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Executives

Frank Guidone - President & CEO

Mark Thomson - CFO

Analysts

John Franzreb - Sidoti & Co

Larry Solow - CJS Securities

Measurement Specialties, Inc. (MEAS) F1Q10 (Qtr End 06/30/10) Earnings Call August 5, 2010 11:00 AM ET

Operator

Greetings and welcome to the Measurement Specialties announces First Quarter Fiscal Year 2011 Conference Call. (Operator Instructions). It is now my pleasure to introduce your host Mr. Frank Guidone, CEO for Measurement Specialties. Thank you, Mr. Guidone you may now begin.

Frank Guidone

Thank you, Chris. Welcome everyone, I am going to start by reading our Safe Harbor provision, make a few opening remarks and then turn the call over to Mark. Management wishes to caution investors that certain statements made on today's call are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended.

Forward-looking statements may be identified by such words or phrases as believe, expect, intend, estimate, anticipate, project, will, may and similar expressions. All statements that address operating performance, events, or developments that we expect or anticipate will occur in the future or forward-looking statements. The forward-looking statements used herein are not guarantees of future performance and involve a number of risks and uncertainties. Please refer to risk factors outlined in the company's SEC reports for more detail.

The company from time to time considers acquiring or disposing businesses or product lines forward-looking statements do not include impact of acquisitions or dispositions of assets which could affect results in the near term. Actual results may differ materially. The company assumes no obligation to update the information provided in today's call.

During the call we may use non-GAAP financial measures including EBITDA and free cash flow, additional information containing this non-GAAP financial measures can be found in the earnings press release posted on our website.

Well as we mentioned in our press release we believe this quarter represented an important milestone for the company marking the first host recession quarter to break through the pre-recession earnings high watermark both in terms of EPS at $0.37 and EBITDA at 12.1 million.

More importantly our margins statistics in terms of gross margin SG&A as a percent of sales and EBITDA margin were all in line with the target earnings model we have consistently outlined.

At 19.8% our EBITDA percent was just shy of the 20% model we have defined for our fiscal ‘13 of 60 million EBITDA on 300 million sales. Our strong bookings over the past three quarters drove higher sales both in terms of year-over-year and quarter-over-quarter growth while book to bill declined slightly in Q1 to 1.06 from the prior two quarter average at around 1.1.

We were still solidly positive suggesting a strong Q2. Past two visibility is still limited although we're forecasting some modest contraction in Q3. For this to happen we would expect our book to bill to drop a low one for Q2.

I want to emphasize that while our sales force is forecasting a slightly lower Q3 based on customer feedback we have been getting conservative outlooks from our customers for several quarters yet our book to bill has remained positive.

July bookings are at respectable 20.5 million and we are off to a good start in August. So, we will have much better clarity on the half two outlook on our next call. We continue to make good progress on new programs, consisting with prior quarters approximately 20% of the increase in our first fiscal quarter over the last 12 month quarterly average as a result of new business introduced in the last 12 months.

We're quite busy qualifying new programs including our high viscosity fluid property sensor targeting a new automotive engine with start up production at the end of this calendar year, several new platforms for our windshield fogging module, several new OEM's for our engine air intake module or otherwise called TRICAN.

We continue to progress with two innovative new ultrasonic imaging programs within the medical ultrasound and biometric security markets and several GPS and location based monitoring systems for our low power, high resolution altimeter module. We expect these and other programs to help drive continued growth in future quarters.

With that I will turn the call over to Mark.

Mark Thomson

Thank you Frank. I'll now cover the financial results for the three months ended June 30th 2010 in more detail. To start I want to point out that we had an accounting change that took affect in our first quarter that impacted the presentation of our Japanese joint venture with Nikkiso. Historically we've included 100% of sales and costs of the joint venture and our results backed up the joint venture partner's interest from other non controlling interest expense.

