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Table of Contents

 

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 August 31, 2004
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 checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

Indicated the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2004.

 

Common Stock - Par Value $.0066   16,884,147
Class   Outstanding Shares

 



Table of Contents

NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES

INDEX

 

        Page(s)

Part I.   Financial Information    
    Item 1.   Financial Statements    
        Consolidated Condensed Balance Sheets -
August 31, 2004 (unaudited) and February 29, 2004
  3.
        Consolidated Condensed Statements of Operations (unaudited) -
Six and Three Months Ended August 31, 2004 and 2003
  4.
        Consolidated Condensed Statements of Cash Flows (unaudited) -
Six Months Ended August 31, 2004 and 2003
  5.
        Notes to Interim Consolidated Condensed Financial Statements (unaudited)   6.-9.
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   10 - 16.
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk   16.
    Item 4.   Controls and Procedures   16.
Part II.   Other Information   17.
    Item 4   Submission of Matters to a Vote of Security Holders   17.
    SIGNATURES   18.
Exhibit Index    


Table of Contents

PART 1. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

NU HORIZONS ELECTRONICS CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

    

August 31,

2004


   

February 29,

2004


 
     (unaudited)        
ASSETS                 
CURRENT ASSETS:                 

Cash and cash equivalents

   $ 10,230,728     $ 12,469,973  

Accounts receivable - net of allowance for doubtful accounts of $4,621,311 and $4,089,801 for August 31, 2004 and February 29, 2004, respectively

     70,557,912       68,230,405  

Inventories

     116,618,873       68,729,081  

Prepaid expenses and other current assets

     1,528,897       794,086  
    


 


TOTAL CURRENT ASSETS      198,936,410       150,223,545  

PROPERTY, PLANT AND EQUIPMENT - NET

     4,214,669       4,401,898  

OTHER ASSETS:

                

Subordinated note receivable

     2,000,000       2,000,000  

Other assets

     1,660,138       1,552,728  
    


 


     $ 206,811,217     $ 158,178,171  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

CURRENT LIABILITIES:

                

Accounts payable

   $ 28,121,860     $ 21,479,465  

Accrued expenses

     4,196,978       5,250,006  
    


 


TOTAL CURRENT LIABILITIES

     32,318,838       26,729,471  
    


 


LONG TERM LIABILITIES:

                

Revolving credit line

     46,100,000       5,300,000  

Deferred income taxes

     390,566       280,495  
    


 


TOTAL LONG-TERM LIABILITIES

     46,490,566       5,580,495  
    


 


MINORITY INTEREST IN SUBSIDIARIES

     1,678,554       1,465,662  
    


 


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; 16,884,147 and 16,859,766 shares issued and outstanding for August 31, 2004 and February 29, 2004, respectively

     111,435       111,275  

Additional paid-in capital

     44,054,608       43,934,877  

Retained earnings

     83,022,715       80,650,760  

Other accumulated comprehensive income (loss)

     (865,499 )     (294,369 )
    


 


TOTAL SHAREHOLDERS’ EQUITY

     126,323,259       124,402,543  
    


 


     $ 206,811,217     $ 158,178,171  
    


 


 

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 Six Months Ended

    For the Three Months Ended

 
     August 31, 2004

    August 31, 2003

    August 31, 2004

    August 31, 2003

 

NET SALES

   $ 237,407,958     $ 152,768,252     $ 119,231,880     $ 79,965,110  
    


 


 


 


COSTS AND EXPENSES:

                                

Cost of sales

     198,054,472       124,341,742       99,493,834       65,570,341  

Operating expenses

     34,434,691       30,755,068       17,250,611       15,401,486  

Interest expense

     785,686       77,588       452,992       57,066  

Interest income

     (29,919 )     (101,217 )     (26,188 )     (92,313 )
    


 


 


 


       233,244,930       155,073,181       117,171,249       80,936,580  
    


 


 


 


INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS

     4,163,028       (2,304,929 )     2,060,631       (971,470 )

Provision (credit) for income taxes

     1,578,181       (1,017,601 )     787,413       (432,497 )
    


 


 


 


INCOME (LOSS) BEFORE MINORITY INTERESTS

     2,584,847       (1,287,328 )     1,273,218       (538,973 )

Minority interest in earnings of subsidiaries

     212,892       166,895       87,181       83,879  
    


 


 


 


NET INCOME (LOSS)

   $ 2,371,955     $ (1,454,223 )   $ 1,186,037     $ (622,852 )
    


 


 


 


NET INCOME (LOSS) PER COMMON SHARE:

                                

Basic

   $ .14     $ (.09 )   $ .07     $ (.04 )
    


 


 


 


Diluted

   $ .13     $ (.09 )   $ .07     $ (.04 )
    


 


 


 


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

                                

Basic

     16,884,147       16,678,093       16,884,147       16,681,145  

Diluted

     17,875,443       16,678,093       17,663,839       16,681,145  

 

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 Six Months Ended

 
     August 31, 2004

    August 31, 2003

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:

                

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Cash received from customers

   $ 235,008,240     $ 142,456,668  

Cash paid to suppliers and employees

     (276,215,110 )     (146,331,308 )

Interest received

     29,919       101,217  

Interest paid

     (785,686 )     (77,588 )

Income taxes paid

     (189,028 )     (30,000 )
    


 


Net cash (used in) operating activities

     (42,151,665 )     (3,881,011 )
    


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                

Capital expenditures

     (436,341 )     (214,833 )
    


 


Net cash (used in) investing activities

     (436,341 )     (214,833 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                

Net borrowings under revolving credit line

     40,800,000       —    

Proceeds from exercise of stock options

     119,891       66,157  
    


 


Net cash provided by financing activities

     40,919,891       66,157  
    


 


EFFECT OF EXCHANGE RATE CHANGE

     (571,130 )     71,512  
    


 


NET (DECREASE) IN CASH AND CASH EQUIVALENTS

     (2,239,245 )     (3,958,175 )

Cash and cash equivalents, beginning of year

     12,469,973       31,345,616  
    


 


CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 10,230,728     $ 27,387,441  
    


 


RECONCILIATION OF NET INCOME (LOSS) TO NET CASH (USED IN) OPERATING ACTIVITIES:

                

NET INCOME (LOSS)

   $ 2,371,955     $ (1,454,223 )

Adjustments:

                

Depreciation and amortization

     623,570       661,438  

Provision for bad debts

     72,211       (80,128 )

Contribution to ESOP

     —         5,446  

Changes in assets and liabilities:

                

(Increase) in accounts receivable

     (2,399,718 )     (10,311,584 )

(Increase) decrease in inventories

     (47,889,792 )     2,430,878  

(Increase) decrease in prepaid expenses and other current assets

     (734,812 )     941,744  

(Increase) in other assets

     (107,410 )     (17,040 )

Increase in accounts payable and accrued expenses

     5,589,368       3,775,563  

Increase in income taxes

     212,892       —    

Increase in minority interest

     110,071       166,895  
    


 


NET CASH (USED) BY OPERATING ACTIVITIES

   $ (42,151,665 )   $ (3,881,011 )
    


 


 

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 Asia PTE LTD, Nu Horizons Electronics Hong Kong Limited, Nu Horizons Europe Limited, Titan Supply Chain Services Corp. and Titan Supply Chain Services PTE LTD and its majority owned subsidiaries, NIC Components Asia PTE LTD and NIC Components Europe Limited, contain all adjustments necessary to present fairly the Company’s financial position as of August 31, 2004 and February 29, 2004 and the results of its operations for the six and three month periods ended August 31, 2004 and 2003, and its cash flows for the six month periods ended August 31, 2004 and 2003.

 

See Note 3 regarding the sale of the net assets of the Company’s majority-owned subsidiary, Nu Visions Manufacturing, Inc.

