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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended November 30, 2005
Commission file number 1-8798
Nu Horizons Electronics Corp.
(Exact name of registrant as specified in its charter)
Delaware | 11-2621097 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
70 Maxess Road, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) |
(631) 396 -5000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Indicated the number of shares outstanding of each of the issuer’s classes of common stock, as of December 31, 2005.
Common Stock - Par Value $.0066 | 17,311,901 | |
Class | Outstanding Shares |
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
INDEX
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
November 30, 2005 | February 28, 2005 | |||||
(unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | 12,798,134 | $ | 7,024,203 | ||
Accounts receivable - net of allowance for doubtful accounts of $5,155,929 and $4,581,812 as of November 30, 2005 and February 28, 2005, respectively | 94,520,418 | 79,679,565 | ||||
Inventories | 93,779,781 | 81,696,415 | ||||
Prepaid expenses and other current assets | 2,282,077 | 1,782,872 | ||||
TOTAL CURRENT ASSETS | 203,380,410 | 170,183,055 | ||||
PROPERTY, PLANT AND EQUIPMENT - NET | 3,759,182 | 3,928,058 | ||||
OTHER ASSETS: | ||||||
Subordinated note receivable | 2,000,000 | 2,000,000 | ||||
Other assets | 1,619,730 | 1,688,187 | ||||
$ | 210,759,322 | $ | 177,799,300 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES: | ||||||
Accounts payable | $ | 29,466,288 | $ | 20,251,746 | ||
Accrued expenses and other liabilities | 6,066,327 | 4,446,226 | ||||
TOTAL CURRENT LIABILITIES | 35,532,615 | 24,697,972 | ||||
LONG TERM LIABILITIES: | ||||||
Revolving credit line | 39,300,000 | 22,800,000 | ||||
Deferred income taxes | 2,253,249 | 1,168,766 | ||||
TOTAL LONG-TERM LIABILITIES | 41,553,249 | 23,968,766 | ||||
MINORITY INTEREST IN SUBSIDIARIES | 1,468,837 | 1,199,655 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||
SHAREHOLDERS’ EQUITY: | ||||||
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued or outstanding | — | — | ||||
Common stock, $.0066 par value, 50,000,000 shares authorized; 17,198,133 and 16,891,647 shares issued and outstanding as of November 30, 2005 and February 28, 2005, respectively | 113,508 | 111,485 | ||||
Additional paid-in capital | 45,384,288 | 44,089,809 | ||||
Retained earnings | 86,519,353 | 83,724,169 | ||||
Other accumulated comprehensive income | 187,472 | 7,444 | ||||
TOTAL SHAREHOLDERS’ EQUITY | 132,204,621 | 127,932,907 | ||||
$ | 210,759,322 | $ | 177,799,300 | |||
See notes to interim consolidated condensed financial statements.
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
November 30, 2005 | November 30, 2004 | November 30, 2005 | November 30, 2004 | |||||||||||||
NET SALES | $ | 397,199,800 | $ | 353,626,883 | $ | 147,514,721 | $ | 116,218,925 | ||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Cost of sales | 333,842,696 | 294,884,235 | 124,271,270 | 96,829,764 | ||||||||||||
Operating expenses | 56,608,050 | 52,122,045 | 20,054,010 | 17,687,355 | ||||||||||||
390,450,746 | 347,006,280 | 144,325,280 | 114,517,119 | |||||||||||||
OPERATING INCOME | 6,749,054 | 6,620,603 | 3,189,441 | 1,701,806 | ||||||||||||
OTHER (INCOME) EXPENSE | ||||||||||||||||
Interest expense | 2,107,187 | 1,355,191 | 714,700 | 569,502 | ||||||||||||
Interest income | (247,584 | ) | (41,951 | ) | (73,220 | ) | (12,031 | ) | ||||||||
1,859,603 | 1,313,240 | 641,480 | 557,471 | |||||||||||||
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS | 4,889,451 | 5,307,363 | 2,547,961 | 1,144,335 | ||||||||||||
Provision for income taxes | 1,825,085 | 1,983,209 | 992,473 | 405,028 | ||||||||||||
INCOME BEFORE MINORITY INTERESTS | 3,064,366 | 3,324,154 | 1,555,488 | 739,307 | ||||||||||||
Minority interest in earnings of subsidiaries | 269,182 | 367,351 | 55,279 | 154,459 | ||||||||||||
NET INCOME | $ | 2,795,184 | $ | 2,956,803 | $ | 1,500,209 | $ | 584,848 | ||||||||
NET INCOME PER COMMON SHARE: | ||||||||||||||||
Basic | $ | .16 | $ | .18 | $ | .09 | $ | .03 | ||||||||
Diluted | $ | .16 | $ | .17 | $ | .08 | $ | .03 | ||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
Basic | 17,004,309 | 16,886,647 | 17,198,133 | 16,891,647 | ||||||||||||
Diluted | 17,746,808 | 17,816,056 | 17,760,196 | 17,506,975 |
See notes to interim consolidated condensed financial statements.