Beginning this quarter, we did not include any of the sales or costs from the joint venture in our consolidated statement of operations and we added back the joint venture interest as equity income in unconsolidated joint venture.

The result to net income is the same. However sales are lowered by roughly 1 million this quarter. In order to compare prior periods on an apples to apples basis, we adjusted prior period financial information to conform to the current year presentation.

We are pleased with our performance during the first quarter and believe the first quarter financial results demonstrated the strength of our business model. Net sales for the first quarter increased 17.4 million to 61.2 million, a 40% increase over the same period last year.

Sales for the quarter were up relative to the prior quarter by almost 1.4 million or 2.4%. As Frank indicated, equally as important to our sales growth is our gross margin performance during the last quarter. Gross margin improved 700 basis points relative to the same period last year reflecting the increases in sales and production volumes and resulting absorption of fixed manufacturing overhead. Relative to the fourth quarter last fiscal year our gross margin improved almost 200 basis points.

We expect gross margins to continue at prerecession levels and range between 40 to 43% in fiscal 2011. Total operating expense increased roughly 1.5 million to 18.6 million for the three months ended June 30th 2010. The most notable increase in operating expense is attributable to increases in compensation costs with the reinstatement of salaries, 401-K match and accrued incentive compensation.

Additionally, operating expenses were adversely impacted by nearly 0.6 million, attributable to the write off of differed financing costs associated with the previous credit facility. We will continue to manage costs closely throughout fiscal 2011 and beyond. Income tax has fluctuated to an income tax expense of 1.4 million for the three months ended June 30th 2010 from an income tax benefit of 0.5 million last year.

The fluctuation is primarily due to the generation of higher profits before taxes during the current quarter and the generation of losses before taxes in certain tax jurisdictions during the corresponding period last year.

Additionally, during the quarter ended June, the company recorded a discreet tax expense adjustment of roughly 0.3 million related to an additional assessment by the U.S. internal revenue service based on a federal tax audit of fiscal 2007 and 2008.

This income tax expense is a non cash item and resulted in a reduction of the company's U.S. net operating loss carry forward. The overall effective tax rate or ETR for the quarter was approximately 20% as compared to approximately 26% for the quarter ended June 30, 2009.

Excluding the 0.3 million discreet tax adjustment just described our ETR for the quarter was 15%.

The overall ETR is based on financial estimates and involves complex domestic and foreign tax issues which the company monitors closely and is subject to change. We ended our first quarter with cash balances of 24.4 million approximately 1.3 million higher than at the end of fiscal 2010.

The company did not make any payments to reduce overall debt levels during the first quarter of fiscal 2011 but retain cash balances to fund operations, to support increased working capital requirements resulting from higher sales as well as capital expenditures for new programs.

Our total indebtedness net of cash balances at June 30 was approximately 49 million. Our fixed charge and leverage ratios at June 30 were 2.33 and 1.82 respectively.

We significantly improved our borrowing availability to our new credit facility and private placements which closed on June 1st. At June 30, 2010 we had approximately 67 million in availability under our revolving credit facility.

I will now turn the call back over to you Frank.

Frank Guidone

Thank you, Mark. Operator, please open the lines for questions at this time.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of John Franzreb with Sidoti & Co. Please proceed with your question. Your mike is now live.

John Franzreb - Sidoti & Co

Good morning guys.

Frank Guidone

Good morning John.

John Franzreb - Sidoti & Co

It seems to me Frank that the feedback from the customers is that be prepared just in case the business – a macroeconomic kind of a slowdown but you seemed a little bit skeptical about that kind of an outlook.

Can you just kind of just talk to about why, if that's why the reason why you maybe skeptical?

Frank Guidone

It's just been getting conservative kind of conservative and cautious outlooks for the last two quarters as well yet the book to bill has remained very strong in terms of signaling growth. So, as that right now seems to be a better indicator because we're not concentrated as you know, we have so many customers. It's tough to aggregate and get a clearing of fixture.

