Filed By
Merix Corporation
Pursuant
to Rule 425 Under the Securities Act of 1933
And
Deemed Filed Pursuant to Rule 14a-6
Under the
Securities Exchange Act of 1934
Registration
Statement No. 333-163040
Subject
Company: Merix Corporation
Commission
File No. 001-33752
Merix
Corporation Analyst Conference Call (Amended to Include Q&A
Session)
Q2
FY2010 Financial Results
January
4, 2010, 2:00 PM PT
Good
afternoon everyone, and welcome to Merix Corporation’s second quarter 2009
earnings conference call. Today’s call is being
recorded.
Comments
made during the course of this call that state the company’s or management’s
intentions, goals, beliefs, plans, projections, expectations or predictions are
forward-looking statements within the meaning of the Securities Litigation
Reform Act of 1995. Many factors could cause actual results to differ
materially from the forward-looking statements, including the factors discussed
in the press release announcing our results, the Company’s annual report on Form
10-K for the year ended May 30, 2009, Form 10-Q for the quarter ended August 29,
2009 and Amended Form S-4 filed December 29, 2009 that are on file with the SEC,
and those discussed from time to time in the Company’s other SEC
filings.
I will
now turn the call over to Mr. Michael Burger, President and Chief Executive
Officer of Merix Corporation. Please go ahead, sir.
Introduction
and Opening (Mike Burger):
In
October 2008, we announced the completion of the integration and technology
expansion, initiated in July 2007. About this time both Merix and the
rest of the world began experiencing the global economic slow-down that sharply
reduced our customer’s demand. This situation caused us to further
reduce our cost structure in order for us to weather the storm, not knowing how
long the downturn would last. The core values that we maintained
throughout these cost reduction actions were our continuous commitment to
technology, the protection of our capacity and the need maintain strong customer
relationships. While we’ve taken significant cost out of our
infrastructure, we’ve also continued to make continuous improvements in both
North America and Asia factory metrics resulting in record quality and on-time
delivery performance. As our markets rebound, we have been able
to capitalize on the opportunity and begin to demonstrate, through our financial
results, the operational improvements that to date we’ve only been able to talk
about. Today I am pleased to report our fiscal 2010 second quarter
financial results that included strong sequential revenue growth, the best
bottom line performance in nearly three years, and meaningful growth in our
targeted markets.
As
reported, second quarter revenues grew 23% from the first quarter of fiscal 2010
to $71.3 million. In addition, we reported a GAAP net profit of $500
thousand, which is our first profitable quarter since February
2007. Our second quarter results did include a few one time items
that Kelly will provide details on later in the call.
The
second quarter revenue increase was enabled by marked progress in both North
America and Asia with growth of 24% and 22%, respectively. We believe
this growth is primarily a result of a relatively broad based improvement in our
market. We have leveraged the actions of our sales organization to
address new customers and the improvements in our operational
capabilities. These combined activities resulted in growth in all of
our targeted markets and a broader more diverse customer mix when compared to
our history. Sales to our top 5 customers have been reduced to nearly
30% of total revenue; while historically this number has been closer to
40%. Further, our recent results reflect the fact that we no longer
have one customer whose sales represent 10 percent or more of our total revenue,
hence our reliance on traditionally larger customers is
reduced. Finally, our second quarter orders outpaced shipments
leading to above parity book to bills in North America and Asia of 1.11 and
1.12, respectively.
Revenues
in the defense and aerospace segment grew 25% from the first fiscal quarter of
this year; the highest level in our history. This key North American
business segment now represents nearly 30% of North America’s revenue base and
nearly 13% of global revenue. Growth in this strategic segment was
enabled by the relentless execution of our engineering, operations and sales
organizations. In the last year we received 31032 military
certifications for both our North American factories and last month announced
the receipt of a top aerospace certification known as AS9100 in
Oregon.
In the
computing and peripherals end market, we reported 53% sequential quarter
growth. A significant piece of this new business came from several
customers in Asia where we initially performed the quick turn prototype builds
in either North America or Asia and have now won the production volumes in our
Asian factories. Some of you know that our quick turn capabilities in
Asia are relatively new and were developed at the same time we were taking cost
out of our business. Today, we find that our customer base is
beginning to see the benefits of this somewhat unique capability along with our
ability to seamlessly transfer work from our North American factories to
Asia.
