Richardson Electronics, Ltd. (RELL) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fiscal Year 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ed Richardson, CEO and Chairman of the Board of Richardson Electronics. Please proceed, sir.

Good morning and welcome to our second quarter 2013 conference call. Joining me today are Kathy Dvorak, Chief Financial Officer; and Wendy Diddell, Executive Vice President of Corporate Development and General Manager of Canvys, and Sandeep Beotra, Executive Vice President of Mergers and Acquisitions. As a reminder, this call is being recorded and will be available for audio playback on our website. During the call, we may make forward-looking statements and based on certain risk factors our actual results could differ materially. Please refer to our press release and SEC filings for an explanation of our risk factors. Net sales for the second quarter of fiscal 2013 were $36.6 million, down 6.5% from net sales of $39.1 million during the second quarter of last year reflecting uncertainty in the global marketplace. Sales during the quarter continue to be hurt by slowing growth in Asia combined with global financial instability. The year-over-year decline is also attributable to continuing economic issues impacting our European display business. Gross profit for the second quarter of fiscal 2013 was $10.7 million, or 29.3% of net sales, compared to $11.7 million, or 29.9% of net sales, during the second quarter of fiscal 2012. Gross profit during the second quarter was impacted by unabsorbed manufacturing labor and overhead of $300,000, or 0.8% of net sales. During the quarter, we adjusted resources to match demand while maintaining flexibility to address opportunities as the economy strengthens. Expenses in the quarter were 5.1% more than the prior year reflecting incremental investments in key initiatives as well as severance costs and expenses related to a preference claim. As a result of lower revenue and incremental expense income from continuing operations for the second quarter of fiscal 2013 was $600,000 compared to income from continuing operations of $1.6 million during the second quarter of last year. With improving global economic conditions, we anticipate sales for the second half of our fiscal year to be up significantly over the first half. We continue to focus on converting sales from OEM customers to end users through our expanded service capabilities for laser and industrial tubes and we continue to drive the organization to find new customers and sources of revenue. In December 2012, we added Sandeep Beotra to our executive management team as Executive Vice President in charge of Mergers and Acquisitions. Sandeep recently worked for Morgan Joseph Triartisan, a middle market investment banking firm, where he was Managing Director covering Technology and Telecommunications. Sandeep has an MBA in Finance and an undergraduate degree in Electronics and Communication Engineering. Our ability to create opportunities to extend our business model in to new industries is crucial to the long term success of the company and we look forward to having Sandeep's help and experience to achieve our growth goals. Now, I will turn the call over to Kathy Dvorak to share the details of our second quarter performance.

Thank you, Ed, and good morning. Sales in our second quarter of fiscal 2013 were $36.6 million representing a 6.5% decline in sales volume compared to the second quarter of fiscal 2012. While we are not pleased with our sales performance during the first half of our fiscal year, we are beginning to see backlog increase and therefore expect to see sales volume improve significantly during the second half of fiscal 2013. Gross margin decreased to 29.3% from 29.9% in last year's second quarter. This decrease reflects about $300,000 of an unabsorbed labor and overhead expense related to the significant volume decline within our manufacturing operation. In response to the declining volume we have reduced some our fixed costs while we wait for the anticipated rebound in demand for manufactured products within the semiconductor wafer fabrication market. Our customers are acting and ordering cautiously but we are beginning to see cording activity pick up. Adjusting for the absorption hit, gross margin would have been 30.2% or a 30 basis point improvement compared with the prior year. Our operating expenses were up about $300,000 during the second quarter of fiscal 2013 compared to last year's second quarter. Included in the second quarter of fiscal 2013 operating expenses were over $400,000 of expense related to severance, a preference claim and unusually high product development cost. Adjusting for these expenses, operating expenses were slightly below the prior year's second quarter. We are closely monitoring our spending and we believe we are well positioned to leverage a relatively fixed expense base as sales volume improves. Operating income for the second quarter of fiscal 2013 was about $500,000 or 1.4% of sales compared to $1.7 million or 4.4% of sales in the second quarter of last year. Adjusting for the items I noted that affected…

Thank you, Kathy. Good morning, everyone, and happy New Year. Canvys sales for the second quarter were $10.4 million versus $10 million during the first quarter and $11.1 million in the second quarter of FY'12. Sales in the North America of Custom/OEM segment were above prior year, while sales in healthcare and in Europe were below prior year. On a year-to-date basis, revenues in both North American segments continued to exceed prior year. Gross margin in the second quarter of Canvys was 27%. This was an improvement over 26.4% realized in the first quarter, but still below 28.3% during the second quarter of FY'12. The decline over prior year continues to reflect the impact of euro exchange rates on fixed price contracts in Europe and to a lesser degree higher freight cost in both of our Custom/OEM segment. Gross margin in our healthcare segment exceeded prior year during the second quarter and on a year-to-date basis. As a result of the ongoing challenges we face in our European Custom/OEM segment, we restructured the team and reduced headcount from 40 to 32 during the quarter. Severance expense associated these changes was recognized in the second quarter. On a positive note, our book-to-bill ratio in Europe was well above one in both November and December and backlog is building as we are seeing benefit from a full year of focus on new customer and new project acquisitions. Last quarter, we talked to you about prospecting for new business being the #1 priority for Canvys and working on new base models which can be easily and rather quickly modified through specific customer requirements such as True Flat monitor series. During the quarter, we initiated a much more concerted effort to share project and customer alliance between Europe and North America. This not only…

