior year. RFI sales increase for the quarter was about $700,000 due to higher sales of magnetic transformers that are used in generators and power systems that our customers have. Our sequential quarter-to-quarter sales were up at all three business units totaling $3 million compared to the prior quarter, Q3.

Please keep in mind that our business is primarily in the capital goods market and the timing of orders and shipments creates some level of volatility in quarter-to-quarter comparisons that might not exist in a more consumer oriented kind of a business. So pay very close attention to the trend and we’re looking at our overall performance on a year-over-year basis as well to avoid some of the volatility but it’s nevertheless an important part of our business.

The consolidated gross margin remains relatively stable for the quarter at 26%. Despite lower sales, the gross margin of the medical systems group remains consistent at about 24% due to increased sales in the legacy product line which Jim mentioned that traditionally have a lower selling price at a higher margin. At RFI, the gross margin decreased to 38.6% in the fiscal 2-08 period from 45% in the prior year based on the shipment mix and some increased inventory and testing costs.

Our operating expenses for the quarter were $4.4 million or 16% of total sales compared with $4.6 million in the prior year fourth quarter. We did increase R&D as we continue to focus on the digital market and are investing in that product line. Our operating income for the quarter was $2.7 million which was a decline from operating income in the fourth quarter of 07. The medical systems group generated op income of $2 million compared to $3 million for the prior year. RFI posted an op profit of $1.1 million which was a slight increase compared to the prior year’s $0.9 million.

Our tax provision for the fourth quarter was 26% compared to 38% in the same period and this is due to the profit mix between the U.S. and Italian operations, which don’t offset each other so quarter-to-quarter as well as year-to-year comparisons for tax rates will largely be impacted by the mix of profit in the two countries.

For the fourth quarter we reported a net income of $2.1 million or $0.09 per diluted share compared to $2.2 million in the prior year. For the full year results, our consolidated sales increased 4% to $108 million primarily as a result of higher sales in the medical systems group. Sales at the medical systems group rose 4.5% due to increased international sales volume primarily in our Apollo product line. RFI sales were at 13.2 and basically flat with the prior year.

The gross margins for the year improved to 24.7% from 24% in the prior year with the largest increase coming in the medical systems business. Our operating income for the fiscal year declined $2 million from $8.4 million to $6.4 million but please keep in mind that the operating income for the year included the non-cash goodwill charge of $1.9 million as well as $450,000 of litigation settlement costs that were a legacy of the business.

Excluding these two items, we had an increase in annual operating income of $300,000. The medical systems group generated operating income of $5 million compared to $7.5 million in the prior year which included these non-recurring goodwill and litigation charges. The operating profit at RFI was slightly improved from the prior year at $2.5 million. Our corporate charges that we incurred to operate the business decreased $300,000 year-over-year as we continue to cut overhead and drive out non-essential spending.

Net income for the year was $3 million or $0.12 per diluted share on approximately 24.6 million shares. This compares to income in the prior year of $3.8 million or $0.23 a share on 16.5 million shares. The share increase was some of the prior year’s rights offering that we held. The goodwill impairment charge as well as the litigation settlement charge had an impact of approximately $0.095 a share.

Our backlog at the end of fiscal 08 was at $22.7 million which was a decrease in the $28 million that we had in the prior year. Two comments on the backlog. This may reflect some reduction of longer term bookings that we’ve had in the past but on a positive note, again I think our shipping performance is much better so internally we don’t look at the total backlog as much as we look at the upcoming quarter’s backlog because our business book is for sales for shipments, for inventory procurement is more driven by the next quarter in the next six months rather than looking at the total 12 month backlog. So the reduction isn’t necessarily a bad sign.

We exited the year in solid financial condition. We had working capital of $31 million, cash on the balance sheet of approximately $8 million. We did not have outstanding borrowings under our U.S. or Italian revolving credit facilities and we are in full compliance with all of our bank covenant. We continue to actively compliment our organic growth efforts through the emphasis on looking at acquisitions while we have no specific details to report at this time.

We plan to file our 10-K early next week so that’ll be available. The RSNA Show that is held in Chicago after Thanksgiving each year is an exciting show that if any of you have an opportunity to visit, we can certainly arrange for badges so that you can get in and see our exhibit as well as the others in the industry. And finally, our annual meeting is tentatively scheduled for December 16 in Chicago.

With that, we will open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Pratt – Wachovia Securities.