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For The Nine Months Ended | ||||||||
November 30, 2005 | November 30, 2004 | |||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Cash received from customers | $ | 381,964,981 | $ | 347,748,461 | ||||
Cash paid to suppliers and employees | (391,198,298 | ) | (376,725,193 | ) | ||||
Interest received | 247,584 | 41,951 | ||||||
Interest paid | (2,107,187 | ) | (1,355,191 | ) | ||||
Income taxes paid | (307,404 | ) | (150,513 | ) | ||||
Net cash (used in) operating activities | (11,400,324 | ) | (30,440,485 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (802,275 | ) | (651,089 | ) | ||||
Net cash (used in) investing activities | (802,275 | ) | (651,089 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Borrowings under revolving credit line | 152,545,000 | 124,400,000 | ||||||
Payments under revolving credit line | (136,045,000 | ) | (89,500,000 | ) | ||||
Proceeds from exercise of stock options | 1,296,502 | 141,391 | ||||||
Net cash provided by financing activities | 17,796,502 | 35,041,391 | ||||||
EFFECT OF EXCHANGE RATE CHANGE | 180,028 | 370,676 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 5,773,931 | 4,320,493 | ||||||
Cash and cash equivalents, beginning of year | 7,024,203 | 12,469,973 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 12,798,134 | $ | 16,790,466 | ||||
RECONCILIATION OF NET INCOME TO NET CASH (USED IN) OPERATING ACTIVITIES: | ||||||||
NET INCOME | $ | 2,795,184 | $ | 2,956,803 | ||||
Adjustments: | ||||||||
Depreciation and amortization | 971,151 | 949,261 | ||||||
Provision for bad debts | 393,966 | 138,401 | ||||||
Increase in deferred taxes | 1,084,483 | 144,651 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) in accounts receivable | (15,234,819 | ) | (5,878,422 | ) | ||||
(Increase) in inventories | (12,083,366 | ) | (31,495,751 | ) | ||||
(Increase) in prepaid expenses and other current assets | (499,205 | ) | (83,971 | ) | ||||
Decrease (increase) in other assets | 68,457 | (70,085 | ) | |||||
Increase in accounts payable and accrued expenses | 10,834,643 | 2,531,277 | ||||||
Increase in minority interest | 269,182 | 367,351 | ||||||
NET CASH (USED) BY OPERATING ACTIVITIES | $ | (11,400,324 | ) | $ | (30,440,485 | ) | ||
See notes to interim consolidated condensed financial statements.
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. | BASIS OF PRESENTATION: |
In the opinion of management, the accompanying unaudited interim consolidated condensed financial statements of Nu Horizons Electronics Corp. (the “Company”), its wholly owned subsidiaries NIC Components Corp., NUHC Inc., Nu Horizons International Corp., Nu Horizons Electronics Asia PTE LTD, Nu Horizons Electronics Hong Kong Limited, Nu Horizons Electronics Europe Limited, Titan Supply Chain Services Corp., Titan Supply Chain Services PTE LTD, Titan Supply Chain Services Limited and its majority owned subsidiaries, NIC Components Asia PTE LTD and NIC Components Europe Limited, contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position as of November 30, 2005 and February 28, 2005 and the results of its operations for the nine and three month periods ended November 30, 2005 and 2004, and its cash flows for the nine month periods ended November 30, 2005 and 2004.
The accounting policies followed by the Company are set forth in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended February 28, 2005, which is incorporated herein by reference. Specific reference is made to this report for a description of the Company’s securities and the notes to consolidated financial statements included therein. The accompanying unaudited interim financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America
The results of operations for the nine month period ended November 30, 2005 are not necessarily indicative of the results to be expected for the full year.
