Meade Instruments F3Q08 (Qtr End 11/30/07) Earnings Call Transcript

Jan.14.08 | About: Meade Instruments (MEAD)

Meade Instruments Corp. (NASDAQ:MEAD)

F3Q08 Earnings Call

January 14, 2008, 5:00 pm ET


Brandi Piacente – Investor Relations

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

Paul E. Ross – Chief Financial Officer, Senior VicePresident of Finance


Jim Barrett – C. L. King & Associates, Inc.

Scott Lewis – Lewis Capital Management


Good afternoon, ladies and gentlemen. Welcome to the Meadethird quarter 2008 earnings conference call. During today’s presentation allparties will be in a listenonly mode. Following thepresentation theconference will be openfor questions. (OperatorInstructions) This conference is beingrecorded Monday, January 14, 2008. Iwould now like to turn the call overto Brandi Piacente, Investor Relations for Meade. Please go ahead.

BrandiPiacente – Investor Relations

Thank you and good day to everyone. Welcome to today’s conference call. Joining us on the call are SteveMuellner, President and Chief Executive Officer; and Paul Ross, Chief FinancialOfficer.

Before we begin, as usual, we would like to remind everyoneof thecautionary language regarding forward-looking statements contained intoday’s newsrelease, which also applies to any such statements made during this conferencecall. During the courseof this call thecompany may make forward-looking statements regarding future events or thefinancial performance of thecompany. We wish to caution you thatsuch statements are justpredictions and actual events or results may differ materially.

For a listof risks and uncertainties that may affect future earnings, please refer to thecompany’s various reports filed with the USSecurities and ExchangeCommission. Investors should not placeundue reliance on such forward-looking statements and thecompany undertakes no obligation to update any forward-looking statements,whether as a resultof new information, future events, or otherwise.

Now I will turn the callover Steve Muellner. Please go ahead,Steve.

StevenL. Muellner – President, Chief Executive Officer, Director

Thank you, Brandi. And thank you to everyone for joining us this afternoon. Today it is mypleasure to report, what we consider to be, very positive results for our thirdquarter, with revenues of $51.4 million and significant improvement in pro formaoperating profit and net income.

We saw particular strengths on therevenue line from our entry level telescope business and we have seen goodsell-through through to the youngconsumers as well. Rifle scope revenuecontinued to accelerate as predicted and we enjoyed some nice, new productrevenue especially from mySKY.

Our pro formaoperating profit of $3.7 million reflects our continued vigilance inreducing our operating costs as part of our on going turnaround efforts, andrepresents a fairlydramatic improvement over the prioryear.

Theexpected last major costsavings step of theturnaround involves theclosure of our US manufacturing operation and thetransfer of production to lower costlocations. We first announced thisinitiative in a Novemberpress release, and I would like to spend a fewminutes now explaining thesignificance of this move.

First, it is the finalstep in ourglobal headcount realignment. While we hadover 500 employees just a coupleof years ago, we expect to have about 250 global employees once we complete theclosure of our US manufacturing operation. A largeportion of these employees will now be at ourMexican manufacturing center. OurIrvine, California facility will remain our corporate headquarters housing thecompany’s sales, marketing, and administrative functions. And we ultimately expect to employ less than100 employees in theUS. For theforeseeable future we expect to maintain our finished goods distribution inIrvine. We will maintain a littleover 100 employees at ourMexico location, which will house telescope manufacturing, assembly, andrepair. Meade Europe, our wholly owned subsidiaryinGermany will comprise thebalance of our employee count.

We had previously stated that our goal as part of thislatest restructuring was to save about $10 million annually in costs,and asignificant portion of these savings will berealized at the grossmargin level. The bulkof the savingsstem from reduced labor expenses, as cost in Mexicotend to run about one-third that of the USequivalent position.

Inaddition and in conjunctionwith this move, we have optimized our high-end telescope SKU line-up resulting in lessthan one for one headcount transfer. Wehave put together aproduction transition plan and have communicated appropriate timelines for eachproduct to our customers. For our mostpopular high-end products, such as the 8-inchLX90 line, we expect to experience very little interruption, if any. And by mid-year, we should bemeeting customer demand on nearly all SKU’sof the marketleading LX90 and LX200 ranges of products.

With Q3 and themajority of our fiscal 2008 revenues now behind us followed by this last majorrestructuring step, we expect fiscal 2009 to be the firstclean year of operation as a fullyrestructured company. Of course therecontinues to be someexecution risks associated with theproduction transfer, but we dobelieve that all majorstructural changesnecessary to right thecompany have now been enacted.

Once these structural changes are behindus, our focus will turn to growing thecompany from its newly profitable base with better deliveries of current andnew product introductions. I will discussthis growth strategy more in a fewmoments, but first I would like to turn the callover to Paul to review thefinancial details of Q3, Paul.