I’m
extremely pleased not only with the efforts of our sales organization in
identifying these new opportunities, but also in our operational
execution. Any sales effort in our industry is a collaborative cross
functional effort, and our entire team is now hitting on all
cylinders.
Last
quarter, I mentioned we had begun transitioning the Company’s focus from simply
weathering the storm to profitable growth. I believe this focus was a
primary factor in our $5.5 million sequential bottom line improvement that I
mentioned earlier. Further, gross margins improved by over 6.5
percentage points when compared to the first quarter to nearly 13% of
revenue. While 13% is short of our success model, this improvement
does demonstrate the gearing within our business that can be achieved with
revenue growth and a relentless focus on costs. Said another way, revenues grew
$13.5 million when compared to the first quarter and nearly 40% of this increase
dropped straight to the bottom line. We’re pleased with this overall
profit flow through and believe it’s a result of the improvements we’ve made in
our underlying business that have been buried from public view by the extremely
soft demand environment. As a management team, we’re excited that our
efforts over the last couple of years are now becoming readily apparent in our
financial results.
I’ll now
pass the call over to Kelly who will provide additional details on our second
quarter financial performance.
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II.
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Earnings
Overview (Kelly Lang):
|
Thanks
Mike and good afternoon everyone.
As Mike
mentioned second quarter revenue of $71.3 million represents a 23% growth over
the first quarter. As you’ll recall from our discussion last quarter,
we began to see initial demand improvements in the June time
frame. These initial improvements have extended throughout the second
quarter in both North America and Asia resulting in a positive second quarter
book to bill of 1.12 and backlog that increased by $8.3 million or 26% to $39.8
million. Although difficult to predict with certainty, we are
becoming more confident that this new demand level is sustainable into the
foreseeable future. Unlike Merix’ past where much of the Company’s
growth was solely tied to a few customers or segments, the recent revenue growth
we’ve experienced is much more diverse.
Quick
turn revenues grew nearly 20 percent from the first quarter to $10.4 million,
our highest level since the May 2008 quarter. During the second
quarter we extended lead times by approximately two weeks in both Asia and North
America and are now in the 6 to 8 week range, except in our automotive factory
where lead times average around 10 weeks, which we believe are
competitive. Despite this lead time increase, we have not yet seen
much growth in our premium services business, which can be highly profitable and
tends to grow when industry capacity tightens. We believe the lack of
growth in this area is an indicator that industry capacity remains available and
other competitors may not be rebounding as quickly as Merix. That
said, our utilization rates, based upon our equipment sets, in North America and
Asia approximate 75% and 85%, respectively.
Second
quarter average panel pricing when compared to the first quarter increased in
both North American and Asia by roughly 3 percentage points. We
believe most of the increase in average pricing is due primarily to the mix of
business being produced and is not attributable to a change in the pricing
environment. The pricing environment remains competitive, but
rational overall.
As noted
earlier, consolidated gross margins doubled in the quarter to nearly 13 percent
and reflect the improvements we have seen in the demand environment, modestly
higher average pricing, improved cost structure as well as further improvements
in our factory metrics where our execution remains
excellent. Further, we also realized approximately 1 percentage point
of one time benefit primarily associated with fluctuations in overhead expenses
being absorbed into inventory.
Reviewing
each region, we saw North America gross margins grow over 13 percentage points
from the first quarter to above 10 percent and Asia’s margins grew 1.3
percentage points to nearly 15 percent during the same time period.
Excluding
one time costs, operating expenses remained controlled and unchanged from
Q1.
In Mike’s
opening remarks he mentioned our second quarter results included certain unusual
items. They are comprised of the following three items:
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·
|
First,
legal and consulting costs for the pending securities litigation and
Viasystems merger totaled $1.6
million.
|
|
·
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Secondly,
our tax provision benefited by $1.8 million due to a US AMT tax refund as
well as a reversal of a valuation allowance on certain China based tax
assets that are believed to be
realizable.
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·
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Third,
a $1.5 million reversal of an older accrual associated with a customs
exposure that is no longer believed to be a liability. This
amount is reported in other income and expense, below operating
income.
|
I should
note that the gross benefits from the customs and valuation allowance accruals
were reduced by approximately $300 thousand to reflect our minority partner’s
interest in these benefits. The net profit improvement from these
items, excluding any tax impacts, was $1.5 million.