2. | PROPERTY, PLANT AND EQUIPMENT: |
Property, plant and equipment consists of the following:
November 30, 2005 | February 28, 2005 | |||||
Furniture, fixtures and office equipment | $ | 9,002,833 | $ | 8,654,290 | ||
Computer equipment | 6,720,387 | 6,338,046 | ||||
Leasehold improvements | 1,254,364 | 1,254,364 | ||||
16,977,584 | 16,246,700 | |||||
Less: accumulated depreciation and amortization | 13,218,402 | 12,318,642 | ||||
$ | 3,759,182 | $ | 3,928,058 | |||
3. | SUBORDINATED NOTE RECEIVABLE: |
On August 23, 2001, the Company completed the sale of the assets of its contract-manufacturing subsidiary, Nu Visions Manufacturing, Inc., (“Nu Visions”). The selling price of $31,563,000 consisted of $2,000,000 in a Junior Subordinated Note and $29,563,000 in cash. The $2,000,000 Junior Subordinated Note, dated August 23, 2001 and issued by the buyer, has a maturity date of May 14, 2007 and is subordinate in right of payment to all existing and future indebtedness of the issuer. The note bears interest from the issue date, on the principal amount, to, and including the maturity date, at a rate of 8% per annum. Interest shall be payable on the maturity date and shall compound quarterly as of each anniversary of the issue date. Prepayment of the note and interest accrued is permitted if and when certain conditions in the subordination agreement have been met.
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. | REVOLVING CREDIT LINE: |
On September 30, 2004, the Company entered into a secured revolving line of credit agreement, as amended, with eight banks, which currently provides for maximum borrowings of $100,000,000. On November 21, 2005, the Company entered into an amendment to the credit agreement to provide for borrowings utilizing an asset based formula predicated on a certain percentage of outstanding domestic accounts receivable and inventory levels at any given month end. Borrowings under the credit line bear interest at either (i) the lead bank’s prime rate or (ii) LIBOR plus 175 basis points at the option of the Company, through September 29, 2008, the due date of the loan. Direct borrowings under the line of credit were $39,300,000 at November 30, 2005 and $22,800,000 at February 28, 2005. As of the end of each of the fiscal periods, the Company had met all of the required bank covenants.
5. | NET INCOME PER SHARE: |
Basic earnings per share is computed based upon the weighted average number of common shares outstanding and excludes any potential dilution. Diluted earnings per share reflect potential dilution from the exercise of convertible securities into common stock.
For the Nine Months Ended | For the Three Months Ended | |||||||||||
November 30, 2005 | November 30, 2004 | November 30, 2005 | November 30, 2004 | |||||||||
NUMERATOR: | ||||||||||||
Net income | $ | 2,795,184 | $ | 2,956,803 | $ | 1,500,209 | $ | 584,848 | ||||
DENOMINATOR | ||||||||||||
Basic earnings per common share – weighted-average number of common shares outstanding | 17,004,309 | 16,886,647 | 17,198,133 | 16,891,647 | ||||||||
Effect of dilutive stock options | 742,499 | 929,409 | 562,063 | 615,328 | ||||||||
Diluted earnings per common share – adjusted weighted-average number of common shares outstanding | 17,746,808 | 17,816,056 | 17,760,196 | 17,506,975 | ||||||||
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
6. | STOCK BASED COMPENSATION: |
The Company accounts for employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25,” and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation.” The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
If compensation cost for the Company’s stock-based compensation plans had been determined in a manner consistent with the fair value approach described in SFAS No. 123, the Company’s net income and net income per share as reported would have been reduced to the pro forma amounts indicated below.
Nine Months Ended November 30, 2005 | Nine Months Ended November 30, 2004 | |||||
Net income : | ||||||
As reported | $ | 2,795,184 | $ | 2,956,803 | ||
Stock-based compensation cost – net of tax | 176,950 | 433,770 | ||||
Pro forma | $ | 2,618,234 | $ | 2,523,033 | ||
Basic earnings per share: | ||||||
As reported | $ | .16 | $ | .18 | ||
Pro forma | $ | .15 | $ | .15 | ||
Diluted earnings per share: | ||||||
As reported | $ | .16 | $ | .17 | ||
Pro forma | $ | .15 | $ | .14 |
Options vest over several years and new options are generally granted each year. Because of these factors, the pro forma effect shown above may not be representative of the pro forma effect of SFAS No. 123 in future years.
The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following weighted average assumptions.