Thanks, Wendy. EDG sales were $26.2 million in the second quarter, down 6.5% from $28 million in [indiscernible] last year. Gross margin was 30.3%, down slightly from 30.5% in the prior year due to under-absorption in manufacturing associated with a drop in demand for semiconductor wafer fabrication components. Sales in Europe and Latin America strengthened over the prior year while sales in Asia-Pac region continued to lag. Given the decline in demand for several manufactured products, we reduced headcount, working hours in our manufacturing facility. During the quarter, sales in marine and broadcast tubes increased over the prior year by 6.6% and 19.8% respectively. One of our most significant growth areas is consumable parts for laser equipment. This includes products such as lenses and Bellos and most recently, the addition of rebuilt driver stages. We are confident that laser consumables, coupled with our expanded service offering ensure that we offer a greater value to our end-user customers and a cost-effective alternative to the OEM for replacement cartridges. In November, we had a record month for laser tubes sold to end-users and margins continued to strengthen appreciably year-over-year as we replace the OEM business with end-user sales. Another highlight for EDG in the second quarter was Powerlink, a service company we acquired at the beginning of the second quarter in FY12. Sales and margin were up significantly over the second quarter of last year. We continue to invest in the Powerlink team as we seek to expand sales in microwave service and traveling wave tubes. Powerlink continues to be extremely valuable in expanding our laser and industrial tube service capabilities and is poised to play a key role in the servicing of replacement parts for the medical market in the future. While we are disappointed in the revenues, EDG continues to…

[Operator Instructions] Your first question comes from the line of Mark Zinski, 21st Century Equity Research.

First question, I guess, I'll put you guys on the spot in terms of your sales guidance. Obviously, this quarter sales came more in line with your guidance in the prior quarter. Are you feeling a little more confident that you have a sort of a grip on current sales trends?

Well, November was the best year we'd say and we were pleased with that. December is really hard to tell, because it ends up being a 2-week month with all the holiday season. Many manufacturers took advantage of the holiday this year to shut down for 10 days or so, so I guess we are as confident as we can be. Backlog is good it's been more coding activity, so I would say that we are feeling better now than we were at the end of the first quarter for sure.

Okay. Then in terms of the unabsorbed manufacturing labor and overhead related to the semiconductor vertical, is that kind of a one-time event that you think is behind you or could this be sort of a recurring problem area going forward?

Well, it's been a problem for us for some time. As you know the semiconductor wafer fabrication market is very cyclical. It probably goes up and down more than any other market which we address. What we are trying to do is to diversify more into the medical area and other areas that are more stable and show some good linear growth for the future and not to be so heavily devoted or counting on the semiconductor wafer fab area, so we think we can correct the situation and get back to a normal position, but it's going to take a quarter or so.

Okay. Then next question for Wendy in terms of Canvys. You guys have stated that healthcare is an important strategic area going forward. You mentioned that the medical devices tax has been a little bit of a negative but with the election over now, are you sensing from the customers a little more clarity on where they think healthcare is going now?

It’s a good question. I can't say with sincerity that’s there is a lot of clarity. I think there is still [indiscernible] and challenge in going back and forth in terms of new regulations and for example the excise tax is a really good example, where there is still a lot of pushback by our customers. We have talked a lot about it. We have seen some of our customers who are starting to order for the products which, again, requires more displays. So that’s a good thing. On the healthcare side, it's up at the hospital level. Again, I would say, it's probably more positive than it has been but I still the cost reduction is really going to challenge how much product variable to bring in, how much new replacement products variable they get from us. So we are going to have to sit back and watch and wait but I would say, generally, the market feels somewhat better but, again, on the manufacturing side of new equipment with that excise tax, we are going to have watch that really closely.

Okay, great, and then just a last question. In terms of the acquisition activity and bringing Sandy on board, do you feel like you are getting closer to an acquisition here in the near future? I think you mentioned you are still looking at both EDG and Canvys for potential acquisitions. Are those still both viable areas or are you leaning towards more of an acquisition in Canvys?

We really currently are not looking at anything for Canvys. We really want to work hard on the European operation for Canvys and get that stable before we look at any future acquisitions there. Now we continue to work hard at the diagnostic imaging portion of the healthcare space. We are probably looking at 3 or 4 companies as we speak. I can't tell there is anything imminent there but we are really excited about the opportunity going forward.

[Operator Instructions] At this time, there are no additional audio questions.

Thanks, Patrick. Well, thank you for joining us and for your continued support of Richardson Electronics. I would also like to thank our employees and our partners for their hard work and commitment. We are more excited about our future than ever and we look forward to discussing our fiscal 2013 third quarter results and updating you on our growth strategies in April. We wish all of you a very happy New Year and the best for 2013. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you so for your participation. You may now disconnect. Have a great day.