Joe Pratt – Wachovia Securities

First question would be on the Apollo DRF approval in the United States. How much of a lift could that give your revenues in the coming fiscal year?

James A. Risher

Basically, Joe, in our plans for this year and as you know we don’t really discuss forecasts per se but we are planning about 2.5 times the shipments from Italy that we had last year. Frankly, right now one of our big issues is the panels. We are sourcing those panels from Trixell which is a company that is actually owned in part by Trixell, Siemens and Philips and they’re having tremendous yield problems and I saw an email this morning from their VP of production and he’s saying that they’re beginning to increase those yields substantially and so we have actually booked an additional order in the U.S.

We have about nine additional systems to ship in Europe; actually six systems of those to Bangladesh, to the situation where we’re in competition with Siemens and we prevailed and so we feel the capacity to sell is excellent. We plan being a little cautious only because we are hoping that they were able to get out of this supply issue in terms of the panels themselves.

As it turns out right now there’s only one manufacturer in the world that’s actually making a dynamic flat panel as opposed to a traditional flat panel for the radioscopic/fluoroscopic and other similar exams and so we’re all depending on this one supplier but feel very good about it.

Joe Pratt – Wachovia Securities

The second one would be on the [NMT] relationship. Have you started to ship on that?

James A. Risher

Actually, we have just received our initial shipment from them. It’ll be arriving on Wednesday. We have one installation in already and we have one that will be shipped within the next two weeks. And we just announced the program actually about 30 days ago and we’ve received some orders and we think as soon as we can get the supply train running, it’s not in this case a matter of shortage; it’s just getting everything started up and unfortunately, we were also caught in the Olympics situation where we should have received some of this product probably three weeks ago but as you recall from the Olympics, the Chinese economy shut down some of its factories and its traffic and so everything got delayed.

But we’re through that now and feel pretty good about it so we have a pretty good uplift in the forecast attributable to these new digital panels and our dealers are extremely excited. They’ve seen the product and they’ve had an opportunity to watch it in action and we have a product launch. We have a retrofit program, Joe, for this product where we can actually take an analog system that we have installed in the field already and convert to a digital system at a very low and aggressive cost. And it fits on what’s called our ED-650 cable and we ship about 500 and so of those a year and have an install base of around 6,000 so we have an immediate audience to go after.

So it wouldn’t take much penetration for us to have a very good improvement in our results as a result of these panels.

Joe Pratt – Wachovia Securities

The ASP on that will be about how much?

James A. Risher

It’d be about $120,000; somewhere between $110,000, $120,000 versus a new system which is well over $200,000.

Operator

Your next question comes from Sam Ribotsky – SER Asset Management.

Sam Ribotsky – SER Asset Management

As far as the Chicago facility, when we move out what is our expectation of the savings we expect to generate?

James A. Risher

It’s roughly in the range of about $300,000 a year. That’s basically just predominantly some overhead facility cost so it doesn’t address some other potential cost savings there but that’s just rent and taxes and I think that’s about the right number, Mark. $250,000 to $300,000?

Mark A. Zorko

Yes. Yes.

Sam Ribotsky – SER Asset Management

And our lease expires or do we have to pay any additional?

James A. Risher

No, the lease will be expired by the time we move.

Sam Ribotsky – SER Asset Management

As far as our Italian facility, how many shifts are we operating? Have we been increasing that to make it more productive?

James A. Risher

So far, we’re operating mostly on one shift. We do work frequently on Saturdays. When we had this large Russian tender we were outsourcing part of our product so rather than add a shift, one of the issues as I’m sure you’re aware of there is that you have to be careful about the idea of increasing your workforce to add a whole new shift. And what we’ve tended to do is to read capacity issues and needs with some additional outsourcing as opposed to necessarily bringing it in house because once we hire those employees, they’re pretty much permanent employees due to the Italian labor laws.

Sam Ribotsky – SER Asset Management

As far as the pipeline, is that the same as it was at the previous quarter and the same time as the previous year? In other words, is the previous quarter sequentially and the previous year or is it more robust or less robust?

James A. Risher

Mark, I’ll let you handle that.

Mark A. Zorko

The backlog at the end of the year was down from what we had in prior quarter ends both sequentially and at the end of last year. And again, I think it’s in part because we’re getting a little better on shipping product closer to when it’s ordered rather than leaving the backlog on the books. Our preference is to when we get an order to ship it within the quarter rather than just leave it in backlog on the books for a subsequent quarter. And then we’re working with our customers to try to be more specific about orders rather than just getting backlog on the books for some undetermined future date.