2005 | 2004 | |||||
Option Plans: | ||||||
Dividends | — | — | ||||
Expected term | 2 –7 years | 2 –7 years | ||||
Risk free interest rate | 2.7 | % | 2.5 | % | ||
Volatility rate | 37.5 | % | 39.2 | % |
The following table shows the weighted average fair value of options using the fair value approach under SFAS 123:
2005 | 2004 | |||||
Weighted average fair value of options granted during the Quarter ended November 30 | $ | 9.58 | $ | 6.44 |
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NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. | BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION: |
Management believes that the Company is operating in a single business segment, distribution of electronic components, in accordance with the rules of SFAS No. 131 (“Disclosure About Segments of an Enterprise and Related Information”).
Although the Company’s business is primarily conducted in the United States, operations are also carried out overseas through its foreign subsidiaries in different geographic areas.
Revenues, by geographic area, for the first nine months of each of our last two fiscal years are as follows:
November 30, 2005 | November 30, 2004 | |||||
Americas | $ | 295,002,000 | $ | 269,288,000 | ||
Europe | 12,815,000 | 10,174,000 | ||||
Asia/Pacific | 89,383,000 | 74,165,000 | ||||
$ | 397,200,000 | $ | 353,627,000 | |||
Total assets, by geographic area, for the third quarter ended in each of our last two fiscal years are as follows:
November 30, 2005 | November 30, 2004 | |||||
Americas | $ | 148,241,000 | $ | 144,535,000 | ||
Europe | 8,923,000 | 7,326,000 | ||||
Asia/Pacific | 53,595,000 | 47,729,000 | ||||
$ | 210,759,000 | $ | 199,590,000 | |||
Long lived assets (net), by geographic area, for the third quarter ended in each of our last two fiscal years are as follows:
November 30, 2005 | November 30, 2004 | |||||
Americas | $ | 3,255,000 | $ | 3,777,000 | ||
Europe | 30,000 | 33,000 | ||||
Asia/Pacific | 474,000 | 294,000 | ||||
$ | 3,759,000 | $ | 4,104,000 | |||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The financial information presented herein includes: (i) Consolidated Condensed Balance Sheets as of November 30, 2005 and February 28, 2005; (ii) Consolidated Condensed Statements of Operations for the three and nine month periods ended November 30, 2005 and 2004 and (iii) Consolidated Condensed Statements of Cash Flows for the nine month periods ended November 30, 2005 and 2004.
Overview:
Nu Horizons Electronics Corp. (the “Company”) and its wholly-owned subsidiaries, NIC Components Corp. (“NIC”), NUHC Inc., Nu Horizons International Corp., Nu Horizons Electronics Asia PTE LTD, Nu Horizons Electronics Hong Kong Limited, Nu Horizons Electronics Europe Limited, Titan Supply Chain Services Corp., Titan Supply Chain Services LTD PTE and Titan Supply Chain Services Limited and its majority owned subsidiaries NIC Components Asia PTE LTD (“NIA”) and NIC Components Europe Limited (“NIE”), are engaged in the distribution of high technology active and passive electronic components to a wide variety of original equipment manufacturers (“OEMs”) of electronic products. Active components distributed by the Company include semiconductor products such as memory chips, microprocessors, digital and linear circuits, microwave/RF and fiberoptic components, transistors and diodes. Passive components distributed by NIC, NIA and NIE, principally to OEMs and other distributors nationally, consist of a high technology line of chip and leaded components including capacitors, resistors and related networks.
Commencing in the second half of calendar 2003, the electronics manufacturing and the electronics distribution industries in which the Company operates began to experience double digit sequential and year over year increases in sales dollar volume. Additionally, there have been recent consolidations in the electronics distribution industry, resulting in greater market share for certain of the remaining companies. Management believes that, although the marketplace continues to afford poor near term visibility, the sales dollar volume improvement in the components market worldwide should continue through fiscal 2006, although at a single digit rate. The increase in sales volume has been accompanied by continued downward margin pressures, primarily due to the industry shift to production in Asia.
Prior to the industry sales volume increases, the Company adopted a strategy of maintaining its infrastructure and investing in personnel. Recognizing the industry shift to overseas production, the Company significantly increased its Asian operations. The Company also took advantage of the recent industry consolidation by hiring a significant number of additional sales and engineering personnel and adding to its line card. This strategy has yielded positive results to date. Sales in Asia increased almost 20% for the first nine months of fiscal 2006 over 2005, while sales in the U.S. increased by 10%. Nevertheless, the Company’s book to bill ratio, company wide, remains positive. Year over year and quarter over quarter compared to the prior period the Company has increased market share with all of its major suppliers for both the semiconductor and passive component businesses.