In
reviewing the balance sheet, our cash balance at the end of November totaled
$10.5 million and our outstanding debt declined from August by $5 million to $78
million. While we consumed over $8.0 million in cash related to
working capital expansion due to our 23 percent sequential quarterly revenue
growth, we continued to make excellent progress on the cash conversion metrics
themselves. Count back DSO, improved another three days to 62 days,
inventory turns were nearly 15 and DPO increased three days to
61. Liquidity, which we define as cash on hand plus
amounts available to be borrowed under our two bank credit facilities, grew
modestly to approximately $60 million.
Earlier
today, we announced that we have signed a binding agreement to sell our
previously vacated Hong Kong property for approximately $11.1
million. The sale is subject to the lessor’s approval and the buyer
completing its financing. Upon closing we anticipate receiving
approximately $9.5 million and the transaction should close in the spring of
2010, which will further enhance our liquidity position.
On
October 6, 2009 Merix announced that it had agreed to merge with
Viasystems. The completion of the merger is contingent on a few
factors including Viasystems filing of an S4 to register its equity with the SEC
and Merix receiving a favorable shareholder vote. Following a normal
SEC review process, on December 31st the S4 outlining the merger became
effective; putting the first contingency behind us. Merix will now mail its
proxy and hold a special shareholder’s meeting on February 8,
2010. As you know the S4 includes both historic and projected
financial results for both Merix and Viasystems. The second quarter
financial results we announced today modestly exceeded the revenue and
profitability expectations we had set forth in the S4. We remain
confident in Merix’ ability to achieve the 2010 financial statement projections
included in the S4.
|
III.
|
Conclusion
(Mike Burger):
|
Thanks
Kelly.
As you
can tell by our comments, we are very pleased with the improvements reported in
our second quarter results and are optimistic about the future. We
have experienced significant quarterly revenue growth and the profit flow
through on that revenue increase has been excellent. Looking ahead,
the global economy appears to be improving and demand for our products and
services is good and growing. That said, our third quarter, which
runs from December through February, will be impacted by the Christmas and New
Year holidays as well as the Chinese New Year. Therefore, we
anticipate our third quarter revenue will increase modestly when compared to the
second quarter. December bookings have been strong, which makes
us optimistic about the overall demand environment and the penetration we are
making in target markets.
Merix has
undergone a tremendous amount of change over the last two and a half years that
has culminated in the significantly improved financial performance we’ve
reported. Today, our business model is meaningfully improved from
what it was a couple of years ago, which when combined with Viasystems should be
even more competitive. The combined companies have the potential to generate
significant value for all stakeholders involved.
Since the
merger with Viasystems was announced, there have been two other mergers
announced within our industry that I believe further validates the
Merix-Viasystems combination. The combined company’s scale,
footprint, focus on operational excellence and a diverse customer base provide
an excellent foundation to grow and deliver outstanding returns to all
stakeholders.
In
closing, I would like to thank the 3,000 Merix employees who have driven
significant change over these last two and half years. Their efforts
have built, through the successful integration of North America and Asia, a
competitive business model while at the same time successfully weathering one of
the worst economic storms in recent memory. I am very proud of what
has been accomplished. We are all very excited about the opportunities that lie
ahead for Merix’ customers, employees and shareholders.
I would
now like to open the call up to any questions you may have.
*********
Operator
(Operator
Instructions) Your first question comes from Matthew Sheerin – Thomas Weisel
Partners.
Matthew
Sheerin – Thomas Weisel Partners
Just
first question regarding the gross margin and obviously the very strong drop
through that you had in North America, would we expect that to slowdown given
that you’re coming off of a lower base so that incremental drop through which I
think was 60% or so would not be as strong on incremental revenue going forward?
And, can you give us an idea of what that might be? Then also, why the drop
through in Asia was [inaudible] I’m guessing because you’ve done restructuring
and you’ve had significant gross margin expansion there already?
Kelly
E. Lang
I’ll
answer the second part of your question first, I think in Asia the reason that
the flow through wasn’t quite as strong as we saw in North America is your first
comment, we already started to see some of the benefits in our first quarter.
But, I think larger was that we actually reinstated some pay changes that were
affected last year earlier in Asia which affected us. Also, in order to reduce
some of the turnover that we have in our labor base over there we also increased
compensation. Today our turnover, etc. is actually probably as low as I’ve seen
it the last three years I’ve been with this company so that was one of the
bigger drivers in Asia why you didn’t see the flow through.
