Filed by Nu Horizons Electronics Corp.
Pursuant to Rule 14a-12
Under the Securities Exchange Act of
1934
Below
is the transcript of a conference call that took place at
4:30
p.m. Eastern Time on October 7, 2010
Operator:
Greetings
and welcome to the Nu Horizons Electronic Corporation Fiscal Year 2011 Second
Quarter Earnings Conference Call.
At this
time, all participants are in a listen-only mode.
A brief
question-and-session will follow the formal presentation.
If anyone
should require operator assistance during the conference, please press star,
zero on your telephone keypad.
As a
reminder, this conference is being recorded.
For the
purposes of the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995, our statements today may include certain forward-looking
statements that include risks and uncertainties that could cause actual results
to differ materially. Such statements are based upon, among other
things, assumptions made from information currently available to the management,
including management’s own assessment of the Nu Horizons industry and
competitive landscape.
It is now
my pleasure to introduce your host, Martin Kent, President and Chief Executive
Office of Nu Horizons Electronic Corporation.
Thank
you, Mr. Kent. You may now begin.
Mr. Martin
Kent:
Thank you, operator.
Good
afternoon and welcome to our second quarter fiscal 2011 financial results
conference call. Joining me on the conference call today from Nu
Horizons management are Richard Schuster, Senior Executive Vice President and
Chief Operating Officer, Kurt Freudenberg, Executive Vice President and Chief
Financial Officer, and Kent Smith, President, Distribution Division and
Executive Vice President.
Kurt will
give an overview of the financials for the second quarter of fiscal
2011. Following Kurt, I will review the company’s performance and
trends in our industry. We will then open the call to questions you
may have.
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Before
turning it over to Kurt, I would like to review an important development
announced after the end of the quarter.
On
September the 20th, 2010, Nu Horizons announced the signing of a definitive
agreement providing for the acquisition of the company by Arrow Electronics in
an all cash transaction. Under the terms of the agreement, which has
been approved by both boards of directors, on the closing of the transaction, Nu
Horizons shareholders will receive $7 for each share of common stock they
own.
This
represents a significant premium for Nu Horizons shareholders based on the
closing stock price of Nu Horizons immediately prior to the announcement of the
deal and is at a price that our common shares have not sustained in nearly three
years. We believe that the transaction represents an excellent value
for Nu Horizons shareholders and a compelling opportunity for our employees,
customers and suppliers.
The
transaction is subject to the approval of shareholders of Nu Horizons as well as
customary closing conditions and regulatory approvals. We expect to
file shortly a preliminary proxy statement pertaining to the shareholder vote
with the SEC. The preliminary proxy statement will explain in details
the reasons that the Board of Directors approved the transaction.
Once the
proxy has been approved by the SEC, we’ve scheduled a special meeting of our
shareholders to take place approximately 40 days after we mail the final proxy
statement to our shareholders. We intend to close the transaction
promptly after the merger is approved by shareholders and after we receive any
regulatory approvals, either in the fourth calendar quarter of 2010 or the first
calendar quarter of 2011.
For our
customers and suppliers, we believe that size and scale are very important and
that the opportunity to become part of Arrow makes sense in terms of our ability
to compete more effectively in today’s global marketplace. We are
pleased to become part of a leading global company with enhanced resources that
are expected to best position Nu Horizons to continue to deliver industry
leading value.
As many
of you know, following the announcement of the merger, several law firms
announced that they will conduct an investigation into the actions of the Board
of Directors related to the merger. Since that time, four separate
class actions have been commenced in New York State Supreme Court, Suffolk
County, alleging that the company’s individual directors breeched their
fiduciary duties to the shareholders and that the company aided abetted such
breech. Each action generally seeks to enjoin the transactions and
legal fees.
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The
company intends to vigorously defend against these actions. We do not
anticipate that any of these actions will affect the timing of the completion of
the merger.
I will
now turn the call over to Kurt for a review of the financials.
