Wells-Gardner Electronics Corporation (NYSEMKT:WGA)
Q2 2014 Earnings Conference Call
August 06, 2014, 11:00 AM ET
Joseph Diaz - Managing Partner, Lytham Partners, LLC
Anthony Spier - Chairman, President and Chief Executive Officer
James Brace - Executive Vice President, Secretary, Treasurer and Chief Financial Officer
Michael Volpe - Cantone Research
Welcome to the second quarter 2014 financial results conference call. My name is Christine, and I will be the operator for today's call. (Operator Instructions) I will now turn the call over to Mr. Joe Diaz. You may begin.
Thank you, Christine, and thank all of you for joining us today to review the financial results of Wells-Gardner for the second quarter of 2014, which ended June 30, 2014. As the conference call operator indicated, my name is Joe Diaz. I am with Lytham Partners. We are the financial relations consulting firm for Wells-Gardner.
With us on the call, representing the company today are, Tony Spier, Chairman and Chief Executive Officer; and Jim Brace, Executive Vice President and Chief Financial Officer.
At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the release, you can retrieve it off the company's website at, wells-gardner.com or numerous financial sites on the internet.
Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Wells-Gardner during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements.
Those statements reflect the intent, belief or expectations of the company and its management. Readers are caution that the forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those expressed in any forward-looking statement.
Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, development of competing technologies, availability of adequate credit, interruption or loss of supply from key suppliers, increased competition, regulatory process and legislative changes affecting the gaming industry.
Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflects management's analysis only as of today. Wells-Gardner assumes no obligation to update information provided in this conference call or to reflect on the occurrence of unanticipated events.
With that said, let me turn the call over to Tony Spier, Chairman and Chief Executive Officer of Wells-Gardner. Tony?
Thanks, Joe, and thanks to all of you for participating on today's call. While the second quarter of 2014 was challenging compared to last year's second quarter, we were able to drive improved net income and earnings per share.
Net income for the quarter increased $195,000 to $226,000 or $0.02 per diluted share compared to $31,000 or $0.00 per diluted share in the second quarter of 2013. Increased parts revenue and a 20% decrease in engineering, sales and administrative expenses contributed to the substantial bottomline increase.
As has been the case for a number of years, our focus on managing operating expenses continue to be positive, particularly in this ongoing challenging environment.
VLT sales for the quarter decreased 20% compared to the second quarter of 2014, as that business begins to enter a mature stage. As we are now in the third year of the program in the state of Illinois, the rate of VLT installation is beginning to slow, as many of the early adopters have in fact installed their equipment, and over the next two years we expect that the market will be close to fully developed.
The dynamics in the Illinois VLT market have changed to the extent that we now believe that the City of Chicago will not opt into the VLT program in 2014. We expect second half of 2015 might be a more realistic entry point for the city. We believe that our market share has actually improved to over 20%, and we expect that Illinois will continue to be a very competitive market for VLTs.
Part sales for the quarter increased approximately 20% versus a comparable quarter last year and increased approximately 28% versus the first quarter of 2014. During the quarter we were able to recapture some OEM parts and service business and generated increased FutureLogic sales. This is a clear indication that the gaming industry continues to repair and maintain existing hardware and equipment rather than replace with new systems.
LCD for the second quarter of 2014 increased by approximately 5% from the first quarter 2014, this is second consecutive quarter of increased LCD sales, which is encouraging. However, LCD sales in the quarter decreased 14% from a relatively strong prior-year quarter. The results for the second quarter of 2014 indicate the continuation of the sixth consecutive year without an equipment replacement cycle in the U.S. gaming industry.
Since the downturn in the economy in 2008, casino operators have dramatically reduced spending on updating their gaming floors and updating their existing technology. As I previously indicated, although we have seen measurable improvement throughout the economy, at large, we are not yet seeing increased CapEx spending by the casino industry.
Although, market conditions continue to be soft, the financial foundation at Wells-Gardner continues to be strong. We continue to run the company conservatively with an unceasing focus on managing expenses, keeping debt low and operating our business from internally generated cash flow.
At June 30, 2014, the company was net debt free with cash of $561,000 and debt of $232,000. In the six months of 2014, the company has generated $1.5 million of positive cash flow with bank debt at $232,000, down from $1.6 million at December 31, 2013.
Engineering, sales and administrative expenses for the second quarter of 2014 were $1.8 million compared to $2.2 million in last year's second quarter, an improvement of 20%. We continue to focus on operating the business as efficiently as possible.