 

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 29, 2004, 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 six-month period ended August 31, 2004 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:

 

     August 31, 2004

   February 29, 2004

Furniture, fixtures and office equipment

   $ 8,459,402    $ 8,185,446

Computer equipment

     6,122,113      5,993,016

Leasehold improvements

     1,254,364      1,254,364
    

  

       15,835,879      15,432,826

Less: accumulated depreciation and amortization

     11,621,210      11,030,928
    

  

     $ 4,214,669    $ 4,401,898
    

  

 

3. JUNIOR SUBORDINATED NOTE:

 

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. BANK LINES OF CREDIT:

 

On September 4, 2003, the Company entered into a secured revolving line of credit, as amended, with three banks which provides for maximum borrowings of $51,500,000 at either (i) the lead bank’s prime rate or (ii) LIBOR plus 100 to 275 basis points, depending on the ratio of the Company’s liabilities to its tangible net worth, at the option of the Company through September 4, 2007. Direct borrowings under the line of credit were $46,100,000 at August 31, 2004 and $5,300,000 at February 29, 2004. As of the end of the reporting period, the Company had met all of the required covenants.

 

On September 30, 2004, subsequent to the balance sheet date, the Company entered into a new secured revolving credit agreement with eight banks which provides for maximum borrowings of $100,000,000 at either (i) the lead bank’s prime rate or (ii) LIBOR plus 100 to 275 basis points, depending on the ratio of the Company’s liabilities to its tangible net worth, at the option of the Company through September 29, 2008.

 

5. NET INCOME PER SHARE:

 

Earnings per share has been computed in accordance with the provisions of SFAS No. 128. The following table sets forth the components of basic and diluted earnings per share:

 

     For the Six Months Ended

    For the Three Months Ended

 
     August 31, 2004

   August 31, 2003

    August 31, 2004

   August 31, 2003

 

NUMERATOR:

                              

Net income (loss)

   $ 2,371,955    $ (1,454,223 )   $ 1,186,037    $ (622,852 )
    

  


 

  


DENOMINATOR

                              

Basic earnings per common share – weighted-average number of common shares outstanding

     16,884,147      16,678,093       16,884,147      16,681,145  

Effect of dilutive stock options

     991,296        *     779,692        *
    

  


 

  


Diluted earnings per common share – adjusted weighted-average number of common shares outstanding

     17,875,443      16,678,093       17,663,839      16,681,145  
    

  


 

  



* 477,000 stock options for the August 31, 2003 six month period and 611,508 stock options for the August 31, 2003 three month period are not included in the calculation of diluted earnings per share since, due to the loss in each period, they are anti-dilutive.

 

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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 its stock-based compensation using the intrinsic value method provided for under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB No. 25 and related interpretations, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. SFAS No. 123, “Accounting for Stock Based Compensation” (as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB Statement No. 123”), establishes a fair-value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure-only alternative under SFAS No. 123, which requires the disclosure of the pro forma effects on net income (loss) per share as if the fair value accounting prescribed by SFAS No. 123 had been adopted. Compensation expense related to stock options granted to non-employees is accounted for under SFAS 148, whereby compensation expense is recognized over the vesting period based on the fair value of the options on the date of grant.

 

No stock-based employee compensation cost is reflected in net income (loss), as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on net income (loss) per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based compensation.

 

     August 31, 2004

   August 31, 2003

 

Net income (loss):

               

As reported

   $ 2,371,955    $ (1,454,223 )

Pro forma

     2,050,643      (1,854,791 )

Basic earnings per share:

               

As reported

   $ .14    $ (.09 )

Pro forma

   $ .12    $ (.11 )

Diluted earnings per share:

               

As reported

   $ .13    $ (.09 )

Pro forma

   $ .11    $ (.11 )

 

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the six months ended August 31, 2004, and August 31, 2003, respectively: expected volatility of 39.2% and 40.0%, respectively; risk free interest rate of 2.5% and 4.0%, respectively; and expected lives of 2 to 7 years.