We
anticipate that revenue growth in Asia would actually have improved flow through
in the coming quarters ahead. In North America I think you probably see a
similar improvement that we see and flow through. It all depends of course on
the mix and if for example we have a mix of high TMS type products which tend to
be a high ASP but also have a higher cost, you may not see on a percentage basis
the same kind of flow through but you will see the dollars flow through on
that.
But I
think also again, looking forward I think that we feel real good just about the
overall cost structure and the changes we have going on. We certainly have this
year accruals for management, bonuses, etc. that are built in there that are
effecting the amount of flow through but again, as you can see from the second
quarter results even with those, we had accrued a few on there, we’re still
seeing a pretty nice trend evolve.
But
again, it’s really going to depend on overall mix of the business. By the way, I
added that there were also a couple kind of miscellaneous one time good things
that happened in the quarter that were equal to about a point of margin.
Principally that was mostly in North America that helped us out there but those
things aside, I think again we feel pretty optimistic about the model that we’ve
built and again, we should get a lot more leverage out of this business as
revenues grow and kind of get back to where we saw a year or so
ago.
Matthew
Sheerin – Thomas Weisel Partners
In that
last comment regarding that extra point of gross margin in North America, does
that go away next quarter?
Kelly
E. Lang
Yes, that
one point of benefit if you will essentially that would go away because it was
one time. Essentially, as our inventory levels grew just modestly in North
America we absorbed some costs that you wouldn’t otherwise get so I’d say about
a point of the overall consolidated margin would go away if all things were
equal.
Matthew
Sheerin – Thomas Weisel Partners
Then on
the comment on pricing, it sounds like that’s getting better. How much of that
is due to mix versus just better pricing environment because demand is picking
up?
Michael
D. Burger
I don’t
think the overall environment has changed the pricing dramatically. I think our
improvement has been primarily driven by mix. We haven’t seen pricing
substantially improve on an ASP to ASP perspective but we do feel like the mix
is actually in our favor as we go forward. I think we’ve actually mentioned in
the script that we haven’t seen the premium revenue dollars. We categorize our
revenue in to full lead time, premium and quick turn, premium is typically that
business which is not quick turn, in other words it’s greater than 10 days but
within lead time and we have not seen a larger growth in the premium revenue to
date.
Historically
we have as the market tightens so as we mentioned in the script we actually
believe that there’s still a lot of capacity out there and so this growth that
we’re seeing either is because we’re penetrating either new markets or new
customers or the capacity continues to come online from our
competitors.
Kelly
E. Lang
I think
Matt just to add on that typically our premium business if you look historically
when the markets have been I’ll call it more towards the top of the cycle, we’d
see somewhere between $10 to $11 million in premium services per quarter. This
quarter and actually the last few quarters they’ve been roughly in the kind of
$2 to $3 million range. So, that gives you a sense again, where typically Merix
would have its most profitable quarters is when we saw really a rich premium
business. Again today, we certainly are not experiencing that because of the
factors that Mike just mentioned.
Matthew
Sheerin – Thomas Weisel Partners
Then just
lastly, just regarding the Viasystems merger to the extent that you can discuss
conversations you’ve had with customers, it’s been a few months now and
obviously customers know what’s happening. What kind of reception have you had
from your customers and then the Viasystems customers in regard to the
capabilities that you can bring to them?
Michael
D. Burger
I don’t
think we can comment on the Viasystems customers. Our customers I think in
general see what the opportunity brings. Obviously having quick turn in North
America and much larger scale in Asia is helpful. Viasystems has capabilities in
Asia frankly, that we do not have to date, primarily HDI and that capability. We
have plans for it but frankly, this merger actually accelerates that so I think
in general our customer base has been supportive and I think everyone frankly,
based on all the announcements that are happening in this industry is kind of in
a wait and see mode. I think the sooner we get this thing done the better off it
will be for everyone.
Operator
Your next
question comes from Brian J. White – Ticonderoga Securities.
Brian
J. White – Ticonderoga Securities
Just a
quick question on the auto market, you had a nice uptick and it sounds like that
market continues to turn the corner and there’s been a lot of discussion about
potential component shortages. I’m just curious how you’re thinking about the
February quarter for auto?
Thomas
R. Ingham
We’re
still seeing a great deal of strength from a bookings standpoint to point
positively towards a February quarter. You are correct as far as inventory
shortages, part shortages, I don’t know if it’s at much part shortages as it is
they really drained the swamp in terms of inventory all the way to the car lot
level and you’ve certainly seen probably a more decided lack of visibility from
our customers about what they need but we haven’t seen any kind of a slack off
in the fact that they need a lot of it and need it quite quickly. So, going in
to the Christmas holiday we were still seeing extremely strong bookings in the
automotive.
