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Meade Instruments Corp. (NASDAQ:MEAD)

F3Q08 Earnings Call

January 14, 2008, 5:00 pm ET

Executives

Brandi Piacente – Investor Relations

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

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

Analysts

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

Scott Lewis – Lewis Capital Management

Operator

Good afternoon, ladies and gentlemen. Welcome to the Meade third quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded Monday, January 14, 2008. I would now like to turn the call over to Brandi Piacente, Investor Relations for Meade. Please go ahead.

Brandi Piacente – Investor Relations

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

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 just predictions and actual events or results may differ materially.

For a list of risks and uncertainties that may affect future earnings, please refer to the company’s various reports filed with the US Securities and 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.

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

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

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

We saw particular strengths on the revenue line from our entry level telescope business and we have seen good sell-through through to the young consumers as well. Rifle scope revenue continued to accelerate as predicted and we enjoyed some nice, new product revenue especially from mySKY.

Our pro forma operating profit of $3.7 million reflects our continued vigilance in reducing our operating costs as part of our on going turnaround efforts, and represents a fairly dramatic improvement over the prior year.

The expected last major cost savings step of the turnaround involves the closure of our US manufacturing operation and the transfer of production to lower cost locations. We first announced this initiative in a November press release, and I would like to spend a few minutes now explaining the significance of this move.

First, it is the final step in our global headcount realignment. While we had over 500 employees just a couple of years ago, we expect to have about 250 global employees once we complete the closure of our US manufacturing operation. A large portion of these employees will now be at our Mexican manufacturing center. Our Irvine, California facility will remain our corporate headquarters housing the company’s sales, marketing, and administrative functions. And we ultimately expect to employ less than 100 employees in the US. For the foreseeable future we expect to maintain our finished goods distribution in Irvine. We will maintain a little over 100 employees at our Mexico location, which will house telescope manufacturing, assembly, and repair. Meade Europe, our wholly owned subsidiary in Germany will comprise the balance of our employee count.

We had previously stated that our goal as part of this latest restructuring was to save about $10 million annually in costs, and a significant portion of these savings will be realized at the gross margin level. The bulk of the savings stem from reduced labor expenses, as cost in Mexico tend to run about one-third that of the US equivalent position.

In addition and in conjunction with this move, we have optimized our high-end telescope SKU line-up resulting in less than one for one headcount transfer. We have put together a production transition plan and have communicated appropriate timelines for each product to our customers. For our most popular high-end products, such as the 8-inch LX90 line, we expect to experience very little interruption, if any. And by mid-year, we should be meeting customer demand on nearly all SKU’s of the market leading LX90 and LX200 ranges of products.

With Q3 and the majority of our fiscal 2008 revenues now behind us followed by this last major restructuring step, we expect fiscal 2009 to be the first clean year of operation as a fully restructured company. Of course there continues to be some execution risks associated with the production transfer, but we do believe that all major structural changes necessary to right the company have now been enacted.

Once these structural changes are behind us, our focus will turn to growing the company from its newly profitable base with better deliveries of current and new product introductions. I will discuss this growth strategy more in a few moments, but first I would like to turn the call over to Paul to review the financial details of Q3, Paul.

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

Thank you, Steve. As Steve mentioned, the revenue came in at $51.4 million in the third quarter, a 6% increase over $48.5 million in Q3 of last year. However last year’s Q3 revenue contained over $2 million in sales to the Discovery Channel store, which closed their doors earlier this year. As such, not only were we able to replace the loss of Discovery Channel revenue, but we grew the top-line by an additional 6%. Adjusting out the prior year’s Discovery Channel revenue, our Q3 revenue growth was greater than 10%.

Net revenue for the quarter was broken down as follows:

· $27 million or 51% for telescopes and accessories

· a little over $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 the quarter reflects a $3 million write-off of inventory. This write-off is related to a couple of different factors. First, our decision to reduce the number of high-end telescopes SKU’s resulted in raw materials and work-in-process inventory for product that we will no longer manufacture and has therefore become obsolete. And second, as part of the clean-up of our Irvine operations for the manufacturing transfer, we indentified additional inventory that will be scrapped or not transferred due to age, work-in-process status, quality, or other issues.

Excluding this inventory write-down, our pro forma gross margin for the quarter was nearly 23%, compared with 21% during the first quarter of the prior year. Excluding the current quarter’s restructuring charge for costs related to the US manufacturing shutdown and the prior year’s one-time charges for severance in the company’s restatements, operating expenses on a pro forma apple-to-apple basis decreased $1.3 million or 14% from the year ago period.

During the quarter we also amended our domestic credit facility to remediate the company’s long compliance with the covenants that existed as of the end of Q2, and we have been in compliance since that amendment and we continue to maintain a good relationship with our lender.

And at this point I would like to turn the call back over to Steve.

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

Okay, thanks, Paul. Before we close, I’d like to spend a few moments discussing our growth strategies, and the outlook for the business into next year and beyond. We believe that in fiscal 2009 our fully restructured company will provide a profitable base off of which we will drive future growth and increasing profits.

First, we have resolved all rifle scope supply chain problems. We have reinvigorated our relationship with four very strong, very reliable Asian manufacturing partners, and we are now fully stocked with product. Additionally, we have made the necessary reparations with every single customer who became disenfranchised due to our past delivery issues. And with that said, and thanks to strong buyer appreciation of our superior engineering and continued consumer demand the Simmons rifle scope business is set for a steady and complete recovery in revenues.