 

The effects of applying SFAS 123 in the above pro forma disclosures are not indicative of future amounts, as they are likely to be affected by the number of grants awarded since additional awards are generally expected to be made at varying amounts.

 

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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 six months of each of our last two fiscal years are as follows:

 

     August 31, 2004

   August 31, 2003

Americas

   $ 183,802,000    $ 129,026,000

Europe

     4,419,000      2,260,000

Asia/Pacific

     49,187,000      21,482,000
    

  

     $ 237,408,000    $ 152,768,000
    

  

 

Total assets, by geographic area, for the second quarter ended in each of our last two fiscal years are as follows:

 

     August 31, 2004

   August 31, 2003

Americas

   $ 141,303,000    $ 116,811,000

Europe

     7,829,000      1,863,000

Asia/Pacific

     57,680,000      31,976,000
    

  

     $ 206,812,000    $ 150,650,000
    

  

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

Introduction:

 

Nu Horizons Electronics Corp. (the “Company”) and its wholly-owned subsidiaries, NIC Components Corp. (“NIC”), NUHC Inc. (“NUC”), Nu Horizons International Corp. (“International”), Nu Horizons Asia PTE LTD (“NUA”), Nu Horizons Electronics Hong Kong Limited (“NHK”), Nu Horizons Europe Limited (“NUE”), Titan Supply Chain Services Corp. (“TLC”) and Titan Supply Chain Services LTD PTE (“TSC”), 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, consists of a high technology line of chip and leaded components including capacitors, resistors and related networks.

 

The financial information presented herein includes: (i) Consolidated Condensed Balance Sheets as of August 31, 2004 and February 29, 2004; (ii) Consolidated Condensed Statements of Operations for the six and three month periods ended August 31, 2004 and 2003 and (iii) Consolidated Condensed Statements of Cash Flows for the six month periods ended August 31, 2004 and 2003.

 

Overview:

 

The electronics manufacturing and the electronics distribution industries suffered one of the most severe downturns in the industries’ history beginning in calendar 2001 and continuing through most of calendar 2003. This downturn was marked by an oversupply of components, excess manufacturing capacity and a significant decline in the demand for electronic components. However, during the second half of calendar 2003 there was industry wide double digit sequential and year over year increases in sales dollar volume, albeit accompanied by continued downward margin pressures. Management believes that this improvement in the components market worldwide will continue, although at a more modest rate. The Company’s strategy of maintaining its infrastructure and investing during the electronic industry’s severe downturn has yielded positive results. Sales in Asia increased almost 200% from fiscal 2003 to 2004 and the Company’s book to bill ratio, company wide, remains positive. Year over year and quarter over quarter the Company has increased market share with all of its major suppliers for both the semiconductor and passive component businesses.

 

For the quarter ended August 31, 2004, net sales increased to $119,232,000 from $79,965,000 for the prior year quarter with net income of $1,186,000 or $.07 per basic and diluted share as compared to a loss of $623,000 or $.04 per basic and diluted share in last year’s second quarter. For the six months ended August 31, 2004, net sales increased to $237,408,000 from $152,768,000 for the prior year period with net income of $2,372,000 or $.14 per basic share and $.13 per diluted share as compared to a net loss of $1,454,000 or $.09 per basic and diluted share in the prior year period. The Company believes that the industry is in recovery mode and that Nu Horizons should continue to participate in the benefits of this increased demand.

 

For an understanding of the significant factors that influenced the company’s performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and other information appearing elsewhere in this quarterly report on Form 10-Q.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

Overview (continued):

 

The following table sets forth for the years ended February 2004, 2003 and 2002, certain items in the Company’s consolidated statements of operations expressed as a percentage of net sales.

