Nu Horizons Electronics Corp. F2Q09 (Qtr End 08/31/08) Earnings Call Transcript

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 |  About: Nu Horizons Electronics Corp. (NUHC)
by: SA Transcripts

Nu Horizons Electronics Corp. (NUHC) Q2 2009 Earnings Call October 8, 2008 4:30 PM ET

Operator

Welcome to the Nu Horizons’ second 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; please go ahead sir.

Richard Schuster

Good afternoon and welcome. I am Richard Schuster, President and Chief Operating Officer. With me here today are Arthur Nadata, Chairman and Chief Executive Officer of Nu Horizons Electronics Corp.; Kurt Freudenberg, Executive Vice President and Chief Financial Officer, Dave Bowers, President of Nu Horizons Distribution Division and Connie Chandler, with our Investor Relations firm.

Kurt will give an overview of the numbers for the second quarter of fiscal year 2009. I will then give a brief market overview and synopsis of the industry and our company’s performance and then we will then we will open the call to any questions you have.

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

Kurt Freudenberg

Thank you Richard, good afternoon everyone. Because of where we’ve been in the financial markets over the past few weeks I want to begin by discussing our balance sheet and credit facilities.

Our balance sheet is strong and liquid with $204 million of working capital and a current ratio of 3.2 to 1 at August 31, 2008. Our day sales outstanding were 61 and our inventory turned 5.7x on average.

At August 31, 2008 our outstanding debt was $70 million under US and Asia revolvers and UK credit line and we had in aggregate of $56 million available on all bank credit lines in the United States and Asia.

Additionally we had $9 million in cash in the bank deposits at August 31, 2008. The company anticipates that its resources provided by its cash flow from operations and credit agreements will be sufficient to finance its operations for at least the next 12 months.

Turning now to the results for Q2 of fiscal 2009, net sales were $211,813,000 compared to $185,369,000 for the comparable period of a year ago, an increase of 14.3%.

This represents a record sales quarter for the company. Net income for the quarter was $192,000 or $0.01 per diluted share as compared to net income of $783,000 or $0.04 per diluted share for the second quarter of last year.

Overall gross profit margin for Q2 of 2009 was 14.6% as compared to 16.8% for the prior year quarter. For the six months ended August 31, 2008 net sales increased to $411,965,000 from $360,601,000 in the comparable period last year, an increase of 14.2%.

Net income for the first half of fiscal 2009 was $100,347,000 or $0.07 per diluted share compared to a net income of $200,471,000 or $0.13 per diluted share in the comparable period of last year.

Overall gross profit margin for the current six month period was 15% as compared to 16.8% for the year ago six month period.

The increased sales for the current three and six month periods are largely attributable to increased Asian sales and an increase in our systems business. The higher volume of lower gross profit margin business in Asia in systems drove lower overall gross profit margins in fiscal 2009 compared to the prior year.

System sales increased $14.5 million and $15.6 million for the three and six month periods ended August 31, 2008 compared to the prior year due to an acceleration of orders for the products which Sun Microsystems is discontinuing.

Sequential system sales are up $12.1 million. Sequential total company sales increased 5.8% which came from the growth in Asia and systems business. Sequential gross profit margin is down 89 basis points due to the increased amount of lower margin Asian systems business.

For the three and six months ended August 31, 2008 operating expenses as a percentage of sales decreased to 13.8% and 13.9% respectively from 15% and 14.8% for the respective three and six month periods.

Operating expenses increased $1.4 million and $3.9 million for the three and six months ended August 31, 2008 compared to the same periods in the prior year.

The dollar increase in operating expenses resulted primarily from the inclusion of $1.7 million and $2.3 million of professional fees for the three and six months ended August 31, 2008 related to the SEC investigation entitled “In the matter of Vitesse Semiconductor Corp.” as well as the related internal investigation being conducted by the company’s audit committee.

Management believes the audit committee’s internal investigation is nearing completion and consequently expect total monthly costs to decline by the end of fiscal 2009. In addition the company incurred severance costs during the second quarter of fiscal 2009 as a result of its previously announced decision to consolidate it Melville, New York warehouse into its expanded Mississippi warehouse.

The closing of our New York warehouse is part of our ongoing focus to improve the efficiency of operations and reduce expenses. We expect to spend approximately $500,000 on severance and moving charges by the end of the fiscal 2009 and expect that this to provide approximately $1.1 million in recurring annual savings.

Finally salaries have also increased in our Asian businesses to support the increased sales.