Mr. Kurt
Freudenberg:
Thank you, Martin.
Good
afternoon, everyone.
Now, I’ll
turn to the financials for the fiscal second quarter and six months ended August
31st, 2010.
Consolidated
net sales for Q2 for fiscal year 2011 were $164,130,000 compared to $156,600,000
in the comparable period last year, a 4.8 percent increase. We
successfully concluded our Xilinx distribution agreement termination on June
5th, 2010, just five days into the second quarter of fiscal
2011. Sales of the Xilinx products were $1,669,000 for this period as
compared to $49,589,000 for the second quarter of fiscal 2010 and $60,749,000
for the first quarter of fiscal 2011.
For the
remainder of this call, we will discuss all sales and booking amounts excluding
Xilinx for prior fiscal periods for better comparability.
Consolidated
net sales for Q2 for fiscal year 2011 were $162,461,000 compared to $107,011,000
in the comparable period last year, a 51.8 percent
increase. Sequential quarterly sales increased $12,448,000 or 8.3
percent over the first quarter fiscal 2011.
For the
six months ended August 31st, 2010, consolidated net sales increased to
$312,474,000, a 52.2 percent increase from $205,263,000 in the comparable period
last year.
The
consolidated gross profit margin for the second quarter of fiscal 2011 was 15.8
percent, an improvement from 15.3 percent in both the same period last year and
the first quarter of fiscal 2011.
Second
quarter 2011 selling, general and administrative expenses as a percentage of
sales decreased to 14.2 percent in Q2 compared to 14.6 percent for the
comparable prior period, and for the six months decreased to 12.8 percent from
14.6 percent in the prior year. The dollar increases in both the
three and six month periods are primarily related to increased selling expenses
associated with higher sales and higher professional fees offset by lower
provision for doubtful accounts.
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Interest
expense increased for the three and six months ended August 31st, 2010 as
compared to the yearly periods primarily due to higher average borrowings due to
increased sales and higher rates.
Net
income for the three months ended August 31st, 2010 was $1,156,000 or 6 cents
per diluted share as compared to net income of $543,000 or 3 cents per diluted
share for the three months ended August 31st, 2009. For the six
months ended August 31st, 2010, net income was $4,530,000 or 25 cents per
diluted share compared to a net loss of $401,000 or 2 cents per share in the
prior year.
The
company continues to have a strong balance sheet. At August 31st,
2010, the company had $174,465,000 of working capital. Our current
ratio is 3.5 to 1 and our bank debt to equity ratio is .21 to 1.
Cash on
hand was $20,508,000, an increase of $14 million from the beginning of the
fiscal year. The bank debt was $32,353,000, a decline of 6.8 million
from February 28th, 2010. And the company had $46,311,000
cash available under all its bank facilities. Additionally, the
company generated approximately $21 million of cash from operations through
August 31st, 2010.
On
September 14th, 2010, the company entered into a settlement agreement with
Lazar, Levine and Felix, LLP and related parties in connection with the
settlement of the company’s arbitration proceedings related to the company’s
restatement of certain prior period financial statements. Lazar,
Levine and Felix previously served as the company’s independent public
accounting firm until January 4th, 2008. Pursuant to the settlement
agreement, the company was paid $1.9 million, which will be recorded in Q3 of
fiscal 2011.
Now, I
will turn the call back to Martin.
Mr. Martin
Kent:
Thank you, Kurt.
Following
on from Kurt’s presentation, please note that all references made to
book-to-bill ratio, booking and billing numbers and gross margin will exclude
Xilinx for this and all prior quarters.
I am
pleased to be able to report that during the quarter, Nu Horizons has made
meaningful progress towards our goal of improving profitability. Our
strategy involves a drive to improve the gross margin generated in two ways -
first, by increasing the gross margin percent, and secondly, by improving our
internal processes so that we can transact an increased level of revenue without
the need to correspondingly increase our SG&A expense.