 

     Years Ended February

 
     2004

    2003

    2002

 

Net sales

   100.0 %   100.0 %   100.0 %

Cost of sales

   82.4     81.7     78.6  

Gross profit

   17.6     18.3     21.4  

Operating expenses

   18.1     19.0     21.4  

Impairment of goodwill

   0.0     0.0     0.4  

Interest expense

   0.0     0.0     0.5  

Interest (income)

   (0.1 )   0.0     0.0  

(Loss) before taxes

   (0.4 )   (0.8 )   (1.0 )

Income tax provision (benefit)

   (0.2 )   (0.2 )   (0.2 )

(Loss) after taxes, before minority interests

   (0.2 )   (0.6 )   (0.8 )

Minority interests

   0.1     0.2     0.2  

Discontinued operations

   0.0     0.0     1.8  

Net income (loss)

   (0.2 )   (0.8 )   0.8  

 

The following table sets forth for the six months and quarters ended August 31, 2004 and 2003, certain items in the Company’s consolidated statements of operations expressed as a percentage of net sales.

 

    

Six Months Ended

Aug. 31,


   

Three Months Ended

Aug. 31


 
     2004

    2003

    2004

    2003

 

Net sales

   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

   83.4     81.4     83.4     82.0  

Gross profit

   16.6     18.6     16.6     18.0  

Operating expenses

   14.5     20.1     14.5     19.3  

Interest expense

   .3     .1     .4     .1  

Interest (income)

   —       (.1 )   —       (.1 )

Income (loss) before taxes

   1.8     (1.5 )   1.7     (1.2 )

Income tax provision (benefit)

   .7     (.7 )   .7     (.5 )

Income (loss) after taxes, before minority interests

   1.1     (.8 )   1.1     (.7 )

Minority interests

   .1     .1     .1     .1  

Net income (loss)

   1.0     (.9 )   1.0     (.8 )

 

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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

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 collectibility 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. 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.

 

  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. If assumptions about future demand/or actual market conditions are less favorable than those projected by management, write-downs of inventories could be required.

 

Results of Operations:

 

Sales for the six-month period ended August 31, 2004 were $237,408,000 as compared to $152,768,000 for the comparable period of the prior year, an increase of $84,640,000 or 55.4%. Sales for the three-month period ended August 31, 2004 were $119,232,000 as compared to $79,965,000 for the comparable period of the prior year, an increase of $39,267,000 or 49.1%. The substantial year over year sales gains, for both quarters being reported, can be attributed to the general double digit recovery experienced by the semiconductor industry in general over the past twelve months. Management attributes the relatively flat sequential second quarter fiscal 2005 sales performance as compared to the first quarter to a seasonal pause. Management believes that the industry growth rate in the near term will be in single digits. The marketplace continues to afford poor near term visibility, which 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 quarter and six months ended August 31, 2004 was 16.6% as compared to 18.0% for the quarter ended August 31, 2003 and 18.6% for the six month period of the prior year. Management believes that the gross margin pressure experienced in the latter part of fiscal 2004 and the first two quarters of fiscal 2005 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 half of fiscal 2005 and management believes they will not continue to decline, however, no assurances can be given in this regard.

 

Operating expenses increased to $34,435,000 for the six month period ended August 31, 2004 from $30,755,000 for the six months ended August 31, 2003, an increase of $3,680,000 or 11.9%. Operating expenses increased from $15,401,000 for the three month period ended August 31, 2003 to $17,251,000 for the three months ended August 31, 2004, an increase of $1,850,000 or 12.0%. The dollar increase in operating expenses was due to increases in the following expense categories: approximately $2,294,000 or 62% of the increase for the six-month period and $1,228,000 or 64% of the increase for the three month period, were for personnel related costs such as bonuses, commissions, salaries, travel and fringe benefits resulting from the increased staffing levels in connection with the expansion of the Company’s Asian and North American operations during the first six months of this fiscal year. The remaining increases for the six and three month periods were a result of net increases in various other general and administrative expenses. Management has decided to endure this higher rate of operating expenses in order to capitalize on the continuing industry rebound, although no assurances can be given in this regard.