Kelly
E. Lang
I think
too Brian just to add, last quarter when we did our October call we were
experiencing some nice bookings in the automotive area and we actually
anticipated frankly, kind of a fall off in some of the demand which I’d say we
saw a little bit of a fall off maybe in the mid November kind of time frame and
then as Tom indicated, in the month of December we actually saw it kick up again
so we’re still I’d say not at the revenue or booking levels that we were say two
years ago but we’re close to it we feel like.
Michael
D. Burger
I think
another note is as a percent of our overall revenue even with a $3 million
increase automotive has not grown as a share quarter-on-quarter of our total
revenue which I think again, points to the mix of business we keep referring to
is probably the healthiest we’ve seen the last couple of years.
Brian
J. White – Ticonderoga Securities
Just on
the communications and networking, an important area, again you had a great
quarter there but that typically does see a kind of seasonal decline in
February. Are you seeing that or are you seeing something
different?
Kelly
E. Lang
No,
actually we’re going to have a pretty significant customer ramp in the quarter
so we’ll continue to see that as a strong market in February as
well.
Michael
D. Burger
I think
it’s also interesting in a networking market, as you probably know we relied on
one or two customers for a long time, I hate to give Tom too much credit for
this but I think his team has done a really nice job of diversifying that mix of
customers that we have there. As we indicated in our script too we no longer
kind of have a 10% customer there so it’s been a little more diversity than we
use to have and I think that also kind of helps us and bodes well as the market
kind of evolves.
Brian
J. White – Ticonderoga Securities
I just
want to be clear, so February quarter you’re saying sales in general will go up
a little bit?
Michael
D. Burger
That’s
right.
Operator
Your next
question comes from Nick Farwell – The Arbor Group.
Nick
Farwell – The Arbor Group
I want to
follow up on your comment about the implications of consolidation in the
industry. What are the valuations of the Meadville and I think the DDI acquired
Coretec, I may have that company wrong, it’s been a while.
Michael
D. Burger
You’re
right it’s Coretec.
Nick
Farwell – The Arbor Group
Could you
talk a little bit about the relative valuations that TTM and DDI paid for those
two properties and how it relates to the Merix property?
Michael
D. Burger
I can’t
comment on the valuations because honestly Nick, I apologize I don’t have it in
front of me and I didn’t memorize it so I’m probably not in a position to
comment on the valuations. I will say though from a strategic perspective and I
guess that’s really where we were coming from in our script, we believe that
scale is a big part of this business and while TTM is a big player in North
America now they’re going to become a much bigger player globally which offers
our traditional customer base which is primarily the western world a much bigger
choice in terms of product portfolio and scale.
I think
the Viasystems Merix merger offers a complimentary structure in scale and
technology set. I think that’s important particularly with the top tier customer
base, that certainly both Merix and TTM share.
Nick
Farwell – The Arbor Group
To follow
up on that, is there anything in the S4 that was filed here recently that I
guess shareholders will get shortly?
Michael
D. Burger
Right, in
fact, I think it’s going out today or in the mail tomorrow.
Nick
Farwell – The Arbor Group
Is there
anything in the current S4 or the updated S4, anything that precludes another
offer for Merix assuming you guys didn’t solicit it?
Michael
D. Burger
Well
obviously we have a breakup fee that’s negotiated and listed in the
S4.
Nick
Farwell – The Arbor Group
Correct,
that wasn’t changed?
Michael
D. Burger
That’s
not changed, no.
Nick
Farwell – The Arbor Group
So if for
some reason given the consolidation in the business and given the nature of the
environment another suitor showed up, there’s nothing other than the break up
fee that precludes them from perhaps bidding for the Merix
property?
Michael
D. Burger
That is
correct.
Nick
Farwell – The Arbor Group
Can you
comment if there have been any inquiries in any way either to your investment
bank or otherwise?
Michael
D. Burger
I can’t
comment.
Operator
Your next
question comes from Shawn Harrison – Longbow Research.
Shawn
Harrison – Longbow Research
A couple
of points of clarification, maybe I missed it but what was capacity utilization
within each region last quarter?
Michael
D. Burger
North
America was running at about 75% and Asia was at about 85%.
Shawn
Harrison – Longbow Research
I’m sorry
I meant the August quarter?
