Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Meade Instruments Corp. (NASDAQ:MEAD)

F2Q09 Earnings Call

October 20, 2008 5:00 pm ET

Executives

Shelley Young – The Piacente Group, Inc.

Steven L. Muellner – President, Chief Executive Officer & Director

Paul E. Ross – Chief Financial Officer & Senior Vice President Finance

Analysts

Barbara Bagley – Lewis Capital Management

John Dashure– Pinnacle Fund

Peter Albert – Private Investor

Operator

Welcome to the Meade Instruments second quarter fiscal 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host Ms. Shelley Young.

Shelley Young

Earlier today we issued a press release announcing our financial results. This release is available on the investor relations section of our website. This conference call is being webcast live and is also available on the investor relations section of our website. An archived audio of the webcast of the call will be posted on the website later today.

Before we begin, as usual, we would like to remind everyone of the cautionary language regarding forward-looking statements contained in today’s news release which also applies to any such statements made during this conference call. During the course of this call, the company may make forward-looking statements regarding future events or the financial performance of the company.

We wish to caution you that such statements are staff’s predictions and actual events or results may differ materially. For a list of risk and uncertainties that may affect future results please refer to the company’s various reports filed with the US Securities & Exchange Commission. Investors should not place undue reliance on such forward-looking statements and the company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Our management team members anticipating on the call today are Steve Muellner, President and Chief Executive Officer and Paul Ross, Chief Financial Officer. I would now like to turn the call over to Steve Muellner

Steven L. Muellner

This quarter was the second full quarter in which the company manufactured substantially all of its high end telescopes in our newly opened Mexico manufacturing facility. The gross margin improvement we achieved last quarter continued due to the reduction in both direct and in-direct manufacturing costs.

We’re still ramping up this facility and as a result we are still not able to ship sufficient high end, higher margin telescopes to meet market demand. We still have a backlog which we expect to substantially work through over the next two quarters. Early indications suggest that the anticipated cost savings are now materializing and the transfer of production outside the United States will be a key driver in improving the company’s future operating results.

The company will continue to lower its cost structure to bring it in line with the reduced revenue expectations due to the divestitures of our sports optics business and we are taking proactive measures to reduce overhead, streamline operations and further simplify our business. During the second quarter we completed the sale of our Simmons sport optics brand and associated inventory for gross proceeds of $7.25 million resulting in a gain of approximately $800,000.

These proceeds were used to fund working capital for the company and to provide short term liquidity which we used in place of our bank line of credit. We are very mindful of our use of credit in the current environment. While we continue to be in compliance with our bank covenants we are monitoring sell through to ensure that our liquidity remains sufficient for the remainder of the year.

The company reported a net loss this quarter of $2 million or $0.09 per share compared with a net loss of $4 million or $0.20 in the same quarter of fiscal 08. Excluding the $800,000 gain on the sale of Simmons brand and associated inventory in June of this year, the company would have reported a net loss of $2.8 million or $0.12 per share. The company still is investing in R&D and we expect to introduce a major new product prior to the end of this fiscal year.

I’d now like to turn the call over to Paul to review the financial results for the second quarter ’09.

Paul E. Ross

Net sales for the second quarter of fiscal year 2009 were $12.6 million, down approximately 22% from $16.2 million in net sales in the second quarter of fiscal 2008. Approximately three quarters of the decrease in that revenue was due to the company’s divestiture of the Simmons and Weaver sport optic brands earlier in fiscal ’09.

Rifle scope and binocular revenue was down $2.7 million in the second quarter of fiscal ’09 versus the prior year due to these divestitures. The remainder of the decrease was due to the reduction in shipments of high end telescopes due to the transfer of our manufacturing facilities to Mexico. The company is still ramping up its production to ship sufficient high end telescopes to meet demand resulting in a backlog which we expect to substantially clear by the end of the fiscal year.

Gross profit for the second quarter of fiscal 2009 was $2.6 million or 21% of net sales compared with $2.3 million or 14% of net sales in the prior year’s comparable quarters. This improvement in gross profit margin was primarily driven by lower indirect manufacturing costs as a result of the closure of the company’s US manufacturing operations.

Margins were adversely affected by the revenue reduction from the sale of the Simmons and Weaver brands had been generating gross margins that were higher than the company’s consolidated margin. Selling, general and administrative expense this quarter decreased by approximately 5% to $5.3 million due to reduced headcount and reduced discretionary spending.

These were offset in part by excess facility costs, the timing of expenses and the non-recurring and certain benefits recorded in the second quarter last year, most notably a bad debt recovery of $200,000. With the closure of the US manufacturing operations the company is incurring excess facility costs for its Irvine California facility which is now classified in G&A and we are looking for ways to sublease the space.