 

Interest expense increased from $78,000 for the six months ended August 31, 2003 to $786,000 for the six months ended August 31, 2004 and from $57,000 for the three month period ended August 31, 2003 to $453,000 for the three months ended August 31, 2004. This increase in interest expense for the current periods resulted from bank borrowings incurred to support increased levels of accounts receivable and inventory required to support the Company’s increased sales volume. There were no bank borrowings in the prior year period ended August 31, 2003.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

Results of Operations (continued):

 

Net income for the six-month period ended August 31, 2004 was $2,372,000 or $.14 per basic share and $.13 per diluted share as compared to a net loss of $1,454,000 or $.09 per basic share for the six-month period ended August 31, 2003. Net income for the three-month period ended August 31, 2004 was $1,186,000 or $.07 per basic and diluted share as compared to a net loss of $623,000 or $.04 per basic and diluted share for the three-month period ended August 31, 2003. Management attributes the increase in earnings for the 2004 periods to increased sales volume resulting in increased gross margin dollars exceeding the increase in operating and interest expenses incurred in connection with the expansion of the Company’s Asian and U.S. operational capabilities.

 

Liquidity and Capital Resources:

 

At August 31, 2004, the Company’s current ratio was 6.2:1 as compared to 5.6:1 at February 29, 2004. Working capital increased from $123,494,000 at February 29, 2004 to $166,618,000 at August 31, 2004, while cash decreased from February 29, 2004 to August 31, 2004 by $2,239,000 to $10,231,000. The increase in working capital resulted from the increase in inventory and accounts receivable, net of an increase in accounts payable, required to sustain the substantial increase in the Company’s sales volume.

 

On September 4, 2003, the Company entered into a secured revolving line of credit with three banks, which was amended on July 2, 2004 and currently provides for maximum borrowings of $51,500,000 at either (i) the lead bank’s prime rate or (ii) LIBOR plus 100 to 275 basis points depending on the ratio of the Company’s liabilities to its tangible net worth, at the option of the Company through September 4, 2007. Borrowings under this line of credit were $46,100,000 at August 31, 2004 and $5,300,000 at February 29, 2004. There were no borrowings at August 31, 2003. As of the end of both fiscal quarters and year, the Company was in compliance with all the required covenants.

 

On September 30, 2004, subsequent to the balance sheet date, the Company entered into a new secured revolving credit agreement with eight banks which provides for maximum borrowings of $100,000,000 at either (i) the lead bank’s prime rate or (ii) LIBOR plus 100 to 275 basis points, depending on the ratio of the Company’s liabilities to its tangible net worth, at the option of the Company through September 29, 2008. The Company is currently in full compliance with all of the covenants contained in this agreement.

 

The Company anticipates that its resources provided by its cash flow from operations and the aforementioned new loan agreement, will be sufficient to meet its financing requirements for 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.

 

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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

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 semiconductors in fiscal years 2004, 2003, 2002 and 2001 were $346,000,000, $302,000,000 $282,000,000 and $634,000,000 respectively. Although the Company’s results 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 started to increase in recent quarters, the Company may be unable to achieve consistent profitability at levels experienced in the past.

 

The Company’s operations have been significantly and negatively affected by the recent 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 two most recent quarters, the Company’s revenues have begun to show signs of growth and an industry up-cycle, with $119,000,000 of revenues in the quarter ended August 31, 2004. Despite this recent growth, the Company has not yet been able to achieve consistent profitability at a level deemed acceptable to management. As a result, the Company has continued to implement substantial cost-cutting measures designed to align its expenses to provide profitability at current revenue levels. The success of these cost-cutting measures, as well as the timing of any economic recovery, will affect the Company’s ability to achieve consistent profitability at reasonable levels. Although the Company does not anticipate any further restructuring charges in the near term, if the Company is not able to maintain an acceptable level of profitability, the Company may need to consider expense reductions.

