Shelley Young – The Piacente Group, Inc.
Steven L. Muellner – President, Chief Executive Officer & Director
Paul E. Ross – Chief Financial Officer & Senior Vice President Finance
Meade Instruments, Inc. (MEAD) F1Q09 Earnings Call July 17, 2008 5:00 PM ET
Welcome to the Mead Instruments first quarter fiscal 2009 conference call. (Operator Instructions) I’ll now turn the conference over to Shelley Young of the Piacente Group.
Welcome to Meade’s first quarter fiscal 2009 earnings conference call. Earlier today we issued a press release announcing our financial results. This release is available on the investor relations section of our website. The conference call is being webcast live and also available on the investor relations section of Meade’s website. An archived audio of the webcast of the call will be posted on the website today.
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 results, 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.
Our management team members participating on the call today are Steven Muellner, President and Chief Executive Officer and Paul Ross, Chief Financial Officer. I would now like to turn the call over to Steve Muellner.
Steven L. Muellner
Thank you to everyone for joining us this afternoon. Before we discuss quarterly earnings, I’ll make a few comments on the progress we are making on the restructuring of the company as evidenced by the results we achieved this quarter. It is encouraging to see that the many changes that we made to the business are beginning to positively impact our operating results. The first quarter of fiscal 2009 was our first clean quarter of operations in Mexico. And though we are still ramping up to meet the market demand as evidenced by our $3 million backlog, we are already seeing positive results from the decision to move manufacturing to Mexico in terms of our gross margins which are up 11 points to 21.4% of net sales.
On top of the gross margin improvement, we also saw modest incremental improvements in operating expenses due to reduced overhead and controlled discretionary spending. Thanks to the sale of our sport optic assets, this is the first quarter in a long time that we have generated a net profit. Our net income was $1.8 million or $0.08 per share. Excluding the gain of the sale of our Weaver and Redfield optic brands, the company would have reported a net loss of $2.7 million or $0.12 per share which is a significant improvement over prior year quarter.
We were successful in amending our line of credit with Bank of America and consequently, we are now back in compliance with the covenants and have the liquidity to finance the remainder of the restructuring and invest in new products. Paul will talk in more detail about our operating results in a few minutes but, I wanted to make a few comments about our near term plan for new products. Now that we have taken most of the shrink and fixed steps to permanently take costs out of the business, we’re focusing on the top line and have many initiatives on that front. We are searching for a new VP of sales to help broaden distribution of our products. We have a backlog for high end product due to the transition to Mexico. We will be relaunching our MaxMount of products following that with the launch of the next generation ETX and mySKY. We are also in the position to ship our mass market goods complete and on time.
On a longer term basis, we intend to demonstrate a renewed dedication to product quality and user satisfaction, expand our big box relationships and our OEM business. These initiatives will benefit both fiscal 09 and 10 and better position us for profitability in fiscal 10. The work is not yet done but we’re making steady progress. We have set some long term performance goals for 2011 that are measurable and obtainable. First of all, we want to increase our gross margins to 30% plus by leveraging our Mexican manufacturing base. Secondly, we want to reduce SG&A to something closer to the 20% plus of sales through continued G&A reductions. My hitting these targets, we can improve the profitability of the company and generate net income.
I’d now like to turn the call over to Paul to review the financial results for the first quarter of fiscal 09.
Paul E. Ross
Net sales for the first quarter of fiscal 2009 were $12 million, down $5.6 million or 32% from the first quarter of fiscal 2008. Of the $5.6 million decline, close to half of that was driven by lower revenue for high end telescope products and accessories as a result of the transition of manufacturing from Irvine to Mexico. Our Mexico facilities have not yet ramped up production to levels that meet market demand and we currently have $3 million of backlog for high end telescope products and we expect that we’ll clear this backlog by the second half of the year. The sale of the sport optics brand during the quarter accounted for another piece of the revenue decline and lastly, there was overall weaker demand for our Simmons rifle scope product and therefore decreased shipments.
Gross profit margin increased to over 21% of net sales, an 11 percentage point improvement. The first quarter of fiscal 2009 marked the first full quarter that the company manufactured substantially all of its high end telescopes in its new Mexican manufacturing facilities and did not incur the higher overhead costs associated with Irvine manufacturing. The improvement in margins is also driven by the non-recurrence of inventory write downs. This counted in other items associated with the restructuring that occurred during the first quarter of last year.
SG&A expenses were down 6% in the first quarter and R&D expenses decreased by 37% both due to the lower volume, headcount reductions related to the ongoing restructuring and controlled discretionary spending. During fiscal 2009 the company sold three sport optics brand for gross cash proceeds of $15 million. We use a portion of the cash generated from the sales of these brands to repay our domestic credit facility balance. We continue to believe and demonstrate that the company has sufficient liquidity to support continuing operations.
As Steve mentioned, we recently signed an amendment with Bank of America to amend our credit agreement and bring us back in to compliance with covenants. The overall turnaround of the company is a continuing effort and we will continue to evaluate long term opportunities to further reduce our cost structure.
Now, I’ll turn the call back over to Steve.
Steven L. Muellner
As I referenced in the press release, liquidity continues to be very strong thanks to the sales of the sport optics brands and related inventory during the first and second quarters of fiscal 09. With the much improved liquidity, reduced level of business complexity and plans for further reductions in overhead costs, we believe that we have sufficient cash flow to support current operations through 09 and to provide us with additional operating and financial flexibility in fiscal 10. We will continue to implement further G&A reductions, facility consolidation and reductions in corporate overhead and manufacturing costs to reduce our overhead structure to a level commensurate with our new revenue model. As we said last quarter on our conference call, we anticipate this restructuring may take the better part of fiscal 09.
At the same time, we are focusing on revenue growth opportunities such as MaxMount and the new generation of ETX and mySKY. So, our general message to the investor community is this: one, with the 16th credit amendment signed, we are now in full compliance with our bank covenants and continue on solid footing with Bank of America; two, we are reducing our overhead structure to be in line with the new revenue model; three, new products such as the MaxMount, ETX and mySKY will continue to play a central role in our overall strategy; four, we are assuming a rough retail environment for the foreseeable future; five, although our gross profit is up and our SG&A and R&D expenditures are down, we will not generate a profit this fiscal year; and six, lastly, we are still evaluating our strategic alternatives.
We’ll now open the call for questions.
I’m not registering any questions, please continue.
Steven L. Muellner
Well then, thank you everybody for listening in. Talk to you next time.