So we think the quality of our backlog number is a little bit better than what it was before, not necessarily indicating a softening of business.

James A. Risher

Let me just add one thing to that, Mark. I think part of what’s also happening as our business models change is we’re doing more really building to orders as opposed to building to forecast. And what that has the net result of is that it’s allowing us to operate with less inventory which of course is a good thing for us.

Sam Ribotsky – SER Asset Management

Yes. Your inventory is down about $3.5 million from last year, presumably. Will you continue to reduce that inventory and –

James A. Risher

That’s our hope. That’s our hope. We’d like to continue reducing our inventory below that. I’m not quite sure, Mark, what our target is this year in inventory reduction. You might be able to answer that. I don’t have it off the top of my head.

Mark A. Zorko

Our overall average has been in the three to 3.5 range of inventory turns and we had programs in place of lean manufacturing being one of them to improve that from the three, 3.5 range up into the four, 4.5, five range. It takes a very concerted effort; we have activities in place at all three locations to put a microscope on inventory and learn how to tighten up the management of procurement from our suppliers with the shipments scheduling for our customers. It’s an evolving practice that we’ve started. Hopefully, it’s going to get a lot better this year and in the years to come.

Sam Ribotsky – SER Asset Management

As far as the receivables, is there something that we have to do to reduce that? Was that some of the shipments were made at the end of the quarter or is that the –

Mark A. Zorko

The receivables are high by U.S. standards and that’s because the bulk of our business is international and the payment terms, rather than being in the 30 to maybe 60 day range are in the 90 to 120 day range. So we have a longer receivable cycle with our international than we do with our domestic receivables.

Sam Ribotsky – SER Asset Management

That’s more predominantly, I guess you’ve got to. Is there a way to break out the receivable, international and domestic, or is that something that you’re not doing at this point?

Mark A. Zorko

We haven’t done that at this point though.

Sam Ribotsky – SER Asset Management

Now you’ve been looking at acquisitions. I guess your RFI business has been improving as far as sales, etc. Are you looking in that area more predominantly than the medical or is both areas something you’re looking at?

James A. Risher

I would say we’re focused on both areas and we’ve identified and continue to work on several opportunities in both areas so we’re hopeful that we’re going to get something accomplished here this year in one or two of the sectors.

Sam Ribotsky – SER Asset Management

So you would feel comfortable that in this current year, you would make an acquisition. Would it be a substantial acquisition or more a $10 million sales acquisition?

James A. Risher

I’d rather not comment.

Sam Ribotsky – SER Asset Management

Just one more thing. I guess it’s been difficult dealing with the stock. I guess this has been a climate affecting everybody; not just Dell, and I’m not sure with the price of stock whether a listing is available but I presume you’re still looking at this. If the stock price cooperated, is there any thoughts about any listing or anything else during this current year?

Mark A. Zorko

We’ve discussed it at past board meetings and the thought right now is that we still have a lot of our energy and focus on the internal operations of the business and we really want to not spend too much time trying to cultivate the investor community until we have a more positive story to tell. And this is in part because the company had some legacy problems and was de-listed back in early 2000 and we think we’re only going to have one chance to really do well and come out of that and we want to have a little better handle primarily on our domestic medical business improvement before we go down that path.

Operator

Your last question comes from John Francis – Francis Capital Management, LLC.

John Francis – Francis Capital Management, LLC

I was calling related to the fact that the company’s stock price seems to be trading in extraordinarily low levels relative to the value. It’s trading at essentially the same level as the company’s working capital. It’s approximately 80% of book value and an enterprise value to EBITDA of three to 3.25 approximately on an adjusted basis. So I was wondering if you have any thoughts in terms of engaging in investment community.

Notwithstanding your previous comments, I think it would be appropriate to at least let the world know what you’re doing and that the future’s bright for the company. It doesn’t seem like it takes a tremendous amount of effort to do this and I think setting an initial stage to let people know about your future success would be beneficial to all of the owners of the company.

James A. Risher

Good suggestion, John. We’ll take a look at it and we are continuing to look at it by the way but we certainly will take that into consideration based on this.

Operator

There are no further questions. I will now turn the conference back to management.

James A. Risher

Well, once again I would like to thank you for your attendance and most importantly for your support and we hope to not only hold the ship steady during the coming year but hopefully continue to improve our results and performance. So we look forward to our next conference call.

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