For the three and six months ended August 31, 2008 interest expense decreased when compared to the comparable prior year periods. Despite increased average borrowings to support higher sales, interest rates declined period-over-period which more then offset the higher borrowings.

Our tax rate for the three and six months ended August 31, 2008 was 58.5% and 35.8% respectively compared to 59.3% and 48.8% for the prior year periods. The elevated tax rate for the second quarter related to tax exposure in our Asian businesses related to one-time assessments in India and Singapore.

The company restated its fiscal 2007 Form 10-K and fiscal first quarter 2008 Form 10-Q due to an understatement of our tax for all periods consequently our effective tax rate for the three and six month periods ended August 31, 2007 is higher principally due to penalties and interest associated with amending our federal and state tax returns.

On a pro forma basis excluding professional fees related to the SEC investigation in the matter of Vitesse Semiconductor Corp. and related internal investigation mentioned above and $295,000 in charges primarily severance related to the closing of our warehouse in New York, pro forma diluted earnings per share would have been $0.09 and $0.17 for the three and six month periods ended August 31, 2008 respectively and to add to pro forma diluted earnings per share of $0.08 and $0.20 for the respective 2008 periods.

Our fiscal 2008 pro forma results excluding professional fees related to the previously mentioned Vitesse matter and taxes, interest and penalties related to our amendment of our prior tax returns.

As many of you are aware on September 9, 2008 Nu Horizons Electronics Corp. acquired C-88 AS, a franchise distributor of electronic components, based near Copenhagen, Denmark. As part of our strategic focus to expand our presence in the expanding markets in Europe pursuant to the terms of the purchase agreement, Nu Horizons paid $3.5 million in cash.

The purchase agreement also provides for additional payments to the seller of a minimum of $500,000 up to a maximum of $3.5 million. The payment of any amounts in excess of the $500,000 minimum is contingent upon attainment of certain earnings milestone by C-88 during the three year period ending August 31, 2011.

C-88 AS had approximately $18 million in sales for the 12 months ended April 30, 2008 and is expected to be accretive to our fiscal 2009 net income. We believe the acquisition will enhance our global selling and support capabilities and position us for further growth within Europe and enable Nu Horizons to enter the important Nordic marketplace.

C-88 AS currently has sales coverage in Denmark and Sweden with plans to expand into Norway and Finland in the near-term. Now I’ll turn the call back over to Richard.

Richard Schuster

Thank you Kurt, the second quarter of fiscal year 2009 was a mixed one. We achieved record top line revenue during the quarter and also recorded yet another quarter of record sales in our Asia Pacific operations, which continue to show strong profitability.

Nevertheless in the UK and the Americas, the slowing market began to impact us particularly in July and August. Regionally sales were up 6% sequentially and 46% year to year in Asia Pacific, down 3% both quarter to quarter and year to year in the Americas and down 3% quarter to quarter and 1% year to year in Europe.

Our systems business sales were up strongly but much of the top line revenue growth in systems was driven by end-of-life programs in Sun Microsystems which had a negative impact on our gross profit margin in the quarter; I’ll comment further on this in a few minutes.

By region we substantially improved our operating margins in the Americas sequentially but our operating income decreased 39% from Q2 a year ago. In Asia Pacific our operating income decreased 4% sequentially but was up tenfold year-over-year. In Europe we had an operating loss for the quarter primarily driven by continuing investments in Central Europe along with the softness in the UK.

In our systems business our operating income was up 50% sequentially and up over 300% from the year ago quarter. Without a doubt the most exciting news for us on an ongoing basis is the rapid and improved profitability of our Asia Pacific distribution operations.

Our continued strong double-digit year-to-year growth is continuing and we are bullish about our ability to continue to grow both top line and bottom line contribution in the region. We see more designs transitioning from both the Americas and Europe to Asia Pacific, as well as stronger local design activity in the region and improved penetration of Nu Horizons.

We are gaining traction with suppliers that we signed over the past two years in Asia Pacific and our line card is expanding there as well. We experienced strong market headwinds in the United Kingdom which negatively impacted our sales in Europe during the quarter.

Central Europe was a bright spot as we achieved yet another quarter of record sales and are gaining the traction that we need to get to profitability in this critical market.

During the quarter Linear Technology extended our very successful partnership into Europe, franchising us in the United Kingdom, Ireland, Germany, Austria, and Switzerland. We have high expectations for this extended partnership.

We recently announced our next step in building a strong European presence with our acquisition of C-88 AS, headquartered near Copenhagen, Denmark which is designed to support our expansion into the key Nordic region.