There is a big chunk what comes in and out in the quarter for us is not forecasted that we are not getting feedback. So, it's tough to rely only on forecast, the bookings trends right now at least in the near term seem to be a better indicator for and so we are watching that very closely.

John Franzreb - Sidoti & Co

Great and the new programs you said that's about 20% of the growth I mean just constant with the prior quarter. Could you talk about to lay of the land of those programs, the progression the more [commodity] it progress we can flat line from here right now or we need more the organic business to comeback and tell us maybe discuss a little bit the margin contribution of new programs let's have two all the programs. Can you just give us some flavor there?

Frank Guidone

I don't think there is any meaningful difference between new programs and older programs. There is clearly a range for everything we produce but I don't think you can draw the conclusion that new programs start either higher or lower than older programs. Certainly as things grow and as volume increases with the customer, more pressure for ASP kind of gives back with higher volumes and generally we have that worked into quotes. But we don't see any difference in our margin as a result of that mix.

I think as we progress forward, we do expect that there will be some continued improvement, just based on your kind of slow economic recovery. The fact that -- we're slightly better than prerecession levels but lets say, squint your eyes, prerecession levels now in part that we're getting there through new programs, it tells us that the historical business is still down relative to that level.

So we still think there is improvement there. That's going to be slow and we're going to see that grow over the next couple of years. Therefore new programs are big driver for us. As I mentioned in my own comments we have still a lot on the hopper that we expect to begin over the next several quarters. So I don't have concerns with our ability to continue to drive some continued improvements as a result of additional new programs, not the ones that are now already launched.

John Franzreb - Sidoti & Co

Okay, and one last question and I'll let someone else get in. Last quarter you kind of talked about how you hope the heavy truck market would kind of bounce back during the summer months. Can you just give us an update there, where the volumes lie compared to your expectations?

Mark Thomson

Yeah, as you know, you tracked us closely John. I know. It's, we've seen a significant improvement in the outlook. You saw numbers from folks like (inaudible) and clearly has filtered through to us as well. So we started to see improvement in bookings last quarter but not really the sales from the heavy truck market. That's translated through to additional production this quarter for us and we have solid outlook in that market as we move forward.

John Franzreb - Sidoti & Co

Great news. Thanks.

Operator

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question. Your mike is now live.

Larry Solow - CJS Securities

Hi, good morning. Frank, I don't know if you can give any more color because I know the customer views are probably more anecdotal than quantitative but you said they had been sort of conservative for the last couple of quarters. Are you finding that they are more conservative now? Obviously there's a lot more news and sensationalistic items that the economy is falling out of bed and who knows really where it's going and perhaps they're just falling more victim of that than anything else. But do you find that customers are getting -- feel more conservative or is it just the same old thing?

Frank Guidone

Really impossible for me to answer. We have so many customers and I'm filtering feedback through RSMs and other executives, our regional sales managers. I have limited one on one direct feedback from customers. So it's tough for me to gauge. I don't have a good litmus test of what was their body language a few months ago as compared to now and we don't have customers large enough that I can even draw conclusion from it if I had enough, large enough sample size. I do think that, my personal opinion is that there is a tremendous amount of, we've bombarded through lots of media avenue, print and television with all kinds of cautious conservatism and the impact of Europe and Greece and given what we just came through, you get a sense that everyone has got a foot on hovering over the break paddle read to jam it in the first sign of trouble.

So, I think that influences just the psychic of how people place order. They want to manage a lean supply chain and that impart influences the outlook but again that's not, that's different in last quarter and we maintain a bookings level that would if we were to do that every quarter we would be growing at 20%.

So, I think we got to wait and see this is an important turning point for us; it will be an important quarter. Like I said July was fine and the first few days of August are solid for us. So, we will know a lot more here in the next 90 days.

Larry Solow - CJS Securities

Right, and is there any differences geographically speaking or I mean I assume a lot of your companies, it's sort of multiple national world we live in, so the fact that Europe is maybe leading the return downward or Europe has improved at all. Are you seeing any more weakness in any particularly geographic region?