For the nine months ended November 30, 2005, net sales increased to $397,200,000 from $353,627,000 for the prior year period with net income of $2,795,000 or $.16 per basic and diluted share as compared to a net income of $2,957,000 or $.18 per basic and $.17 per diluted share in the prior year period. For the quarter ended November 30, 2005, net sales increased to $147,515,000 from $116,219,000 for the prior year quarter with net income of $1,500,000 or $.09 per basic share and $.08 per diluted share as compared to $585,000 or $.03 per basic and diluted share in last year’s third quarter.
The following table sets forth for the nine months and quarters ended November 30, 2005 and 2004, certain items in the Company’s consolidated statements of operations expressed as a percentage of net sales.
Nine Months Ended Nov. 30, | Three Months Ended Nov. 30 | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 84.0 | 83.4 | 84.2 | 83.3 | ||||||||
Gross profit | 16.0 | 16.6 | 15.8 | 16.7 | ||||||||
Operating expenses | 14.3 | 14.7 | 13.6 | 15.2 | ||||||||
Interest expense | .5 | .4 | .5 | .5 | ||||||||
Interest (income) | — | — | — | — | ||||||||
Income before taxes | 1.2 | 1.5 | 1.7 | 1.0 | ||||||||
Income tax provision | .5 | .6 | .7 | .4 | ||||||||
Income after taxes, before minority interests | .8 | .9 | 1.0 | .6 | ||||||||
Minority interests | .1 | .1 | — | .1 | ||||||||
Net income | .7 | .8 | 1.0 | .5 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued):
Critical Accounting Policies and Estimates
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company evaluates its estimates, including those related to bad debts, inventories, income taxes, litigation and other contingencies, on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements:
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). Under SAB 104, revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured. The Company recognizes revenues at time of shipment of its products and sales are recorded net of discounts and returns.
The Company maintains allowances for doubtful accounts for estimated bad debts. Our estimate of the allowances needed is based on our past history of collections of accounts receivable from our customers. This history has shown that we have always provided sufficient allowances in prior periods. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required thereby reducing our operating income. For example, at November 30, 2005, each additional 1% accounts receivable allowance would reduce operating income by approximately $950,000.
Inventories are recorded at the lower of cost or market. Write-downs of inventories to market value are based upon product franchise agreements governing price protection, stock rotation and obsolescence, as well as assumptions about future demand and market conditions. In prior periods, reserves required for obsolescence were not material to our financial statements. If assumptions about future demand/or actual market conditions are less favorable than those projected by management, additional write-downs of inventories could be required. For example, at November 30, 2005, each additional 1% obsolescent inventory that could not be returned under our many distributor franchise agreements would reduce operating income by approximately $900,000.
Results of Operations:
Sales for the nine month period ended November 30, 2005 were $397,200,000 as compared to $353,627,000 for the comparable period of the prior year, an increase of $43,573,000 or 12.3%. Sales for the three month period ended November 30, 2005 were $147,515,000 as compared to $116,219,000 for the comparable period of the prior year, an increase of $31,295,000 or 26.9%. Sequentially, sales for the current three month period increased to $147,515,000 from $128,265,000 for the quarter ended August 31, 2005, an increase of approximately $19,249,000 or 15.0%. Management believes that this sales increase is primarily due to increased market share resulting from the industry consolidation, its increased sales personnel and the expansion of its line card and customer base. The unknown near term visibility in the electronics manufacturing and the electronics distribution industries makes it difficult for management to estimate the Company’s overall sales volume and earnings for the balance of this fiscal year and the early part of the next fiscal year.
The gross profit margin for the nine months and quarter ended November 30, 2005 was 16.0% and 15.8%, respectively, as compared to 16.6% for the nine month period and 16.7% for the three month period ended November 30, 2005. Management believes that the increased gross margin pressure experienced in the first three quarters of fiscal 2006 resulted from a change in the Company’s product mix and increased order size, coupled with increased sales in the Asian market which requires lower selling prices due to volume demand from large Asian contract manufacturers. Margin pressures appear to have stabilized during the first three quarters of fiscal 2006 and management believes that margins will not continue to decline; however, no assurances can be given in this regard.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued):
Operating expenses increased to $56,608,000 for the nine month period ended November 30, 2005 from $52,122,000 for the nine months ended November 30, 2004, an increase of $4,486,000 or 8.6%. Operating expenses increased to $20,054,000 for the three months ended November 30, 2005 from $17,687,000 for the three month period ended November 30, 2004, an increase of $2,367,000 or 13.4%. The dollar increase in operating expenses was due to increases in the following expense categories; Approximately $3,964,000 or 88.4% of the increase for the nine month period was for personnel related costs such as bonuses, commissions, salaries, travel and fringe benefits, in each case primarily related to new hires to support expanded supplier relationships. Approximately $225,000 or 5.0% of the increase was for professional fees and $256,000 or 5.7% was an increase in our bad debt expense. For the three months period ended November 30, 2005 approximately $2,369,000 or 100% of the increase was for personnel related expenses of the type described above. The increase in professional fees for the nine month period was due to additional fees for compliance with the Sarbanes Oxley Act, as well as legal fees. Management anticipates that the ongoing cost of compliance with the Sarbanes Oxley Act will be at the rate of approximately $75,000 per quarter.
