Ballantyne Strong, Inc (NYSEMKT:BTN)
Q2 2012 Earnings Call
August 03, 2012 10:00 am ET
Gary L. Cavey - Chief Executive Officer, President and Director
Mary A. Carstens - Chief Financial Officer, Senior Vice President, Treasurer and Secretary
Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2012 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, August 3, 2012. I would now like to turn the conference over to Rob Rinderman from J C I R Ballantyne Investor Relations firm.
Thank you, Mandy. Good morning, everyone, and welcome to our 2012 second quarter earnings results conference call and webcast.
Today's call and webcast may contain forward-looking statements related to the company's future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions and involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and these risks and uncertainties are detailed from time to time in the company's SEC filings. The company's actual performance may differ materially because of these or other factors discussed in the management's discussion and analysis section of Ballantyne's filings, copies of which can be obtained from the SEC or via the company's website at www.strong-world.com.
All information discussed on this conference call is as of today, August 3, 2012, and Ballantyne undertakes no obligation to update any statements or expectations from prior conversations. Today's call is being webcast live over the Internet, and a replay will be available on our website for a minimum of 30 days.
I'll now turn the call over to President and CEO, Gary Cavey, who's joined by CFO, Mary Carstens. Gary?
Gary L. Cavey
Good morning, everybody, and thank you for joining us today. Earlier today, Ballantyne Strong reported our second quarter results featuring top line net revenue growth of 24% when compared to Q2 2011.
As expected and similar to trends reported in recent quarters, our margins faced some headwinds due to competitive pricing issues in the cinema equipment industry. In addition, our Q2 results were negatively impacted by year-over-year increase in the company's selling and administrative expenses. Mary will provide more color on this and the rest of Ballantyne's financials, including an update on our capital structure following my prepared remarks.
Our net revenue growth in the quarter was directly attributable to the cinema industry's ongoing digital transformation, which has continued its positive momentum year-to-year, especially domestically. Many smaller circuits and independent exhibitors are now registering for one of the industry's Virtual Print Fee funding models, helping them defray a large portion of the cost of digitizing their auditoriums.
As a reminder, the VPF deadline, previously established by the major Hollywood studios, is coming to an end sometime in 2013. And as you would expect, this is helping to influence a number of the theater owners to take action, who was previously on the sidelines. Summer goers appreciate the enhanced pristine picture and state-of-the-art sound quality delivered through digital projection systems, which help create a more immersive experience that cannot be duplicated by even the best home theater equipment.
Going to the cinema remains a comparatively affordable entertainment option and is also one of the most popular social experiences. The industry continues to enhance the delivery through new technology in digital projection systems. Texas Instruments has developed a new light engine around a 0.69 chip that will allow the projector manufacturers to develop a more compact and efficient projector for small theater locations. This will be available in 2013.
Other enhancements in development include laser-light engines to improve the brightness and clarity of pictures, high-speed frame rates of 48 and 60, new immersive sound systems, products to enhance the entire moviegoing experience, such as 4D.
Now turning back to our results once again. Ballantyne generated a solid quarter in our cinema service segment, with revenues growing -- continuing to grow compared to our year ago levels. As a reminder, the services category comprises projection system installations, integration work, in addition to after-the-sale service contracts and the 24/7 Network Operations Center monitoring.
Q2 revenues were once again spread over a wide range of digital deployments from a large number of customers from medium-sized circuits to smaller mom-and-pop theater owners. We are continuing to pursue opportunities to further grow our cinema services footprint, both organically, as well as nonorganic acquisitions. As mentioned in the past, some of the areas we were prioritizing and actively exploring are related to security and energy management, both of which are key issues for the cinema industry, as well as other business segments.
We believe that given Ballantyne's unique core competency and technology-based services, our talented 80-person industry-leading services team and our state-of-the-art Network Operations Center is creating a unique opportunity to successfully transition into a number of non-cinema related areas. Some of our exhibitor customers are in -- also involved in related hospitality businesses, such as hotels, restaurants and resorts. They and many other exhibitors have also been adding additional dining options in recent years.