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Our gross
margin percent grew from 15.3 percent in Q1 to 15.8 percent in Q2 with positive
contribution from both our active and passive component
businesses. Our gross margin dollars grew by 11.9 percent Q2 over Q1
and our operating expense reduced 6.7 percent Q2 over Q1. This
improvement in gross margin has resulted in Nu Horizons being able to report
operating income of 1.6 percent and earnings per share of 6 cents despite the
loss of the Xilinx revenue reported in Q1.
Nu
Horizons has continued to receive strong support from both its suppliers and
customers, and this combined with the excellent performance of its employees,
has resulted in a sales growth of 51.8 percent Q2 ’11 over Q2 ’10 and 8.3
percent growth Q2 ’11 over Q1 ’11. The book-to-bill ratio has
remained positive in Q2 ’11 at 1.12 to 1, and although this is a reduction from
the 1.22 to 1 reported in Q1, the decline is due to the increase in billings,
not a reduction in the value of the bookings.
A
reduction in book-to-bill is common in a market that is experiencing rapid
growth and extended lead time on products as we have in the last three
quarters. You may initially experience high book-to-bill ratios as
customers react and place higher quantity backlogs for longer
periods. And then, as the billings increase to reflect this, the
book-to-bill ratio may decrease even though the dollar value of both continues
to grow.
I will
now review each individual region for our active component
business.
In North
America, our sales grew 34.3 percent Q2 ’11 over Q2 ’10 and 9.3 percent Q2 ’11
over Q1 ’11. The book-to-bill ratio in Q2 ’11 was 1.22 to 1, which
when combined with the positive bookings in Q1 gives a ratio of 1.17 to 1 for
the first half of ’11.
This
growth is a combination of increased customer demand, the successful
introduction of new franchises into the region and design wins generated in
previous months now turning into billings. The book-to-bill ratio in
September was even at 1 to 1.
In Asia
Pacific, our sales grew 79.7 percent Q2 ’11 over Q2 ’10 and 6.7 percent Q2 ’11
over Q1 ’11. After a very strong book-to-bill ratio in Q1, we
experienced a slowdown during Q2 with a ratio of 0.96 to 1. However,
our ratio for the first half of ’11 was 1.13 to 1 and we have seen a recovery in
our bookings during September with a positive ratio of 1.06 to
1. This significant growth in sales is a combination of a successful
program of generating local design wins and an increase in customer
demand.
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In
Europe, our sales grew 55.2 percent Q2 ’11 over Q2 ’10 and 13.9 percent Q2 ’11
over Q1 ’11. The book-to-bill ratio in Q2 ’11 remains strong at 1.27
to 1, resulting in a 1.29 to 1 ratio for the first half of ’11.
As in
North America, our improved performance in Europe is a combination of new
franchise introduction, stronger customer demand and previous design wins now
turning into revenue.
A week
performance in our Nordic business resulted in a September European book-to-bill
ratio of 0.98 to 1. However, both the UK and Germany remain positive
with ratios of 1.03 to 1 and 1.11 to 1 respectively.
With
regard to our Passive Division, NIC Components, the second quarter of fiscal
2011 saw revenues 8.8 percent higher than Q1 ’11 and 63.3 percent higher than Q2
’10 with a positive book-to-bill ratio of 1.02 to 1. Gross margins
continued to increase slightly.
Design
and quoting activity remains strong for many market
segments. Generally speaking, we believe that industry pricing for
passive components has stabilized with the exception of Tantalum and large size
aluminum capacitors. Lead times started to improve, which we believe
contributed to the modest slowdown in bookings. Consumption is still
consistent at our customers, but due to heavy pipelining in the first quarter,
some inventory was built up in the channel. We expect this inventory
will be worked down in our third quarter.
NIC
continues to market high reliability products for longer life and critical
applications. NIC’s product portfolio and supply base is geared for
future technology and quality demands.