 

If the Company were unable to maintain its relationships with key suppliers, it could adversely affect the Company’s sales.

 

In fiscal 2004, the Company purchased inventory from two suppliers that was in excess of 10% of the Company’s total purchases on a consolidated basis. As a result, to the extent 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 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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

Risk Factors (continued):

 

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. If the economic and industry downturn were to continue, it could have an adverse affect on the servicing of these accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations.

 

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 2004, approximately 18.5% of the Company’s sales came from its operations outside the United States. During fiscal 2003 and 2002 approximately 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 17.1% of consolidated sales in fiscal 2004. 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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

Risk Factors (continued):

 

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 could be materially adversely affected if this shift continues and the Company is unable to develop distribution relationships with these or other manufacturers on acceptable terms. In particular, if the Company is unable to develop relationships with manufacturers that provide profit margins comparable to the margins maintained under existing relationships, the Company’s operating results may be negatively affected. In addition, the Company has operations in several locations in emerging or developing economies that have a potential for higher risk. The risks associated with these economies include currency volatility and other economic or political risks. While the Company has and will continue to adopt measures to reduce the impact of losses resulting from volatile currencies and other risks of doing business abroad, the Company cannot ensure that such measures will be adequate.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s credit facility bears interest based on interest rates tied to the prime or LIBOR rate, either of which may fluctuate over time based on economic conditions. 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 and 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 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of August 31, 2004. Based on such evaluation, they have concluded that, as of August 31, 2004, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their designers and the Company’s objectives and the Company’s chief executive officer and chief financial officer have concluded that such controls and procedures are effective at the “reasonable assurance” level.

 

There were no changes in the Company’s internal control over financial reporting or in other factors that have, or is reasonably likely to, materially affect the Company’s internal control over financial reporting during the period covered by this report.

 

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PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

There are no material legal proceedings against the Company or in which any of their property is subject.

 

ITEM 2. Changes in Securities

 

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 September 23, 2004. The following proposals were adopted by the votes indicated.

 

(b) (c) (1)    Three directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2007. 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


Martin Novick

   15,684,117      84,910

Dominic Polimeni

   15,614,605    352,422

Richard Schuster

   15,419,646    348,381

 

ITEM 5. Other Information

 

None

 

ITEM 6. Exhibits and Reports:

 

  (a) Exhibits:

 

  10.1 – Revolving credit agreement dated September 30, 2004 between the Registrant and Citibank, N.A., Fleet National Bank, JP Morgan Chase Bank, HSBC Bank USA, North Fork Bank, Israel Discount Bank of New York, Commerce Bank, N.A. and Bank Leumi USA (Incorpoated by reference to current report on Form 8-K dated October 4, 2004.)

 

  31.1 - Section 302 Certification of Chief Financial Officer

 

  31.2 - Section 302 Certification of Chief Executive Officer

 

  32.1 - Section 1350 Certification of Chief Financial Officer

 

  32.2 - Section 1350 Certification of Chief Executive Officer

 

  (b) Reports on Form 8-K

 

None

 

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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: October 6, 2004

 

/s/ Arthur Nadata


   

Arthur Nadata, President and CEO

Date: October 6, 2004

 

/s/ Paul Durando


   

Paul Durando, Vice President-Finance

and Chief Financial Officer

 

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SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

EXHIBIT INDEX

 

to

 

FORM 10-Q

 

FOR THE SECOND QUARTER ENDED AUGUST 31, 2004

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 


 

NU HORIZONS ELECTRONICS CORP.

 

(Exact Name of Registrant as Specified in Its Charter)

 

EXHIBIT

NUMBER


 

DESCRIPTION


31.1   Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
31.2   Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
32.1   Certification of Chief Financial Officer Pursuant to Section 1350 of 18 USC
32.2   Certification of Chief Executive Officer Pursuant to Section 1350 of 18 USC