Kelly
E. Lang
I have
the numbers here in front of me, I’m trying to read between the lines bringing
the factories together but it’s probably about 50% to 55% North America and in
Asia it was probably 65% to 70%.
Michael
D. Burger
Yes,
that’s right.
Shawn
Harrison – Longbow Research
I know
you’ve spoken in regards to premium business not really coming back but quick
turn came back for you in Asia, have you seen that accelerate in North America
as well?
Michael
D. Burger
Actually,
most of the quick turn happened in North America. Asia is a relatively new
business for us and frankly, I think it’s high was around a $100,000 on a
monthly basis if I’m not mistaken so in scale between North America and Asia
there’s really very little comparison. We were actually talking about the new
capability and the fact that we’re seeing some traction. But, all the
acceleration that we refer to in terms of quick turn was actually in North
America.
Kelly
E. Lang
One thing
Shawn to maybe add a little bit there is when you look at each day we get an
order sheet that basically summarizes our quick turn orders and stuff and
historically similar to our kind of overall book of business it was pretty
narrow as far as this segment that we tend to participate in. I’d say today it’s
a much more broader base particularly in the military and aerospace segment. We
tend to have a much broader diversification if you will so again, I think a lot
of it has to go to just that segment that we really started to focus on in the
last year that’s really helping us grow in that segment. We feel real good about
what’s going on there and the pricing frankly has been good.
Shawn
Harrison – Longbow Research
It sounds
like you’re taking share in the quick turn market, is the quick turn market kind
of in North America growing overall as well and you’re just growing
significantly faster than that because of penetration of these other end
markets?
Thomas
R. Ingham
We appear
to be, just doing a little bit analysis using the ITC data for North America and
just looking at some of the growth rates among our peers, if you take that as a
metric, it appears that we did take some share in North America with some of
that possibly being on the quick turn side as well. But, I think the quick turn
market was reasonably healthy too. Normally, I’d have those numbers broken down
by quick turn so I think we took a little share but I think the quick turn
market was also pretty healthy.
Michael
D. Burger
I think
it’s important to note that I think we’ve listened to other competitors on their
calls and I think there’s been a lot of talk about pricing and predatory pricing
and I have just got to say that we have not seen that at all nor are we
participating in that at all. We feel really good, in fact our overall pricing
has held up pretty well so we don’t see an environment where our competitors are
doing crazy things, we haven’t seen that so I think it’s just important to
note.
Shawn
Harrison – Longbow Research
Then
maybe just a final note on quick turn, is there any way to think of maybe a time
line of typically better quick turn demand indicates better volume demand
potentially down the road? Is there some type of any metric that I should look
at within a quarter, within two quarters, just maybe a time frame of what better
quick turn demand would mean for your volume work potentially down the
road?
Kelly
E. Lang
It’s a
little bit difficult because as Mike mentioned and Tom mentioned I think as
well, a lot of the quick turn growth that we’re having is in the defense and
aerospace market and that’s not going to migrate to our Asia facilities and it
doesn’t probably expand in to the larger volumes that you would typically see.
Having said that though, if you were to ask me a timeframe which I think you
kind of did, it’s about 18 months, 18 to 20 months.
Michael
D. Burger
It ends
up actually manifesting itself on the development cycle of the end industry so
the communication guys go from prototype to volume production quicker than for
example the automotive guys and in some cases the military guys so it comes down
to kind of the end segment and the development cycles within the
segments.
Shawn
Harrison – Longbow Research
Then two
final follow up questions, maybe a guidance on a tax rate assumption and then
second, there’s been a lot within kind of the press lately mainly in Asia based
websites of material costs going up in 2010, if you can just kind of discuss
what you’re seeing on laminate and maybe other raw materials?
Kelly
E. Lang
Just
talking about that tax rate I think maybe the way I’d look at the modeling is if
you take a look at our income tax expense for the quarter it was a benefit for
$1 million. I think if you backed out the AMT and the reversal of the tax asset
thing we’d be about $500,000 tax if you will on the total amount of income that
we have out there. So again, it’s going to be pretty small overall, it’s really
principally all related to the Asia business because North America is almost
100% shielded because of the NOLs we have on our books so it’s going to be
pretty modest. I think versus a percent I’d kind of look at total dollars and it
would kind of track a little bit with that.
Shawn
Harrison – Longbow Research
Then in
terms of raw materials?