During
the earnings call we held in Q1 ’11, we advised you that our systems division
had entered into discussions with Sun Microsystems, now part of Oracle, relating
to the non-renewal of their supplier distributor relationship following Oracle’s
acquisition of Sun but that the timing of the termination had not been
determined. During Q2, it was confirmed that this termination will be
effective November 30th, 2011.
Whilst
this will obviously have a negative impact on our revenue line since sales of
Sun Oracle products for the first half of ’11 were $14 million, following an
associated SG&A reduction, the impact on our net income will be
minimal.
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Q2 has
been a strong quarter for Nu Horizons with growth in all the key areas of
revenue, margin and operating income and a tight control on SG&A
expense. Our balance sheet has strengthened and our net debt has
reduced to just under $12 million.
Our
bookings in our component divisions have remained positive throughout the
quarter following on from a strong Q1 book level and the trend has continued in
September. As demonstrated by our Q2 results, Nu Horizons has the
ability to be a profitable business, even if the growth in the market were to
slow and demand settled at the level it is today.
We have
new franchises in all regions that continue to give us growth and we are
maintaining our drive to secure design wins today that create the platform for
tomorrow’s revenue.
This
concludes the presentation of our prepared remarks. We will now pass
the call back to the operator so that we may open the conference call to any
questions you may have.
Operator:
Thank
you.
We’ll now
be conducting a question and answer session.
If you
would like to ask a question, please press star, one on your telephone
keypad. A confirmation tone will indicate your line is in question
queue. You may press star, two if you would like to remove your
question from the queue.
For
participants using speaker equipment, it may be necessary to pick up your
handset before pressing the star keys.
One
moment please while we poll for questions.
Our first
question comes from Matt Sheerin from Stifel Nicolaus.
Mr. Matt
Sheerin:
Yes, thanks, and good afternoon.
Martin,
just a couple questions regarding the numbers, and I appreciate the granularity
you gave in terms of your business. You talked about sequential
growth in the different businesses. Is that excluding the impact of
Xilinx?
Mr. Martin
Kent:
Yeah. So, all the numbers I referred to and I
said was absolutely excluding Xilinx.
Mr. Matt
Sheerin:
Okay, okay, great.
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So, you
saw--so, the sequential growth in--from Q1 to Q2 in North America, what was that
number again? Was it 9.3?
Mr. Martin
Kent:
I’m just looking now, but I believe it--it was 9.3,
yeah.
Mr. Matt
Sheerin:
9.3, okay.
And then,
the book-to-bill--sounds like the book-to-bill slowed down and it was just
around--in the month of September is 1.1. Is that
correct?
Mr. Martin Kent:
In
North America, that’s correct.
Mr. Matt
Sheerin:
Okay, okay.
And then,
just--and I know that you benefited on the gross margin side from mix and
Xilinx--.
Mr. Martin
Kent:
--Yeah--.
Mr. Matt
Sheerin:
--And Sun. But, are you getting any
benefit because of the price, the environment, the supply demand environment
where you’re seeing premium pricing that might not last if lead times and
bookings slow down at some point?
Mr. Martin Kent:
I
would say that’s very limited. There is the odd opportunity where we
have had the opportunity maybe to raise prices because the manufacturers raised
the incoming price to us, but it’s been only one or two manufacturers and it’s
been at this sort of 5 percent level. It’s not been
significant.
Mr. Matt
Sheerin:
Okay, okay, great.
And then,
it sounds like in Asia, you saw a bit of a dip in August, but that’s come back
in September.
Mr. Martin
Kent:
Yeah.
Mr. Matt
Sheerin:
What markets or what areas of strength are you seeing
there?
Mr. Kent
Smith:
Yeah. So, Matt, it’s Kent
Smith.
Mr. Matt
Sheerin:
Yeah, hi, Kent.
Mr. Kent
Smith:
Hi.
The--from
a strength standpoint, we’ve seen both demand creation [unintelligible] creation
that we’re working increasing. I mean, the percentage and the amount
of our business is relatively broad customer-wise.