These include in-theater restaurants, and others are offering sit-down food and alcohol service at your seats from attentive waitstaff with the goal of further enhancing and differentiating the theater-going experiences. We believe Ballantyne can be a valuable equipment and related services partner for many existing and prospective customers and we are involved in many high-level discussions on these fronts.
We are also asking our clients how we can assist them in better managing their business as a value-added outsource partner. We are actively pursuing opportunities as we seek to successfully transform our business and evolve with the changing times.
Before I turn it over to Mary, I think it's worth reiterating that Ballantyne is also focusing on several other new initiatives. They include increasing our cinema screen sales on a worldwide basis, and to that end, we've expanded our sales teams throughout the world to drive cinema screens, notch [ph] and lighting sales worldwide.
And Mary will now give you more color on our second quarter financials and a brief overview of our capital structure. Mary?
Mary A. Carstens
Thanks, Gary, and good morning, everyone. Today, I'll provide additional analysis of our second quarter results and an update with respect to our balance sheet.
For the second quarter, we generated total revenue of $46.7 million, which consisted of $46 million of sales in our cinema products and services, and $700,000 in sales in the Lighting products. The total results reflect an increase of 24% when compared to the prior year period.
Ballantyne's top line increase was the result of strong sales in cinema products as the digital rollout maintained its momentum along with continued growth in our cinema services business, which grew 12.9% over the year ago period. Screen sales came in at $3.3 million. And although the sales are down from the second quarter of 2011, which had the very strong sales due to exhibitors preparing their theaters for scheduled 3D movie releases, it's up approximately 10% over the first quarter of 2012.
Gross margin came in at 13.6% or $6.4 million, which is down from the compared -- to the year ago period of 18% or $6.8 million. The decline in margin is due to higher concentration of digital equipment sales, which carries lower margins combined with the strong competitive environment in this phase of the rollout.
Operating income for the quarter came in at $2.5 million, which is down from the prior period due to lower margin from the sales and an increase in SG&A cost, which is partially offset by the gain of approximately $460,000 from the recent sale of our film projector manufacturing facility. Our SG&A expenses increased to $4.4 million from $3.1 million, reflecting the cost associated with the recent strategic investments we have made in the business, along with the expansion of our global product and service offerings.
In addition, the second quarter 2011 expense was lower than normal due to some unfavorable -- due to some favorable adjustments that occurred during the period. There are also some expenses that flowed through in different quarters when comparing the 2 periods. Going forward, we expect to see SG&A return to more normal levels.
Reported net earnings amounted to $1.8 million or $0.13 per diluted share versus $2.5 million or $0.17 per diluted share in the prior year period. Our tax rate for the second quarter of 2012 is 32.5%, up from 27.6% in the prior year period as a result of higher earnings within the U.S. operations due to the digital rollout. The U.S. had a higher tax rate than the other regions we do business in.
Moving to the balance sheet. The quarter-end cash and cash equivalents balance of $35.9 million is down slightly from year end. As we mentioned in our press release, the decrease was attributable to stock that was purchased this year, payment of the 2011 tax liability along with the quarterly estimates, a reduction in accounts payable, and to a lesser extent, an increase in inventory as we continue to take advantage of supplier discounts. This was partially offset by collections of accounts receivable, proceeds received from the sale of the film assets and a distribution from the Digital Link II joint venture.
During the second half of 2012, we utilized approximately $2.7 million to repurchase over 558,000 shares of common stock pursuant to our board-authorized stock buyback program. The company's $20 million credit facility with Wells Fargo remains available and untapped at quarter end, affording us ample funding for potential future capital needs.
In summary, we remain confident in our ability to continue to grow the business and believe the recent strategic investments we have made in the business and the expansion of our global product and services offerings will enable us to take advantage of new opportunities.
This concludes our prepared remarks. Operator, please open up the lines for questions.
[Operator Instructions] And we currently have no questions registered. Mr. Cavey, I'll now turn call back to you.
Gary L. Cavey
Well, thank you very much for joining us today. Mary and I are looking forward to speaking with you again following the release of Ballantyne's 2012 third quarter results later this year. Have a great day.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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