Michael
D. Burger
Raw
materials we have seen what we would consider relatively modest request for
increases and frankly, it’s a lot less volume than it was 18 months ago. So,
we’re seeing anywhere between 1% and 3% increases being requested and we’re
negotiating each of those, we just don’t take them flat out.
Operator
Your next
question comes from Amitabh Passi – UBS.
Amitabh
Passi – UBS
I just
had a couple of questions on your end market segments, the first was
communication and networking and I know you talked about the strength being
pretty much broad based but I was hoping you could provide incremental color in
terms of whether it was driven by wire line or wireless and whether China 3G was
a factor during the quarter?
Thomas
R. Ingham
In the
November quarter it was more on the wire line side than the wireless side
however in the February quarter that’s going to be more on the wireless
side.
Amitabh
Passi – UBS
And
driven by North America or international?
Thomas
R. Ingham
Yes and
driven by China 3G build out.
Amitabh
Passi – UBS
In
February?
Thomas
R. Ingham
Yes.
Amitabh
Passi – UBS
Then just
on your aerospace and defense again, a very strong performance sequentially is
this just a function of you continuing to maybe take share in the segment,
ramping with new customers or was this just overall broad based trends that you
think kind of benefitted everybody that has exposure in this area?
Thomas
R. Ingham
It’s
definitely new customers in that segment. It’s a real long sales cycle there and
we’ve been doing it over years and incrementally been landing more and more
customers in that basis and we will continue to see that grow I think in future
quarters as well.
Kelly
E. Lang
I
actually did a little bit of looking at historical metrics and stuff and defense
and aerospace for August 2007 for North America was about 8% of revenue and
today it is about 30% of revenue in North America. Also interesting is that just
a couple of quarters ago we had only two customers that really had $250,000 or
more in quarterly revenue, today I think it’s upwards of like eight or nine. So,
I think you can see that there is a momentum shift that is starting to occur,
we’re getting more customers but it’s also we’re starting to get those larger
orders. Again, I think it’s a new aspect that is typical of this segment that
we’re dealing with.
Amitabh
Passi – UBS
Any sort
of preliminary thoughts you have just in terms of the outlook of that segment as
you look at the next 12 months? I mean, a lot of concerns they come and go on a
daily basis around US defense spending. I’m just curious how you’re looking at
this segment and your thoughts over the next 12 to 18 months?
Thomas
R. Ingham
I think
we’re looking at it very positively over the next 12 months particularly a lot
of the dollars get allocated out years ago and then get spent in the future and
we feel really good about the programs we’re on. But primarily it’s because
we’ve taken share. I mean as I think we’ve mentioned on some of these calls
before there aren’t that many tier 1 printed circuit board manufactures in North
America to land in this market. We’ve got the technology and we’ve got the
volumes that our customers like and that has driven them away I think from one
of the other primary providers in North America and has really benefited sales
techniques for us I guess I should say.
Kelly
E. Lang
We said
before on calls too that this is a segment that a lot of these prime contractors
frankly have never dealt with Merix because we’ve always been kind of a
commercial provider and it’s only been the last year to year and a half that
we’ve actually really started to focus on getting the certifications, getting
the ES9100 last month in the aerospace, we’re just kind of the new face and I
think we feel it really is a market share gain not necessarily growth in the
overall market.
Michael
D. Burger
I’d just
add again, a final comment that the pipeline of new customer qualifications that
we’ve had in our facilities that have not yet materialized in to revenue is
really the future. We’re extremely excited about kind of the ramp being able to
continue regardless of whatever ends up happening kind of in a macroeconomic
perspective.
Operator
Your next
question comes from Nick Farwell – The Arbor Group.
Nick
Farwell – The Arbor Group
Can I
just ask a couple of perhaps nuances but I wanted to make sure I understood the
adjusted operating income which you reported I think as a loss of $600,000. Yet,
if I understood the adjustments you made it added up to roughly an incremental
$1.5 million or $1.6 million so therefore it looks like it is about an $800,000
or $900,000 or $700,000 positive if I try to take all of the non-op
out.
Kelly
E. Lang
I think
maybe the easier way to look at it is the very last page of our press release
there’s a reconciliation from the GAAP net income to kind of the pro forma
excluding the items. But again, the couple of items that are not in operating
income are the VAT penalty accrual of $1.5 and then the two tax items then
you’ve also got the [inaudible] so if you kind of back that out you’ll get
yourself to that number.