We recently announced that both Xilinx and Linear Technology extended our partnerships into the Nordic region. We also furthered our Eastern European expansion and believe that we are now well positioned in most major markets continuing to gain share and build towards strong performance in the region.

Eastern Europe is a highlight where we are gaining position with the major EMS contract manufacturer players and expect strong growth over the coming quarters. Within the Americas we saw the benefits of our cost reduction actions of Q4 fiscal year 2008 but growth here remains an ongoing challenge.

The overall market in the Americas is not growing and we do not see prospects for meaningful market growth over the next several quarters. However we are focused on several opportunities to gain share in the region and we are beginning to see a positive contribution from our new suppliers such as Atmel and On Semiconductor which we signed approximately one year ago.

In addition we continue to see growth in design metrics which have had a substantial positive effect in driving our revenue and profitability in the Asia Pacific region.

Finally our systems business saw strong top line growth. This was primarily driven by substantial end-of-life sales for Sun Microsystems servers. These sales had a minimal positive impact on our overall profitability during the quarter but did negatively impact our gross profit margins which were effectively flat in all regions, excluding these large low margin system sales.

Over the next several quarters our system sales of Sun products are expected to be constrained by the Q2 sales activity since these customers are not expected to procure additional systems until they have completed redesign to replace the end-of-life servers.

On a positive note, our efforts to reduce our go-to-market strategy in our systems business have borne fruit in our bottom line. Although we do not yet see strong recurring top line growth in this business our increased margin business with mid tier customers with flat costs have resulted in driving a business with sustaining operating margins now approaching 4%.

While we have not yet seen traction from our IBM engagement the opportunity pipeline is encouraging and we expect to see this as a growth driver for us beginning early in the next fiscal year.

Overall our distribution design activity which we believe is a key differentiator and an important value add for our customers continues to be strong in spite of the market softening. Both new opportunities and design win revenue increased strongly during Q2.

This is a result of our strengthened line card throughout the globe as well as our increased focus on both the size of new design opportunities that we engage in and the breadth of Nu Horizons’ content in these designs.

Total design win revenue in the second quarter of fiscal 2009 increased 19% to $50,593,000 compared to $42,516,000 in the prior year period.

Design registrations increased 14% year-over-year. For the first six months of the current fiscal year design win revenue increased 15.5% to $97,070,000 from $84,079,000 from the prior year. The number of design registrations increased 45% compared to fiscal 2008.

NIC Components Corp. sales and gross profit for the second quarter increased slightly year-over-year and sequentially. NIC sales in Europe were up 18% year-over-year and 10% sequentially. NIC Asia sales were up 19% year-over-year and 11% sequentially. NIC sales in North America were down 13% year-over-year and flat sequentially.

We see continuing weakness in North America for passive components as more customers migrate to Asia and competition for the remaining business intensifies. A very positive trend is that our higher margin specialty business in magnetics is up over 20% year-over-year.

In addition our core business of aluminum electrolytic capacitors is up almost 8% over last year. These two product categories historically have had more stable margins then our other commodity passive components and we believe that they have a higher potential for top line growth.

There is some over capacity in passive components but raw material prices are increasing and forcing prices to stabilize or increase. We believe that while top line growth will be challenged margins should be relatively stable.

Our strategy for NIC continues to be the expansion of specialty and higher reliability products. These products will target customers in the medical, security, energy and smart home markets that are expected to have continuing growth potential.

In closing it is not possible to predict the impact that the current economic environment in the US and globally will have on our business going forward. In the months ahead we will remain focused on maximizing the opportunities we have to expand our business globally while at the same time looking for opportunities to increase the efficiencies of our operations where we can.

Given the diverse end markets and geographic regions we serve we believe that we are in a reasonably good position to withstand these uncertain economic times.

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 the line of Matt Sheerin – Thomas Weisel Partners

Matt Sheerin – Thomas Weisel Partners

On the gross margin the design win revenue is up 19% year-over-year which is very strong, but obviously the margin was down because of some of these end-of-life products and the mix shift towards Asia, can you quantify the amount of end-of-life products that were sold in the quarter and the approximate gross margin just to get a sense of what the core business was actually doing because it seems like that’s not really a recurring source of revenue?

David Bowers

Correct its not. The end-of-life purchases in total were in the $10 to $15 million range and the margin on those was substantially lower then our typical systems margin so it’s low to mid single-digit margins.