Interest expense increased to $2,107,000 for the nine months ended November 30, 2005 from $1,355,000 for the nine months ended November 30, 2004 and to $715,000 for the three months ended November 30, 2005 from $570,000 for the three month period ended November 30, 2004. This increase in interest expense for the current periods resulted from greater bank borrowings incurred to support an increase in accounts receivable and inventory levels, as well as the effect of increased interest rates on those borrowings in the current periods.
Net income for the nine month period ended November 30, 2005 was $2,795,000 or $.16 per basic and diluted share as compared to net income of $2,957,000 or $.18 per basic share and $.17 per diluted share for the nine month period ended November 30, 2004. Management attributes the decrease in earnings for the nine month period to an aggregate increase in both operating and interest expenses greater than the increase in gross margin dollars. Net income for the three month period ended November 30, 2005 was $1,500,000 or $.09 per basic share and $.08 per diluted share as compared to a net income of $585,000 or $.03 per basic and diluted share for the three month period ended November 30, 2004. Management attributes the increase in earnings for the third quarter of fiscal 2006 to the increase in sales providing an increase in gross margin dollars greater than the increases in operating and interest expenses.
Liquidity and Capital Resources:
At November 30, 2005, the Company’s current ratio was 5.7:1 as compared to 6.9:1 at February 28, 2005. Working capital increased to $167,848,000 at November 30, 2005 from $145,485,000 at February 28, 2005, while cash increased by $5,774,000 from February 28, 2005 to $12,798,000 at November 30, 2005. The increase in working capital resulted from the increase in accounts receivable and inventory required to sustain the increase in the Company’s sales volume net of the increase in accounts payable.
On September 30, 2004, the Company entered into a secured revolving line of credit agreement, as amended, with eight banks, which currently provides for maximum borrowings of $100,000,000. On November 21, 2005, the Company entered into an amendment to the credit agreement to provide for borrowings utilizing an asset based formula predicated on a certain percentage of outstanding domestic accounts receivable and inventory levels at any given month end. Borrowings under the credit line bear interest at either (i) the lead bank’s prime rate or (ii) LIBOR plus 175 basis points, at the option of the Company, through September 29, 2008, the due date of the loan. Direct borrowings under the line of credit were $39,300,000 at November 30, 2005 and $22,800,000 at February 28, 2005. As of the end of each of the fiscal periods, the Company had met all of the required bank covenants.
The Company anticipates that cash from operations, together with borrowings under its line of credit agreement, as described above, will be sufficient to finance its operations for at least the next twelve-month period.
Inflationary Impact:
Since the inception of operations, inflation has not significantly affected the operating results of the Company. However, inflation and changing interest rates have had a significant effect on the economy in general and therefore could affect the operating results of the Company in the future.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued):
Forward Looking Statement Disclaimer:
Except for historical information contained herein, the matters set forth above may be forward-looking statements. Such forward-looking statements are based on the current beliefs of the Company’s management. Certain risks and uncertainties could cause actual results to differ from those in the forward-looking statements. Potential risks and uncertainties include such factors as those described under Risk Factors below. The Company does not undertake any obligation to update its forward looking statements.
Risk Factors:
A large portion of the Company’s revenues come from sales of semiconductors, which is a highly cyclical industry, and an industry down-cycle could significantly affect the Company’s operating results.
The semiconductor industry historically has experienced periodic fluctuations in product supply and demand, often associated with changes in technology and manufacturing capacity, and is generally considered to be highly cyclical. According to the Semiconductor Industry Association, the semiconductor industry experienced its worst annual downturn in history with revenue from worldwide semiconductor sales estimated to have fallen by approximately 50% from calendar 2000 to 2001. The Company’s revenues closely follow the strength or weakness of the semiconductor market. The Company’s total sales of electronic components in fiscal years 2005, 2004, 2003, 2002 and 2001 were $467,000,000, $346,000,000, $302,000,000, $282,000,000 and $634,000,000 respectively. Although the Company’s sales have recently shown signs of an industry upturn, a technology industry downcycle, particularly in the semiconductor sector, could negatively affect the Company’s operating results in the future.