Nick
Farwell – The Arbor Group
Second of
all, you mentioned the incremental margin or perhaps Mike mentioned the
incremental margin, I work that out to a little over 40% for the quarter I think
what I heard was maybe roughly 1% of that incremental margin came from North
America, perhaps you’re putting some of the incremental costs in to inventory.
Does it suggest then that the incremental margin perhaps for the third quarter
will be less than the second quarter, is that what you’re
suggesting?
Kelly
E. Lang
I think
what I was suggesting is that there was about a point of overall margin, we
didn’t specifically assign it to North America or Asia but most is added towards
North America if you will, I’ll call it onetime benefits. When you grow
inventory you tend to absorb costs in to your inventory and we’re trying to
maintain our inventory levels and not let them grow and so even though we are
anticipating a modest increase in sales we’ll probably see a little bit of an
increase in inventory but not a whole lot. Again, that onetime benefit of about
a point of $700,000 of benefit that we don’t anticipate so you’d have to kind of
back that off if you were going to try and model Q3. But with all that said, I
think if you excluded that I think you’d do a pretty good job of kind of
estimating the flow through.
Nick
Farwell – The Arbor Group
But if
you do have somewhat higher volume and you’re going to get some economies of
scale, should that not be offset? I mean you’re not reaching maximum incremental
margin at this early of a time in the cycle?
Kelly
E. Lang
No, I
agree. There certainly is going to be some flow through but I think right now
what essentially is happening is you’ve got to look at the mix of business, if
you do a lot more automotive you’re going to get less than if you do certain
other types of products. So again, as always we give qualitative guidance on
this but I think what we’re trying to do is say the mix is still changing
because the market is growing and different sectors are growing here and there
so we’re just being a little cautious on the overall guidance that we’re giving
on kind of overall margins heading forward.
Nick
Farwell – The Arbor Group
Did you
say in the call, I might have missed it, that the final vote would hopefully
close the deal on February the 8th?
Kelly
E. Lang
We didn’t
say when it would close, it would probably close shortly thereafter but 2/8 is
actually the special meeting date. But typically a transaction like this would
close shortly thereafter but we have not set an actual close date.
Nick
Farwell – The Arbor Group
I did
want to ask Tom about CISCO, what is the status of your current relationship,
are you bidding on new programs and are you getting orders for new
programs?
Thomas
R. Ingham
We don’t
typically comment on any specific customers on these calls. We’re still engaged
with CISCO, I can definitely say that but I don’t want to go in to any more
specifics that that.
Operator
Mr.
Burger we have no further questions.
Michael
D. Burger
Thank you
everyone for attending. We appreciate it and we wish everyone a happy New
Year.
Operator
Ladies
and gentlemen that does conclude our conference for today. Thank you for your
participation and for using AT&T Executive Teleconference. You may now
disconnect.
*********
Important
Merger Information and Additional Information
This
document does not constitute an offer to sell or the solicitation of an offer to
buy any securities or a solicitation of any vote or approval. In connection with
the proposed transaction, Viasystems and Merix will file relevant materials with
the Securities and Exchange Commission (the
“SEC”). Viasystems has filed, and the SEC has declared effective, a
Registration Statement on Form S-4 that includes a proxy statement of Merix and
which also constitutes a prospectus of Viasystems. Merix will mail
the proxy statement/prospectus to its shareholders.
Investors are urged to read the
definitive proxy statement/prospectus regarding the proposed transaction because
it contains important information.
The definitive proxy
statement/prospectus and other documents that have or will be filed by
Viasystems and Merix with the SEC will be available free of charge at the SEC’s
website, www.sec.gov, or by directing a request when such a filing is made to
Merix Corporation, 15725 SW Greystone Court, Suite 200, Beaverton Oregon 97006,
Attention: Investor Relations or by directing a request when such a filing is
made to Viasystems Group, Inc., 101 South Hanley Road, Suite 400, St. Louis,
Missouri 63105, Attention: Investor Relations.
Participants in
Solicitation
Viasystems,
Merix, their respective directors and certain of their executive officers may be
considered participants in the solicitation of proxies in connection with the
proposed transaction. Information about the directors and executive
officers of Merix is set forth in Merix’s definitive proxy statement, which was
filed with the SEC on August 26, 2009. Information about the
directors and executive officers of Viasystems is set forth in the Form 10-K of
Viasystems, Inc., which was filed with the SEC on March 30,
2009. Investors may obtain additional information regarding the
interests of such participants by reading the definitive proxy
statement/prospectus Merix filed with the SEC on January 4, 2010.
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