Matt Sheerin – Thomas Weisel Partners

That business, the systems business should be probably down sequentially because these products are going to be going away next quarter.

Richard Schuster

That’s correct, the customers, they were accelerated purchases so the customers that procured those won’t be buying those same servers over the next few quarters at least.

Matt Sheerin – Thomas Weisel Partners

Looking bigger picture on the core distribution business can you talk about the book-to-bill maybe regionally, what the order patterns have been? I know you mentioned some softening in July and August in the Americas and Europe, maybe discuss a little bit of the demand trends there.

David Bowers

Generally speaking, book-to-bill within all the regions was approximately one to one for the quarter. Really nothing much above or nothing much below through the regions. We dipped slightly below one to one in August but it was very nominally below one to one. It was still effectively the same.

Matt Sheerin – Thomas Weisel Partners

Quarter to date, can you maybe discuss a little about if its changed significantly since then or is it moving along at that same rate?

David Bowers

We don’t give guidance of course, the only thing we can say quarter to date is September was a reasonable month so we did not see a strong decline in order activity during the month of September and book-to-bill was slightly under one.

Matt Sheerin – Thomas Weisel Partners

In Europe specifically it seems to be down year-over-year and I think maybe currency had something to do with that but can you talk about some of the organic trends in that market and what we should expect to see based on some of the currency trends as well and will you see some benefit on the SG&A line as well from the currency going down, I know you’re going to see sales probably fall organically, but will you see some benefit on the SG&A line?

David Bowers

We will see benefit in SG&A, salaries are paid in local currencies and a substantial portion of the business is transacted in US dollars depending upon the market. In Germany its primarily transacted in Euros, in the UK a substantial portion is transacted in US dollars and in the Nordic, the new territory, its primarily dollars. So we’ll see some beneficial impact from those factors offset by Euro trading in Germany.

From a general market, what we saw during the quarter Germany, Central Europe we continued to see growth and its tracking more or less the way we would want it to track in order to get to break even in Germany.

And then UK we saw substantial softening in particular in July and August. We have some consolidated businesses run out of the UK so we saw growth in EMS business which is primarily in Eastern Europe activity and quite encouraged in fact by the penetration in Eastern Europe as we’re gaining traction there but UK core business was down pretty substantially and we don’t see short-term recovery in that business.

Matt Sheerin – Thomas Weisel Partners

In terms of the C-88 acquisition can you maybe give the sales, were those sales, those were primarily conducted in dollars you’re saying?

Richard Schuster

Yes.

Matt Sheerin – Thomas Weisel Partners

Can you maybe give some of the margin targets, the reason I’m asking about that is with the earn out you could pay up to .4x sales, that’s well above what your stock is trading at and other distributors are trading at, it seems to be a pretty significant premium, so just trying to figure out if this is a higher margin business and whether its going to be accretive.

Kurt Freudenberg

Keep in mind, you’re basing it off the $18 million base sales they have now. But obviously we’re expecting to add lines there so the sales should, similar to what happened with our UK acquisition will increase we believe pretty quickly.

Operator

Your next question comes from the line of Elliott Glazer – Unspecified Company

Elliott Glazer – Unspecified Company

The product relationship with IBM, what products are you carrying?

David Bowers

We’re carrying servers and storage.

Elliott Glazer – Unspecified Company

Which servers? Because they have some outstanding growth items like the Z series servers and they have some that are not growing so fast.

David Bowers

So the Z series is included.

Elliott Glazer – Unspecified Company

So it’s a mixture?

David Bowers

Correct, it’s a mixture of servers.

Elliott Glazer – Unspecified Company

And what about at the lower level microelectronics, what are you carrying?

David Bowers

Microelectronics, we carry IBM microelectronics in Asia Pacific region.

Elliott Glazer – Unspecified Company

Which products?

David Bowers

Power PC, microprocessors and there set top box ICs.

Elliott Glazer – Unspecified Company

When would you expect the volume here to get up to what we would consider critical mass, something you can earn a living on?

David Bowers

From the server and storage business we expect to begin to see meaningful growth in the beginning of FY10.

Elliott Glazer – Unspecified Company

That would be March of 2010?

David Bowers

Correct, March of 2009.

Operator

Your next question comes from the line of [Alan Seymore] – Columbia Management

[Alan Seymore] – Columbia Management

I’m curious if you could flush out the acquisition and what you’re thinking about there because there’s obviously some line extensions but I’m also curious its in Denmark but I presume that that means that you’re going to look at Finland, Sweden as this is a jumping off point for other parts of the Nordic area, is that correct?