The company continues to spend on the development of new products and R&D expenses of $600,000 were consistent with the prior year quarter. Turning to the balance sheet, we are still relatively debt free. We used the proceeds from the sale of the Simmons sport optics brand sold during the quarter to fund the company’s working capital needs in lieu of drawing down our bank line of credit.

As we enter the third quarter which is the company’s heaviest sales quarter just prior to the holidays, Meade continues to depend on operating cash flow and availability under its bank lines of credit to provide short term liquidity. The company currently believes it will have sufficient liquidity and capital resources to support operations through the year. However, such efficiency cannot be assured.

Since our credit facility is asset based, which of course is largely dependent on current receivables and therefore revenue, we are closely monitoring the sell through situation during what will clearly be a very challenging retail environment. In addition, our current line of credit expires in less than one year and we have already begun taking steps towards ensuring the continuity of financing.

We have nothing specific to report at this time but will of course make the appropriate disclosures as required. I will now turn the call back over to Steve.

Steven L. Muellner

As I commented in the press release, we are taking a cautious stance for the remainder of the year given the significant contractions and consumer discretionary spending in recent weeks and the impact this may have on our business and the sale of our products. The weakened economic environment suggests that this will be a very challenging year for retailers and related manufacturers such as Meade.

So, our game plan for the next few quarters is as follows. First, focus on the continuing ramp up of manufacturing facilities in Mexico so that we can fill the backlog in high end telescopes and thereby enjoy higher gross margins. Second, find alternatives to our excess space in Irvine California. Third, introduce new products. Fourth, monitor sell through closely over the next few months to ensure our liquidity remains sufficient. Finally, the continued evaluation of our strategic alternatives.

I’d now like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Barbara Bagley – Lewis Capital Management.

Barbara Bagley – Lewis Capital Management

What I wanted to ask you guys about was the percent of demand for the high end telescopes that you are currently meeting. If you could just describe a little bit about how much of the demand you’re currently able to satisfy?

Steven L. Muellner

Barbara, it’s changing monthly as you would probably hope. You’ll recall when we made the decision to shutdown Irvine, we did it in a fashion that can only be referred to as cold turkey. We weren’t really quite ready to shift the production to our facility in Mexico so the first month of this calendar year, January we probably, and I’m really going to have to give you some estimates, probably didn’t fulfill 10% of the demand.

As we’ve gone through these last six months I would tell you that today we are probably depending on the product mix and there are different products, on the LX line which is our primary telescope line, we’re probably somewhere in the neighborhood of 80% fulfillment against demand. The other major line that we have shifted production to Mexico on is the Coronado solar products.

On the Coronado we’re probably still at maybe about 50%. Those numbers are rough but I’m pretty sure they’re pretty close.

Barbara Bagley – Lewis Capital Management

My understanding is that there is to be a redesign of the ETX? Is that currently being redesigned? And, that’s not shipping I assume, that’s just out of the market until it’s completed?

Steven L. Muellner

Actually, prior management made the decision to move ETX production to China. I’m not sure the dating but probably three years, three and a half years ago and so the current ETX continues to be in production out of our Chinese partner’s facility. There has been discussion about a new product being introduced this coming year and that would in many ways replace the older ETX but everything there I’m happy to say is moving along on schedule.

Barbara Bagley – Lewis Capital Management

But would that be part of what you referred to in your earlier comments?

Steven L. Muellner

About new products? Yes.

Barbara Bagley – Lewis Capital Management

Then just getting back to the Coronado and the other telescope you mentioned the LTX, has there been any associated market share loss that you can quantify or have you taken any action to prevent it?

Steven L. Muellner

It’s a two part question, the first thing I would tell you is that on the LX it’s pretty much been a slate shift product of our company and is respected around the world as one of the, if not the primary amateur telescopes. So, my comment would be that while it was short lived that we undoubtedly loss some product to competitive product for those customers that just had to have something that moment, I would tell you that we have not lost any interest among our base.

I know this for the simple fact that as I mentioned, we built a rather substantial backlog in product and as we have continued to work our way through the backlog we have really realized almost zero cancellations. In other words, whatever demand there was for our products continues to be there.

Barbara Bagley – Lewis Capital Management

Have the order rates been as you’ve expected so far going in to this period?

Steven L. Muellner

Yes, the answer there is a clear yes. I don’t think there’s any question that this is going to be a tougher season than maybe we experienced a year or two ago. I don’t have to tell you or any of the other listeners about what’s going on in the marketplace.

So, when you ask the question the way you did, the orders are meeting our expectations however, we have expected things to start to tighten up and as we wait as you do to see what and as we wait as you do to see what happens with the financial world and the ability of consumers to access credit lines and so on, it’ll clearly have an impact on our higher end products.