The Company’s revenues and profitability have declined significantly from historical highs and, although revenues have shown stability in recent quarters, the Company may be unable to achieve acceptable profitability at levels experienced in the past.
The Company’s operations have been significantly and negatively affected in the past by the downturn in the technology industry and the general economy. From a high of approximately $191 million in sales in the fiscal quarter ended November 2000, the Company’s sales stabilized in the $70 to $80 million range per quarter for eight quarters. In the four quarters ended February 28, 2005, the Company’s revenues showed signs of a return to stability with sequential revenues of $118,000,000, $119,000,000, $116,000,000 and $114,000,000. The three most recent quarters ended November 30, 2005 have shown signs of a return to top line growth with sequential sales of $121,000,000, $128,000,000 and $147,000,000. Nevertheless, the Company has not yet been able to achieve consistent profitability at a level deemed acceptable to management. The Company has determined to increase its sales force in an attempt to increase sales and profitability. In the event that this strategy is unsuccessful, the Company may need to adopt cost-cutting measures which may include restructuring and other charges.
If the Company were unable to maintain its relationships with key suppliers, it could adversely affect the Company’s sales.
In fiscal 2005, sales of products and services from each of three suppliers exceeded 10% of the Company’s inventory on a consolidated basis. As a result, in the event that those suppliers are not willing to do business with the Company in the future on terms acceptable to the Company, the loss of these suppliers could materially adversely affect the Company’s business, results of operations, financial condition or liquidity. If any of these industry leading suppliers was unwilling to do business with the Company, the Company’s relationships with its customers could be materially adversely affected because the Company’s customers depend on the Company’s distribution of electronic components and computer products from the industry’s leading suppliers.
Declines in the value of the Company’s inventory could materially adversely affect the Company’s business, results of operations, financial condition or liquidity.
The electronic components and computer products industry is subject to rapid technological change, new and enhanced products and evolving industry standards, which can contribute to decline in value or obsolescence of inventory. During an economic downturn it is possible that prices will decline due to an oversupply of product and, therefore, there may be greater risk of
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued):
declines in inventory value. Although it is the policy of many of the Company’s suppliers to offer distributors like the Company certain protections from the loss in value of inventory (such as price protection, limited rights of return and rebates), the Company cannot assure you that such return policies and rebates will fully compensate it for the loss in value, or that the vendors will choose to, or be able to, honor such agreements. The Company cannot assure you that unforeseen new product developments or declines in the value of its inventory will not materially adversely affect its business, results of operations, financial condition or liquidity, or that the Company will successfully manage its existing and future inventories.
Substantial defaults by the Company’s customers on the Company’s accounts receivable could have a significant negative impact on the Company’s business, results of operations, financial condition or liquidity.
A significant portion of the Company’s working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, the Company’s business, results of operations, financial condition or liquidity could be adversely affected.
The electronics component and computer industries are highly competitive and if the Company cannot effectively compete, its revenues may decline.
The market for the Company’s products and services is very competitive and subject to rapid technological advances. Not only does the Company compete with other distributors, it also competes for customers with some of its own suppliers. The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects.
The sizes of the Company’s competitors vary across market sectors, as do the resources the Company has allocated to the sectors in which it does business. Therefore, some of the competitors may have greater financial, personnel, capacity and other resources than the Company has in one or more of its market sectors. As a result, the Company’s competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements.
The Company’s non-U.S. locations represent a significant and growing portion of its revenue, and consequently, the Company is increasingly exposed to risks associated with operating internationally.