With that, let me turn the call over to Jim Brace, Wells-Gardener's Chief Financial Officer, for a review of the financial results. At the conclusion of Jim's review, we will open the call for your questions. Jim?
Wells-Gardner reported net income of $226,000 or $0.02 per share in the second quarter ending June 30, 2014, compared to net earnings of $31,000 or $0.00 per share for the same period in 2013. For the second quarter ended June 30, net sales decreased $1.7 million or 12% to $12.4 million compared to $14.1 million in the second quarter of 2013.
Monitor sales decreased $0.9 million or 14% to $5.7 million in the second quarter compared to $6.6 million in the second quarter of '13. This was due to total display unit volume decrease of 6% to 19,200 units compared to 20,500 units last year second quarter, plus an average selling price decrease of 8%.
Parts in VLT sales decreased $0.8 million or 10% to $6.7 million in the second quarter compared to $7.5 million in the second quarter 2013. Part sales increased noticeably of a small base, while VLT sales declined in the second quarter compared to the same period 2013.
Gross margin for the second quarter 2014 decreased $240,000 or 11% to $2 million or 16.3% of sales compared to $2.25 million or 16% of sales in the second quarter of 2013.
Monitor gross margins decreased by approximately $300,000 with 30% of decline due to volume and 70% due to lower overhead absorption and the decline in average selling prices. Parts and VLT gross margins increased slightly due to more favorable parts margin, partially offset by lower VLT margin dollars.
Operating expenses decreased $436,000 to $1.78 million in the second quarter of 2014 compared to $2.22 million in the second quarter of '13. Operating expenses decreased $148,000 to support monitor engineering; $124,000 to support sales; $38,000 more for sales commissions; and a $127,000 decrease for administrative expenses, including bad debt expense in the second quarter of '14 compared to the same quarter last year. Operating expense as a percent of sales decreased to 14.4% in the quarter and 15.7% in the same quarter last year.
Operating earnings were $234,000 in the second quarter of '14 compared to $42,000 in the second quarter of '13, resulting in a $192,000 increase in operating earnings. This increase was due to significantly lower operating expense for the second quarter this year, exceeding the lower sales and margin this year compared to the second quarter last year.
Interest expense was $15,000 in the second quarter this year compared to $9,000 last year same quarter. Other income was $7,000 in the second quarter this year compared to zero last year.
Income tax expense was zero in the second quarter 2014 compared to $2,000 in the second quarter '13. As a result, net income was $226,000 in the second quarter of '14 compared to net income of $31,000 in the second quarter of '13. For the second quarter of '14, again basic diluted earnings per share was $0.02 compared to $0.00 in the second quarter last year.
For this first half ended June 30, the six months, net sales decreased $7.3 million or 23% to $24.8 million compared to $32.1 million in the first half of '13.
Monitor sales decreased $6.23 million or 36% to $11.12 million in the first half compared to $17.35 million in the first half of '13. This was due to the total display unit volume decrease of 31% in the first six months to 36,800 units compared to 53,700 units same period last year, plus an average selling price decrease of 7%.
Parts and VLT sales in the six months decreased $1.04 million or 7% to $13.72 million in the first half of 2014 compared to $14.76 million for the first half of '13. Parts sales increased noticeably, again, while VLT sales declined in the first half compared to the same period last year.
Gross margin for the first half decreased $1.1 million or 22% to $4.1 million or 16.4% of sales compared to $5.2 million or 16.2% of sales in the first half of last year. Monitor gross margins declined by $1.3 million with about 80% of the decline due to volume and 20% to lower overhead absorption in selling prices. Parts and VLT gross margins increased by $200,000 due to favorable product mix with more growth in parts then VLTs.
Operating expenses for the first six months decreased $862,000 to $3.7 million in the first half of 2014 compared to $4.6 million in the first half of '13. Operating expenses decreased $301,000 to support engineering, $220,000 to support sales, $135,000 lower for sales commissions and $207,000 lower for administrative expenses, including bad debt expense in the first half of 2014 compared to the first half of '13. Notwithstanding the operating expense decreases, the lower sales increased operating expenses as a percent of sales to 15% in the first half from 14.3% in the first half of last year.
Operating earnings were $353,000 in the first half of 2014 compared to $628,000 in the first half of '13, resulting in a $275,000 operating expense decline for the six months. This decline was due to significantly lower monitor sales and margins, exceeding the operating expense decreases for the first half of this year compared to the first half of last year.
Interest expense for the six months was $31,000 compared to $45,000, first half of '13, due to very low debt balances. Other income was $13,000 in the first half of this year and $1,000 expense in the first half of '13.