David Bowers

Correct, it is in both Denmark and Sweden as we speak and we’ll use that as the basis for expansion into Norway and Finland.

[Alan Seymore] – Columbia Management

Could you talk a bit about, you’re talking about the US being a little slower but Asia being a little faster, I’d be curious as to how you handled the design part of things where obviously a lot of, some design work gets done in the United States but manufacturing gets done over in China, how do you handle that and can you get designed in here but get the parts delivered over there when things get manufactured?

David Bowers

We have internal revenue and margin sharing between the businesses so it’s internal, it’s not reflected.

Kurt Freudenberg

From a financial standpoint are you asking for business standpoint or financial standpoint?

[Alan Seymore] – Columbia Management

No I’m asking how you handle it from a business standpoint because presumably if you can, the more design end wins you can get whether its here or over there, where you [can] get volume, presumably its to your benefit and--

David Bowers

Correct so without sharing the secret sauce, we do share credits back to the design locations and the individuals that are driving those design activities. We do provide compensation as well as revenue and margin credit to the divisions which allow us to staff accordingly so that we can staff properly to support design activities and that question is very relevant in particular for the America’s market and the UK market.

We do it in a manner that’s consistent with the way a lot of suppliers go-to-market in fact, so we made the comment here for the first time that our North America design activity was driving revenue in Asia Pacific and its now becoming meaningful revenue, significant revenue and its having a very favorable impact to the profitability, to our growth and profitability in Asia Pacific.

Both design activity in the Americas, primarily the US and design activity in the United Kingdom are reflected in those numbers.

Kurt Freudenberg

We also have an excellent system that tracks, to track business from one geographic location to another.

David Bowers

And that’s a system that we started developing almost 10 years ago and we believe that we are absolutely best-in-class within our industry at tracking the design from inception at a disparate OEM or design entity as it goes through development into production and the process that we have for tracking that business and closing it even if its halfway around the world is second to none.

Operator

Your next question comes from the line of Mike Neary – Neary Asset Management

Mike Neary – Neary Asset Management

What blended rate are you paying right now on your financing?

Kurt Freudenberg

Its approximately 4.9%.

Mike Neary – Neary Asset Management

So you’re going off the prime?

Kurt Freudenberg

Well we actually go off of both LIBOR and prime. In the past it was more LIBOR then prime but because of what’s happened with LIBOR in the past couple of months, particularly the past month, we had a little more prime then we do LIBOR. There was a point which is unusual where LIBOR was higher then prime.

Mike Neary – Neary Asset Management

In terms of the SEC investigation why do you think that’s wrapping up?

Kurt Freudenberg

It’s divided into two parts, one is the SEC questions themselves, and we don’t know when they’re going to be done asking questions; we’re just not privy to that. The second part is the interim investigation which our audit committee has put underway and that is nearing completion and the reason we know that is because our audit committee obviously is part of The Board so we have some indication from them that they are getting near completion and it should come to an end soon.

Mike Neary – Neary Asset Management

Is there anything you can do to finish up the SEC piece, have you had any discussions in terms of settlements or anything like that?

Kurt Freudenberg

There’s nothing else, right now its question and request for documents, there’s nothing else that we need to provide to them. It’s in the matter of Vitesse not in the matter of Nu Horizons so unless we hear otherwise from the SEC we just answer the questions when they arise.

Mike Neary – Neary Asset Management

In past cycles you’ve done a very good job of liquidating inventory somewhat seamlessly, how are things going to be different this time or are they?

David Bowers

There are a lot of things we don’t know about, the speed of a downturn but our ability to liquidate inventory as you call it, our ability to sell or return inventory should not be substantially different. Substantially all of our inventories are covered by stock rotation privileges and that which is not standard [inaudible] that is covered by non-cancelable, non-returnable agreements with our customers.

Mike Neary – Neary Asset Management

In terms of your accounts receivable can you talk about those and the health of those?

Kurt Freudenberg

Receivables are actually in fine shape. We haven’t seen any downturn at all. Its pretty much status quo. The DSOs are pretty typical. We see the higher ones in Asia because that’s the nature of the business in Asia and the lower DSOs are here in the US. So there’s no unusual trends there. Are agings are in line with where they need to be and of course with the current economic times, we’re watching it very closely.

Mike Neary – Neary Asset Management

About the stock, which is sometimes different then the business, the stock is currently under $3.00 and we have tangible book of near $8.00, for the price that we’re going to pay for C-88 we could buyback 10% of the entire company. When are we going to do a stock buyback and/or when are you going to buy stock yourselves?