Operator

Your next question is from John Dashure – Pinnacle Fund.

John Dashure– Pinnacle Fund

Couple questions, one last year’s results included some of the Simmons and Weaver sales, correct?

Paul E. Ross

That’s right.

John Dashure– Pinnacle Fund

How much was embedded in that $16.2 million sales of last year from Simmons and Weaver?

Paul E. Ross

About $2.7 million.

John Dashure– Pinnacle Fund

So if we back out $2.7 million that’ll get us to apples to apples?

Paul E. Ross

That’s right.

John Dashure– Pinnacle Fund

On the SG&A, granted that the absolute amount went down but as a percentage of revenues it’s actually gone up. I realize you’re working hard to fix that but was there anything included in this quarter’s SG&A that’s non-recurring? I remember [Don Finkle] left the company. I’m wondering was there any severance costs included in the quarter or any other non-recurring touch stuff?

Paul E. Ross

Yes. Let me share a little bit with you. For the G&A as a percent of revenue obviously the revenue dropped quite a bit from last year so that had an impact on the percentage. Another thing is that this building that we’re in Irvine which runs us about $1.7 million a year all in is now mostly excess space. When we did the transfer of manufacturing from Irvine to Mexico, we took the Irvine building out of cost of goods sold and replaced it with the New Mexican space.

That building is now in G&A so G&A is being burdened, if you will, with these building costs. Don’s severance will show up in Q3 because that’s when it happened. So that’s not in this current quarter. There is some low level of noise in there from other headcount reductions that we’ve done over this past quarter, but it’s not a real material number.

Steven L. Muellner

John, I would add to that we did list the building for sublet pretty much immediately after moving the operation side down to Mexico and we’ve had a couple of interested parties but so far there’s been nothing concrete that I can report on.

John Dashure– Pinnacle Fund

Are you still on track to get to the headcount reduction that we’ve talked about in the past by the end of the fiscal year?

Paul E. Ross

I would tell you that our expectation is probably even a little more aggressive than what we’ve been talking about because of the sale of the Sport Optics brand. So you have to do a proportionate consideration there as well. We continue to work that side of the business very aggressively.

John Dashure– Pinnacle Fund

How much on the credit line, how much is available at this point in time on that line?

Paul E. Ross

As of today there’s in the neighborhood of $2 million available.

John Dashure– Pinnacle Fund

I forget the dynamic, is the use of the credit line going to go up from here or are you starting to get cash in from the retailers?

Paul E. Ross

It’ll probably go up modestly between now and say the end of November and then as the cash starts coming in December, it’ll start coming down from there.

John Dashure– Pinnacle Fund

You think the $2 million is enough to get you to the end of November?

Paul E. Ross

Yes.

Operator

There is a question from the line of Peter Albert – Private Investor.

Peter Albert – Private Investor

I have a question on what you’re doing to address the situation with parts in the [astro-market] repair availability on the LX series?

Steven L. Muellner

Peter, we’ve actually done quite a lot to increase the amount of spare parts that we have in inventory. In the process of moving to Mexico unfortunately we did pick up a little bit of an extended repair cycle. However, I’m hearing substantial improvement happening from customers and from retailers alike. I would tell you that for instance one sign that we watch all the time is with our customer service how many calls they’re taking and the wait time and things of that nature.

The wait time is now down from a year ago, we were experiencing something in the range of 15 minute wait time, sometimes much longer than that of course, but on average 15 minutes. Today we’re down to something closer to 20 seconds, 30 seconds with an abandon rate of only 2% or 3% which again is in contrast to a really bad number of a year ago.

It’s all part and parcel of the same question actually, Peter, because as we have more spare parts and faster turnaround it reduces the number of phone calls that come in to ask where my product is and so on. If you’ve heard differently or if you’ve personally experienced a problem, I’m not telling you that it’s perfect and I don’t know that we can ever attain perfection, but it is dramatically better than it was six months or 12 months ago.

We’ll continue to work at it, it’s a high priority of ours, post-sales service, high priority.

Peter Albert – Private Investor

That’s your in-house service now. What about service at the dealerships? If a dealer needs parts, I understand they can’t get them.

Steven L. Muellner

I really don’t know what you’re talking about but, Peter, I’d be happy to address this with you off line. It sounds like you might have a very specific instance. I’d be glad to talk with you about it.

Operator

At this time I show no further questions in the queue. I’d like to turn the call back over to management for any closing remarks.

Steven L. Muellner

There will actually be no closing remarks but everybody thank you for tuning in to the conference call and over here we’ll continue to work hard. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Meade Instruments Corp. F2Q09 (Qtr End 08/31/08) Earnings Call Transcript
This Transcript
All Transcripts