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Where we
saw a slowdown was the 3G side of the business. The 3G build out and
investment that was in play in China, in particular, we did see that slow
down. We’ve seen a relatively broad pickup in other
markets.
Mr. Matt
Sheerin:
Okay, okay.
And
then--and on the Passive business, it sounds like things have slowed a little
bit as lead times have come in. Just in terms of the business
overall, usually at this kind of cycle, companies or distributors tend to see
cancellations. Have you ever--have you seen any signs that
cancellations have picked up or--you know, from customers broadly speaking, or
no?
Mr. Martin
Kent:
Certainly on the active component side, I would say
definitely no and I’ll let Rich answer for you on the passive side.
Mr. Richard
Schuster:
On the passive side, you’re right, Matt, that lead
times have come in considerably except for Tantalum and large size
aluminums. We haven’t seen dramatic cancellations - some push outs,
but nothing dramatic.
Mr. Matt
Sheerin:
Okay, okay.
And on
the acquisition, Martin, do you have any--a sense of the Nu Horizons brand,
how--will that currently exist, will the company be--you know, have a--be run as
a second separate marketing arm or anything like that or you don’t know
yet?
Mr. Martin
Kent:
No, the position today, Matt, is that we continue to
operate as competitive companies.
Mr. Matt
Sheerin:
Okay. Okay, great. Thanks, and
congratulations on the acquisition.
Mr. Martin
Kent:
Thank you.
Operator:
Thank
you.
Once
again, if you do have a question, please press star, one at this
time.
Again,
that is star, one to ask a question.
It
appears we have no further questions at this time. I would like to
turn the floor back over to management for closing comments.
Mr. Martin
Kent:
Thank you.
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I would
like to thank everyone for participating on this conference call. We
welcomed your questions and look forward to the next conference
call. Until that time, please feel free to call us if you have any
questions regarding our financial performance.
We
encourage you to read the proxy statement and any other documents that we file
with the SEC carefully and in their entirety when they become available because
they will contain important information about the proposed merger with
Arrow.
Thank you
and have a good day.
Operator:
Thank
you.
A replay
of today’s call will be available today beginning at 7:30 PM Eastern time and
will be available until October 14th by dialing 877-660-6853 and
201-612-7415. The pass codes are account number 374 and conference ID
number 356784. Please note, both numbers are required for
playback.
This
concludes today’s presentation. Thank you for your
participation.
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Additional
Information and Where to Find It
In
connection with the proposed merger between Nu Horizons Electronics Corp.
(the “Company”) and Arrow Electronics, Inc. (“Arrow”) pursuant to an
Agreement and Plan of Merger dated September 19, 2010, the Company intends to
file with the Securities and Exchange Commission (“SEC”) a proxy statement for
the stockholders of the Company, and each of the Company and Arrow may file
other documents with the SEC regarding the proposed merger transaction. BEFORE
MAKING ANY VOTING OR INVESTMENT DECISION, THE COMPANY’S STOCKHOLDERS AND
INVESTORS ARE URGED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH
THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE, BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. Investors and
stockholders will be able to obtain, without charge, a copy of the proxy
statement, as well as other relevant documents containing important information
about the Company and Arrow at the SEC’s website (http://www.sec.gov) once such
documents are filed with the SEC. The Company’s stockholders will also be able
to obtain, without charge, a copy of the proxy statement and other relevant
documents when they become available by directing a request by mail or telephone
to Nu Horizons Electronics Corp., 70 Maxess Road, Melville, New York
11747, Attention: Corporate Secretary, (631) 396-5000. Information about
the Company’s directors and executive officers and other persons who may be
participants in the solicitation of proxies from the Company’s stockholders is
set forth in the Company’s proxy statement on Schedule 14A filed with the
SEC on June 14, 2010. Additional information regarding the interests of
participants in the solicitation of proxies in connection with the proposed
merger will be included in the proxy statement that the Company intends to file
with the SEC.
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