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

Thank you, Steve. AsSteve mentioned, therevenue came in at $51.4million in the thirdquarter, a 6%increase over $48.5 million in Q3 oflast year. However last year’s Q3revenue contained over $2 million in salesto theDiscovery Channel store, which closed their doors earlier this year. As such, not only were we able to replace the lossof Discovery Channel revenue, but we grew thetop-line by anadditional 6%. Adjusting out the prioryear’s Discovery Channel revenue, our Q3 revenue growth was greater than10%.

Net revenue for the quarterwas broken down as follows:

· $27 million or 51% for telescopes andaccessories

· a littleover $4 million or 7% for rifle scopes

· $5 million or 10% for binoculars

· $15 million or 31% percent for other products,which included mySKY.

Our gross profit margin for thequarter reflects a $3million write-off of inventory. Thiswrite-off is related to a coupleof different factors. First, ourdecision to reduce the numberof high-end telescopes SKU’s resulted in rawmaterials and work-in-process inventory for product that we will no longermanufacture and hastherefore become obsolete. And second,as part of theclean-up of our Irvine operations for themanufacturing transfer, we indentified additional inventory that will bescrapped or not transferred due to age, work-in-process status, quality, orother issues.

Excluding this inventory write-down, our pro formagross margin for thequarter was nearly 23%, compared with 21% during the firstquarter of the prioryear. Excluding thecurrent quarter’s restructuring charge for costs related to the USmanufacturing shutdown and the prioryear’s one-time charges for severance in thecompany’s restatements, operating expenses on a pro formaapple-to-apple basis decreased $1.3 million or 14% from the year ago period.

During thequarter we also amended our domestic credit facility to remediate thecompany’s longcompliance with thecovenants that existed as of the end ofQ2, and we have been incompliance since that amendment and we continue to maintain a goodrelationship with our lender.

And at thispoint I would like to turn the callback over to Steve.

StevenL. Muellner – President, Chief Executive Officer, Director

Okay, thanks, Paul. Before we close, I’d like to spend a fewmoments discussing our growth strategies, and theoutlook for thebusiness into next year and beyond. Webelieve that in fiscal2009 our fully restructured company will provide aprofitable base off of which we will drive future growth and increasingprofits.

First, we have resolved all riflescope supply chainproblems. We have reinvigorated ourrelationship with four very strong, very reliable Asian manufacturing partners,and we are nowfully stocked with product. Additionally, we have made thenecessary reparations with every single customer who became disenfranchised dueto our past delivery issues. And withthat said, and thanks to strong buyer appreciation of our superior engineeringand continued consumer demand theSimmons rifle scope business is set for a steadyand complete recovery inrevenues.

Second, we have resolved all the ETXsupply chainproblems and are nowshipping at ratesthat meet demand. With this productshipping inreliable quantities and in a timelyfashion, we can now focus on theappropriate next stage in the lifeof this wonderful product which happens to be about ten yearsold.

Third, we have continued to spend more on research anddevelopment than in pastyears and now boast a solidpipeline of many new products slated for introduction in fiscal2009 and beyond. MySKY is a primeexample of the resultingkind of product coming out of this increased effort atproduct development. MySKY not only hadsolid sell-through but was featured on Good Morning America as a greatholiday gift idea and was nominated for the 2007Outstanding Technology of the Yearaward by theInternational Academy of Scientists.

Lastly, we continue to penetrate new accounts and sign upadditional customers thanks to the powerof our brand, our products, and therelentless efforts of our sales team. Based on recent meetings with current and potentially new customers wehope to see niceyear-over-year revenue growth in fiscal2009.

On aseparate note, we have recently announced thesettlement of the StarInstruments - RCR Optical Systems complaint. We have always maintained that we were not liable in thismatter and we defended ourselves quite vigorously. Despite their original demands for a largefinancial restitution, thesettlement required only a[dominimus] payment to plaintiffs. It’s a sense allcomplaints brought forward, Standard releases Meade from any and all futureclaims relating to this litigation. We aretherefore happy to close the bookon this matter so thatwe can now turn our full attention to thedevelopment and introduction of more new products for our customers.

As far as potential strategic alternatives areconcerned which we announced on the lastcall, this process is moving along predictable paths, however, we are not atliberty to say muchmore about it at thistime.

So inclosing, I would like to reiterate my thanks to our investors for theirpatience as we turn this company around. Although I have been consistent in mymessage that aturnaround of this severity typically takes three to five years and we are stillreally in yeartwo of that turnaround, it’s sometimes easy to lose sight of the endgoal and getwrapped up in thequarterly fluctuations that come naturally with abusiness in transitionas Meade Instruments hasbeen. So Iappreciate your support.