Second, we have resolved all the ETX supply chain problems and are now shipping at rates that meet demand. With this product shipping in reliable quantities and in a timely fashion, we can now focus on the appropriate next stage in the life of this wonderful product which happens to be about ten years old.

Third, we have continued to spend more on research and development than in past years and now boast a solid pipeline of many new products slated for introduction in fiscal 2009 and beyond. MySKY is a prime example of the resulting kind of product coming out of this increased effort at product development. MySKY not only had solid sell-through but was featured on Good Morning America as a great holiday gift idea and was nominated for the 2007 Outstanding Technology of the Year award by the International Academy of Scientists.

Lastly, we continue to penetrate new accounts and sign up additional customers thanks to the power of our brand, our products, and the relentless efforts of our sales team. Based on recent meetings with current and potentially new customers we hope to see nice year-over-year revenue growth in fiscal 2009.

On a separate note, we have recently announced the settlement of the Star Instruments - RCR Optical Systems complaint. We have always maintained that we were not liable in this matter and we defended ourselves quite vigorously. Despite their original demands for a large financial restitution, the settlement required only a [dominimus] payment to plaintiffs. It’s a sense all complaints brought forward, Standard releases Meade from any and all future claims relating to this litigation. We are therefore happy to close the book on this matter so that we can now turn our full attention to the development and introduction of more new products for our customers.

As far as potential strategic alternatives are concerned which we announced on the last call, this process is moving along predictable paths, however, we are not at liberty to say much more about it at this time.

So in closing, I would like to reiterate my thanks to our investors for their patience as we turn this company around. Although I have been consistent in my message that a turnaround of this severity typically takes three to five years and we are still really in year two of that turnaround, it’s sometimes easy to lose sight of the end goal and get wrapped up in the quarterly fluctuations that come naturally with a business in transition as Meade Instruments has been. So I appreciate your support.

We would now be glad to open up the call to questions.

Question-and-Answer Session

Operator

Thank you gentlemen and we will now begin the question and answer session. (Operator Instructions) Our first question comes from Jim Barrett with C. L. King, please go ahead.

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

Hi everyone.

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

Hi, Jim.

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

Hi, Jim.

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

I think that this would be a question for Paul. Paul, can you talk about the company’s credit lines for the upcoming year and your financing needs for the upcoming holiday season and how that is likely be addressed at this point in time?

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

Sure. As you all know, we amended our credit facility back in November and I guess that I will just reiterate what we are publishing in the 10-Q filed this afternoon, which is that we expect the credit facility and our cash from operations to be sufficient for the next twelve months. So I do not anticipate any special liquidity news.

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

Does it also suggest you would not expect to do another equity raise?

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

At this point we have no plans whatsoever to do another equity raise.

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

Okay, and then secondly once you have fully transitioned out of Irvine from the manufacturing standpoint and broadly speaking, and Steve I think that you may have touched on this. But broadly speaking, tell us at what point in time the company would tend to realize the roughly $10 million worth of savings.

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

Sure. The major employee reduction actually occurred mid-December, so effective with January 2, when we opened our doors for business in this calendar year all of those savings were being realized by [inaudible] basis immediately. I would say that we will be recognizing full revenue, full return from this by mid-year. And by that I would say, Jim, that there are still some start-up costs occurring to date in terms of getting the new facility up and running, and getting the machinery set up, and things that you would expect. But as I just said, by mid-year it should be full and running according to what we have stated.

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

Okay, well thank you both very much.

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

Okay, thanks.

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

You’re welcome.

Operator

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

Scott Lewis – Lewis Capital Management

Thank you, and good morning guys. Are there going to be delivery issues for this fiscal fourth quarter and first quarter based on manufacturing transition for the high and mid-level telescopes?

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

Scott, the short answer is yes. We’ve got out to our customer base with a list of product lines that they can expect to experience some delay in shipments with approximate dates for when we should be back in full shipping mode. And I would say that letter went out mid-December I think, maybe early December, maybe before that. And everything is pretty much on schedule with what we had published to our customer base.

Scott Lewis – Lewis Capital Management

Okay, and then on mySKY do have any sense yet if that is going to be primarily a seasonal kind of product or would you expect to have strong sales year round in that?

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

We actually expect it to be probably two seasons, which would be spring and then the holiday season, the Christmas season. Stream will be driven by graduation presents, and Father’s Day, and things like that, and then of course Christmas coming in the fall. The only business that we have that is really pretty flat throughout the year would be our very high-end telescopes. So this is pretty much going to follow the same pattern as the rest of our business.

Scott Lewis – Lewis Capital Management

Okay, great. And then lastly, Steve, can you elaborate at all about some of the new products? I know that you talked earlier last year about having seven or eight in the pipeline and I was just wondering if you could talk about those at all.

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

As much as I would like to, the nature of these calls is whatever I say of course I’m tipping my hand to the competition. I will tell you that we have some very exciting new products scheduled for introduction in the early quarters of this coming fiscal year. And they would involve products in both the rifle scope sport optic side as well as the telescope side.

Scott Lewis – Lewis Capital Management

Okay, great. Thank you very much.

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

Thanks.

Operator

(Operator Instructions) At this time there are actually no questions in the queue. I would like to turn the call back over to management for their concluding remarks.

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

Okay, well I guess that I can be happy that I’ve answered all of your questions everybody. I think, I hope that you will agree that it was a good third quarter for the company registering gains in sales and nice improvement in profitability over a year ago. And we will get down to the business of finishing up the year and making the appropriate sales calls, and rolling into next year. Thank you all for your call.

Operator

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

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