Income tax expense was $38,000 in the first half of '14 compared to, must have been around $22,000 first half of 2013. The company has available net operating loss carry forward of approximately $5 million as of June 30, 2014.
Net income was $297,000 in the first half of '14 compared to net income of $580,000 in the first half of '13. For the first half of 2014, basic and diluted earnings shares were $0.03 compared to basic and diluted earnings per share of $0.05 in the first half of last year.
Our balance sheet continues to remain very strong. Our debt was $232,000 at June 30, compared to a debt level of $1.6 million at yearend 2013. Cash at June 30, was $561,000, meaning that Wells was cash positive. The company's debt to equity ratio was less than 2% at June 30, compared to 10% at yearend 2013. We are in compliance with all June 30, 2014 bank covenants with Wells Fargo Bank.
That concludes my financial review. I'll now turn the call back to Tony.
Thank you, Jim. Before we open up the call for our questions, I want you to know that our strategic review that commenced in December of 2013 continues. The Board of Directors of Wells-Gardner Electronics Corporation authorized management to explore strategic alternatives.
The company has retained Innovation Capital, based in El Segundo, California as your financial advisor to conduct a thorough review of company's business and assets and to provide recommendations for consideration by the Wells-Gardner's Board of Directors. And we are looking at several possible alternatives here. There could be no assurance that this evolution process will result in any transaction. Management will report results of the strategic review at the conclusion of the process.
As it relates to our outlook for the full year 2014, based on our best estimates and information available at this time, we believe full year 2014 net sales will be in the range of between $46 million and $49 million compared to $57.9 million in the full year 2013.
The management believes that the first quarter of the year will turn out to be the most charging of the year, as evidenced by the improved results generated in the just completed second quarter. The sales guidance is based on the assumption that the City of Chicago does not opt-in to the VLT program in Illinois in 2014.
With that, let me turn the call over to the conference call operator to begin the question-and-answer session. Christine?
(Operator Instructions) Our first question comes from Michael Volpe from Cantone Research.
Michael Volpe - Cantone Research
I have actually two questions. With the decreasing markets and where the price of the stock is, is there any consideration, and I understand you're looking at all types of alternatives, I just don't understand how with a company of this size, it takes so long to find out any alternatives? But the stock being down around $1.25 to $1.30, is there ever going to be a point in time where management decides that we're going to show the shareholders that we believe in our company itself and we're going to start to buy some shares back?
Well, I don't think we're in a position to do anything right now, because we are in the strategic alternatives, and anything we do would be inside trading. So I don't think we're in any position to trade or to buy also, Mike, at the current time.
Michael Volpe - Cantone Research
And my second question, Tony, is with the ability to find alternatives to get the company going into -- is there any thought of future contracts that are out there? I understand that there are some things you can't disclose, but where is the company going at this point on a go-forward basis with the decreasing markets you have out in Illinois?
Well, I mean I think the issue is we've hired Innovation Capital to advise us on those issues. And believe me we're taking those issues very seriously. And obviously, we're well aware of our markets, and which are growing and which aren't growing. So we're looking hard at our strategic alternatives and we are in conversations with our investment bankers absolutely every day.
Our next question comes from [ph] Robert Bacchi, who is a Private Investor.
Jim and Tony, did a great job considering the hard times that you're having. My question is for the future, in reference to Scientific Gaming taking over Bally and GTECH taking over IGT, which is also a partner in a VLT gaming. Do we expect or can we expect that you're trying to get their business for the slot machines?
Firstly, Bob, thanks for question. Let's do each one separately. Firstly, what I can tell you is that we are aggressively marketing to both groups. So first let's start with GTECH, IGT. You're absolutely right. The GTECH is our largest customer. We have a very close relationship with them. We have 90% of the LCD business. And so we full expect GTECH's acquisition of IGT to be a net positive for Wells-Gardner, without any question.
On the issue of Scientific Games buying WMS, and then buying Bally. We have a significant amount of WMS business. Right now, we have none of Bally, although we have had in the past. And we have actually been in dialogue with Bally in the last 30 days. And so there to we expect to get some benefit from the roll-up of WMS and Bally together.
Very good. I am glad you're pursuing this.
We're pursuing it very aggressively, Bob.
Thank you. I will now turn the call back to Tony Spier for closing remarks.
Again, Jim, Joe, and I thank you for your participation on today's call. We look forward to talking to you again at the conclusion of the third quarter. We hope you have a great day. Thank you.
Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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