We would now be glad toopen up the callto questions.



Thank you gentlemen and we will now begin thequestion and answer session. (OperatorInstructions) Our first question comes fromJim Barrett with C. L. King, please go ahead.

JimBarrett – C. L. King & Associates, Inc.

Hi everyone.

StevenL. Muellner – President, Chief Executive Officer, Director

Hi, Jim.

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

Hi, Jim.

JimBarrett – C. L. King & Associates, Inc.

I think that this would be aquestion for Paul. Paul, can you talkabout thecompany’s credit lines for theupcoming year and your financing needs for theupcoming holiday season and how that is likely beaddressed at thispoint in time?

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

Sure. As you all know,we amended our credit facility back inNovember and I guess that I will just reiterate what we arepublishing in the 10-Qfiled this afternoon, which is that we expect the creditfacility and our cash from operations to besufficient for the nexttwelve months. So I do notanticipate any special liquidity news.

JimBarrett – C. L. King & Associates, Inc.

Does it alsosuggest you would not expect to doanother equity raise?

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

At thispoint we have no plans whatsoever to doanother equity raise.

JimBarrett – C. L. King & Associates, Inc.

Okay, and then secondly once you have fully transitioned outof Irvine from themanufacturing standpoint and broadly speaking, and Steve I think that you mayhave touched on this. But broadlyspeaking, tell us at whatpoint in time thecompany would tend to realize theroughly $10 million worth of savings.

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

Sure. The majoremployee reduction actually occurred mid-December, soeffective with January 2, when we opened our doors for business in thiscalendar year all ofthose savings were being realized by [inaudible] basis immediately. I would say thatwe will berecognizing full revenue, full return from this by mid-year. And by that I would say, Jim, that there are stillsome start-up costs occurring to date in termsof getting the newfacility up and running, and getting themachinery set up, and things that you would expect. But as I just said, by mid-year it shouldbe fulland running according to what we have stated.

JimBarrett – C. L. King & Associates, Inc.

Okay, well thank you both very much.

StevenL. Muellner – President, Chief Executive Officer, Director

Okay, thanks.

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

You’re welcome.


(Operator Instructions) Our next question comes from Scott Lewis with Lewis Capital Management. Please go ahead.

ScottLewis – Lewis Capital Management

Thank you, and good morning guys. Are theregoing to bedelivery issues for this fiscal fourth quarter and first quarter based onmanufacturing transition for the high andmid-level telescopes?

StevenL. Muellner – President, Chief Executive Officer, Director

Scott, the shortanswer is yes. We’ve got out to ourcustomer base with a listof product lines that they can expect to experience some delay inshipments with approximate dates for when we should be back in fullshipping mode. And I would say thatletter went out mid-December I think, maybe early December, maybe beforethat. And everything is pretty much onschedule with what we had published to our customer base.

ScottLewis – Lewis Capital Management

Okay, and then on mySKY do haveany sense yet if that is going to beprimarily aseasonal kind of product or would you expect to have strong sales year round in that?

StevenL. Muellner – President, Chief Executive Officer, Director

We actually expect it to beprobably two seasons, which would be springand then theholiday season, theChristmas season. Stream will be drivenby graduation presents, and Father’s Day, and things like that, and then ofcourse Christmas coming in thefall. The onlybusiness that we have that is really pretty flat throughout the yearwould be ourvery high-end telescopes. So thisis pretty much going to follow the samepattern as the restof our business.

ScottLewis – Lewis Capital Management

Okay, great. And thenlastly, Steve, can you elaborate at all aboutsome of the newproducts? I know that you talked earlierlast year about having seven or eight in thepipeline and I was just wondering if you could talk about those at all.

StevenL. Muellner – President, Chief Executive Officer, Director

As much as I would like to, the natureof these calls is whatever I say ofcourse I’m tipping my hand to thecompetition. I will tell you that wehave some very exciting new products scheduled for introduction in the earlyquarters of this coming fiscal year. Andthey would involve products in both the riflescope sport optic side as well as thetelescope side.

ScottLewis – Lewis Capital Management

Okay, great. Thankyou very much.

StevenL. Muellner – President, Chief Executive Officer, Director



(Operator Instructions) At thistime there areactually no questions in thequeue. I would like to turn the callback over to management for their concluding remarks.

StevenL. Muellner – President, Chief Executive Officer, Director

Okay, well I guess that I can be happythat I’ve answered all ofyour questions everybody. I think, Ihope that you will agree that it was a goodthird quarter for thecompany registering gains in salesand nice improvement inprofitability over a yearago. And we will get downto thebusiness of finishing up the yearand making theappropriate sales calls, and rolling into next year. Thank you all foryour call.


Ladies and gentlemen this does conclude the MeadeInstruments third quarter 2008 earnings conference call.

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