In fiscal 2005, approximately 24% of the Company’s sales came from its operations outside the United States. During fiscal 2004, 2003 and 2002 approximately 18.5%, 8% and 11.8% of sales, respectively, were from locations outside the United States. Most notable in this growth of non-U.S. sales is the increasing volume of sales activity in the Asia region, which accounted for approximately 21.4% of consolidated sales in fiscal 2005 and 22.5% for the first nine months of fiscal 2006. As a result of the Company’s foreign sales and locations, its operations are subject to a variety of risks that are specific to international operations, including the following:
• | potential restrictions on transfers of funds; |
• | foreign currency fluctuations; |
• | import and export duties and value added taxes; |
• | import and export regulation changes that could erode profit margins or restrict exports; |
• | changing foreign tax laws and regulations; |
• | potential military conflicts; |
• | inflexible employee contracts in the event of business downturns; and |
• | the burden and cost of compliance with foreign laws. |
Manufacturing of electronic component and computer products is increasingly shifting to lower-cost production facilities in Asia, and most notably the People’s Republic of China. The Company’s business and prospects have been and could continue to be adversely affected by the shift to the Asian marketplace. In addition, the Company has operations in several locations in emerging or developing economies that have a potential for higher risk.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of the Company’s bank debt and the associated interest expense are sensitive to changes in the level of interest rates. The Company’s credit facility bears interest based on interest rates tied to the bank’s prime rate or LIBOR rate, either of which may fluctuate over time based on economic conditions. A hypothetical 100 basis point (one percentage point) increase in interest rates would have resulted in incremental interest expense of approximately $100,000 for the three month period ended November 30, 2005. As a result, the Company is subject to market risk for changes in interest rates and could be subjected to increased or decreased interest payments if market rates fluctuate and the Company is in a borrowing mode.
The Company has several foreign subsidiaries in Asia, the United Kingdom and Canada. The Company does business in more than one dozen countries and currently generates approximately 26% of its revenues from outside North America. The Company’s ability to sell its products in foreign markets may be affected by changes in economic, political or market conditions in the foreign markets in which the Company does business.
The Company’s total assets in its foreign subsidiaries was $62.5 million and $55.1 million at November 30, 2005 and 2004 respectively, translated into US dollars at the closing exchange rates. The Company also acquires certain inventory from foreign suppliers and as such, faces risk due to adverse movements in foreign currency exchange rates. These risks could have a material impact on the Company’s results in future periods. The potential loss based on end of period balances and prevailing exchange rates resulting from a hypothetical 10% strengthening of the dollar against foreign currencies was not material in the quarter ended November 30, 2005. The Company does not currently employ any currency derivative instruments, futures contracts or other currency hedging techniques to mitigate its risks in this regard.
The electronic component industry is cyclical which can cause significant fluctuations in sales, gross profit margins and profits, from year to year. For example, during calendar 2001, the industry experienced a severe decline in the demand for electronic components, which caused sales to decrease by 56%. The prior year reflected a 74% increase in net sales. It is difficult to predict the timing of the changing cycles in the electronic component industry.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The management of the Company, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective, as of November 30, 2005 (the end of the period covered by this Quarterly Report on Form 10-Q).
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting includes those policies and procedures that:
• | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and |
• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements |
Management’s assessment of internal control over financial reporting used the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment and the criteria set forth by COSO, management believes that Nu Horizons maintained effective internal control over financial reporting as of February 28, 2005.
There were no changes in the Company’s internal control over financial reporting during the period covered by this report.
Inherent Limitations on Effectiveness of Controls
The Company’s system of internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
All internal control systems, no matter how well designed and operated, can provide only reasonable assurance with respect to financial statement preparation and presentation. Management does not expect that the Company’s disclosure controls and procedures will prevent all error and fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected, even with respect to those systems of internal control that are determined to be effective. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company’s system contains self monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company’s chief executive officer and chief financial officer have concluded that such disclosure controls and procedures are effective at the “reasonable assurance” level.
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ITEM 1. Legal Proceedings
There are no material legal proceedings against the Company or in which any of their property is subject.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) | The Registrant held its Annual Meeting of Stockholders on November 14, 2005. The following proposals were adopted by the votes indicated. | |||||
(b) (c) (1) | Two directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2008. The names of the Directors elected and votes cast in favor of their election and shares withheld are as follows: | |||||
NAME | VOTES FOR | VOTES WITHHELD | ||||
Arthur Nadata | 13,154,656 | 1,924,720 | ||||
Martin Novick | 13,144,751 | 1,934,625 | ||||
(2) | Amendments to the 2002 Key Employee Stock Option Plan were adopted by the following vote: | |||||
Votes For | Votes Against | Votes Withheld | ||||
9,797,860 | 2,091,790 | 55,043 |
ITEM 5. Other Information
None
ITEM 6. Exhibits:
31.1 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Nu Horizons Electronics Corp. | ||
Registrant | ||
Date: January 9, 2006 | /s/ Arthur Nadata | |
Arthur Nadata Chairman and CEO | ||
Date: January 9, 2006 | /s/ Paul Durando | |
Paul Durando, Vice President-Finance | ||
and Chief Financial Officer |
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