David Bowers

That question is currently under Board discussion so we are addressing that and obviously any decisions will be communicated when appropriate.

Operator

Your next question comes from the line of [Larry Karlit] – Trident Partners

[Larry Karlit] – Trident Partners

Just noticed the non-recurring costs for the most part should be out of the way by the end of fiscal 2009, also I’ve been reading from an economic service which I think is probably the highest priced and best rated in the country that they expect a pickup in the economy starting next spring. What you said about business it makes me feel that 2010 for us could be a hell of a year. Any comment on this?

Richard Schuster

As far as the costs from the investigation as we’ve said, we know that the internal investigation is winding down. As far as the SEC’s investigation, that we’re not privy to that information. Right now based on what’s going on in the economy, the visibility is not great but we certainly feel that based on what we’ve done with the company with our lines and our investments and watching expenses, we’ll be in a good position for the recovery. I don’t think we have any question here about that; we’re very confident that we’ll get through this and we’ll be in a strong position to benefit when the economy does turn around.

[Larry Karlit] – Trident Partners

Do you check the SEC attorney’s from time to time re Vitesse just to see what’s doing? I understand years ago you couldn’t talk to them but now you can check with them to see what the status of some sort of suits are.

Kurt Freudenberg

The status of the suits with regard to Vitesse?

[Larry Karlit] – Trident Partners

With regard to Vitesse.

Kurt Freudenberg

We do have attorneys that do interact with the SEC but its more to answer questions that come up as they arise.

[Larry Karlit] – Trident Partners

They don’t tell you how far they have progressed towards ending the situation?

Kurt Freudenberg

The issue is we’re not really privy to that information as a company because we’re not the ones being investigated, its Vitesse so we can’t inquire about that company since it’s a separate company.

Operator

Your final question is a follow-up from the line of Matt Sheerin – Thomas Weisel Partners

Matt Sheerin – Thomas Weisel Partners

Just wanted to go back to Germany, we didn’t actually talk about whether you thought you could still break even in Germany by the end of fiscal 2009, is that still a target you want to stick to?

David Bowers

There’s a big question mark now and that is what impact the macroeconomic climate that we’re operating through has and it will have an impact in Germany as it has in other parts of the world and we don’t think its going to be a positive impact.

Matt Sheerin – Thomas Weisel Partners

On the NIC business can you talk a bit about the pricing environment, how that’s been and what you’re hearing about industry capacity expansion plans from some of your Asian competitors?

Richard Schuster

We’ve heard that capacity has been disappointing year-over-year for this time of the year which is generally Christmas production so we think capacity is under utilized. Most of us have seen commodity prices go up, precious metals, that are used, raw materials used in the production of capacitors so at this point we’ve seen prices definitely stabilize. Some prices are even up a little bit.

Whether or not the slowing market will cause some panic selling, I can’t predict, but in general we see prices stable to up slightly, capacity is off but we’re hearing and seeing that the manufacturers of components are walking away from business rather then taking business at a loss.

Matt Sheerin – Thomas Weisel Partners

What’s the tax rate we should expect going forward for the second half of the year?

Kurt Freudenberg

Going forward it should be in the low 30s.

Matt Sheerin – Thomas Weisel Partners

And then can you maybe breakout the spend of the internal investigation versus the spend on the SEC investigation on a quarterly basis roughly speaking, is it 50-50 or--?

Kurt Freudenberg

Unfortunately it’s combined, the billing has been combined from the attorney so it’s just something that we never thought of breaking out and it’s billed as a combined number.

Matt Sheerin – Thomas Weisel Partners

On lead times and cancellations, we’ve heard that visibility has sort of gotten pretty bad out there, have you seen lead times come in even further and have you seen any customers involved in cancellations?

David Bowers

We’ve seen no change in lead times to this point but we’re dealing with the situation that’s a couple of weeks old so I think its going to be a little bit, another week or two before we see any changes.

Related to cancellations and reschedules, we’re hearing so it’s more anecdotal increased level of cancellations and reschedule requests but again it’s a little early in the cycle.

Richard Schuster

We haven’t on the passive side; we have not seen anything dramatic in terms of push outs or cancellations at this point.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Arthur Nadata

I would like to thank all of you for participating on this conference call. We look forward to our ongoing dialogue with you in the months ahead and hope that we have the opportunity to talk to you on the next conference call. Thank you all very much and have a good day.

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