Frank Guidone

We did a little cut by region and most growth was Far-East followed by Europe, followed by North America.

Larry Solow - CJS Securities

And that could be export, import just I guess try to really tell where that – the underlying economies are?

Frank Guidone

Exactly and we have a higher concentration for a example in our heavy truck business in Europe and that had a stronger quarter and so I don't know that you can take our performance and conclude anything relative to the region because we don't have a large enough market share but certainly we are not seeing Europe as a problem today.

Larry Solow - CJS Securities

Got it and the gross margins or the sequential improvement under 50 bps or so quarter-over-quarter and a similar sales level. Is there anything as it just a mix shift or is there anything, is the currency doing anything there or is it just more.

Frank Guidone

It's really absorption; our contribution margin was almost dead flat so mix would affect contribution margins so we know that's really not a driver. It's our slightly higher sales with basically the same fixed cost gives us better leverage in our overall manufacturing overhead. That's the driver.

Larry Solow - CJS Securities

Got you.

Frank Guidone

That's what we have been talking about for a while that was the driver of what drove it down into the 30s a year ago and that's clearly what's going to – the volume is what has allowed us get to back the pre-recession number.

Larry Solow - CJS Securities

Got it and the just last question on SG&A I expected just some absolute basis to be a little bit higher. Was there any, we expect it to tick up a little bit going forward even on a similar sales level.

Frank Guidone

Keep in mind last quarter we had done basically a year's accrual for bonus in one quarter.

Larry Solow - CJS Securities

Right that I know, I thought it would come down sequentially but it will be a little bit sort of maybe mid-60 million or 200,000 higher than that, only rephrase. Is it sort of good run-rate to use assuming that the sales sort of stay at these levels?

Mark Thomson

We are going to have some uptick in wage we had, the reinstatement took place in April but we had increases taking affect in July which will effect our second quarter. That would be the most substantive increase relative to the prior quarter.

Larry Solow - CJS Securities

Got it.

Frank Guidone

And we do have, I think as I mentioned on prior calls we when we put our budget together we really tried to resist new hirers. So there was a 1.5 million or so in requested new hire on an annualized basis which we spread out throughout the year. So we kind of pushed that to the right. So there may be two or 300,000 a quarter that we see float in as a result of filling open positions.

Larry Solow - CJS Securities

Got it. Okay then just if I may, it sounds like Frank, from just trying to read your by language, obviously you never know what's going to happen in the next few quarters but it does seem like as though economy sort of flat line from here for a while just with your new product pipeline and customer interest there. Even in a flat economy in fiscal '12 you would expect growth from where you stand today. Is that a fair statement?

Frank Guidone

In fiscal '12 I think it's a very fair statement. In the back half of this year I think it's too cloudy to tell at this point. If we had a half, a flat half two I'd be very satisfied relative to the balance we've seen in half one.

Larry Solow - CJS Securities

Right. Okay, excellent. Thank you very much.

Operator

(Operator Instructions). Mr. Thomson and Mr. Guidone, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Frank Guidone

Great. Well in summary, we are clearly very enthusiastic about our Q1 results. From a sales, bookings, earnings and margin standpoint we outperformed our estimates. We had a solid July and expect Q2 to be similar to Q1. There remains as we've discussed some uncertainty in the longer term outlook. Our book-to-bill, while positive was a little less positive in Q1 in the prior quarter which suggests growth may slow. This is really not a surprise given the recent inventory buildups in the supply chain which we think will moderate at this point. We believe Q2 bookings will provide a lot more clarity on our half two results. Regardless, we feel the strength of our development pipeline will allow us to outperform our industry in comps. I'd like to thank everyone for their participation today and Chris, this will conclude our call.

Operator

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Good day.

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Source: Measurement Specialties, Inc F1Q10 (Qtr End 06/30/10) Earnings Call Transcript
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