Jan 28, 2010
Executives
Dennis Bunday -- EVP and CFO Pat Cavanagh -- President and CEO
Analysts
Howard Halpern -- Taglich Brothers Michael Taglich -- Taglich Brothers Peter Nitz [ph]
Operator
Good afternoon. My name is Mason and I will be your conference operator today.
At this time, I would like to welcome everyone to the Williams Controls first quarter 2010 results conference call. (Operator Instructions).
Thank you. I would now like to turn the call over to Mr.
Dennis Bunday, Chief Financial Officer of Williams Controls. You may now begin.
Dennis Bunday
Good afternoon everyone and welcome to our first quarter fiscal 2010 conference call. Before we begin, you should note that the following discussions and responses to questions reflect management’s views as of today, January 28, 2010, and may include forward-looking statements.
Actual results may differ materially from those projected in the forward-looking statements. Information concerning risk factors and other factors that could cause actual results to differ materially is included in our filings with the SEC, including our 2009 annual report on Form 10-K, our fiscal 2010 quarterly reports on Form 10-Q and our fiscal 2010 current reports on Form 8-K.
Specific factors that may cause such a difference include, but are not limited to, availability of adequate working capital, domestic and international competitive pressures, increased governmental regulation, increased cost of materials and labor, and the general economic conditions in the United States and abroad. I will now turn the call over to our CEO, Pat Cavanagh, for his comments on the quarter.
Pat Cavanagh
Thank you, Dennis. Good afternoon, everyone and welcome to our fiscal first quarter conference call.
This morning, we released our financial results for the first quarter of fiscal 2010. We have seen continued improvement in our sales starting in September of last year.
Our first quarter sales were $11.7 million, up 9.5% from the same quarter in fiscal 2009. We saw a 138% improvement in Asia, and a 25% improvement in Europe, while our North American sales were down 5% compared to the year ago first quarter.
Compared to the fourth quarter of fiscal 2009, all sales in North America and Europe were up 7% and 44% respectively, while our Asian sales remained the same. Notably in the quarter, we had one of our Russian commercial truck customers place an order for over $300,000.
As a result of a new Chinese off-road customer coming online in the first quarter, our off-road sales were up 11% compared to the same quarter last year and 17% sequentially. As a direct result of the higher sales of $11.7 million and cost reductions, we had an operating profit of $527,000 for the quarter, a significant improvement from the fiscal 2009 first-quarter loss of $909,000 on sales of $10.7 million; and a $396,000 increase from the fourth quarter of 2009 operating profit of $131,000 on $10.5 million in revenue.
Over the past four years, we have seen a rather important shift in our geographic sales mix. In 2006, the North American commercial truck business made up more than 39% of our sales.
While still very important to us, our growth in international markets and in the off-road segment, combined with the weakness of the North American truck market has reduced this segment to 19% of our total sales in 2009. In our first quarter, the North American truck market improved, with total Class 8 production reaching just over 118,000 units for the year, while Class 5 through Class 7 production reached 98,000 units.
These levels of North American truck production are the weakest in over 10 years. Last week, I was at the Heavy Duty Dialogue Conference.
This is a meeting that brings together many of the industry's key suppliers and OEMs to discuss the latest technology and the industry forecast. In our first quarter, there was a modest pre-buy in part of the 2010 NAFTA emissions mandate, which impacted our sales positively by approximately $500,000.
We expect to see approximately the same others that impact on our second quarter sales, as the pre-mandate engines are used up, but there continues to be uncertainty in our fiscal third and fourth quarters as the more expensive EPA-2010 emission compliant engines are required in North American trucks. These engines are typically $10,000 to $14,000 more expensive than the pre-mandate engines.
It is widely perceived that truck build rates may decline for a couple of quarters once the pre-mandate engines are exhausted in March or April. Current industry forecast estimates the North American Class 8 market in 2010 will improve modestly to 120,000 to 150,000 units, while the Class 5 through Class 7 markets will reach 110,000 to 130,000 units.
Current industry forecasts also point to significantly higher North American commercial truck production in 2011, as the economy continues recover, truck rate improves, fleet balance sheets are repaired, truck age, mileage and depreciation reach replacement stage. And more used trucks are exported because of the weaker dollar.
While the estimates for 2011 vary widely, we feel North American Class 8 production will be in the 190,000 to 250,000 unit range, while the Class 5 through Class 7 will be in the 140,000 to 180,000 range. This will be a welcome change from where we are at today.
Our visibility into the future is improving, and we are seeing sales in our second quarter improve to the $3.8 million to $4 million a month range. While surely this tells us it is sustainable in the third and fourth quarter, it is a positive sign.
We will continue working on growing the company internationally in improving our market share and product offering. I will now turn the call over to Dennis to comment on our financial position.
Dennis?
Dennis Bunday
Thank you, Pat. Sales increased to $11.7 million in the first quarter, posting the highest quarterly sales since the fourth quarter of fiscal 2008.
The trough of the economic cycle appears to have occurred during our third fiscal quarter of 2009 and sales have increased steadily since that time, with first-quarter 2010 sales being 11% higher than the fourth quarter and 39% higher than the third quarter of fiscal 2009. Although we have seen improvement from our low point, the industry is still significantly below the levels of the pre-economic downturn, and our first quarter run rate is still approximately 30% below fiscal 2008 sales levels.
Comparing our results to last year's fourth-quarter, the improvement was most dramatic for our European OEM truck business, with sales up 113%. NAFTA OEM truck sales were up 13% and worldwide off-road sales were up 17%.
The only negative was Asian truck sales, which were down 4%. However, this is more due to timing of shipments than an overall change in the market.
Sales in that region were up 11% over the third quarter and 132% over fiscal 2009 first quarter. Net income for the quarter was $396,000 or $0.05 per diluted share compared to the $841,000 or $0.11 per share loss in the first quarter of 2009.
Even excluding the first quarter 2009 write-down of marketable securities of $317,000 or $0.04 per diluted share, the $900,000 quarter-to-quarter improvement was substantial and was accomplished through a combination of cost controls and $1 million in higher sales. As we have discussed in prior calls, in the first half of fiscal 2009, we adjusted our expenses downward in response to the difficult business environment.
These actions included temporary wage reductions, reduced work schedules, a workforce reduction of approximately 10% for the US salaried workforce, suspension of the company’s 401(k) match as well as other cost reductions. With increasing sales volumes, we returned all employees to full workweeks in the fourth quarter of fiscal 2009, and in the first fiscal quarter of this year, the 401(k) match was restored.
We reinstated all salaried employees to their full salaries at the beginning of the second quarter of fiscal 2010. Other than small increases in our engineering department to support the large number of new products programs, we have no plans at this time to fill any of the eliminated positions.
For the quarter, the basic EPS share count was 7,271,065 and fully diluted shares were 7,375,680. At quarter end, we had 7,273,320 shares outstanding.
First quarter 2010 gross profits were $3.6 million, a 22% improvement over the fourth quarter of last year and a 40% improvement over the first fiscal quarter of 2009. For this year’s first fiscal quarter, gross margins were 30.6% of sales compared to 28% in the fourth quarter of last year and 23.9% in the first quarter of last year.
As a percent of sales, material, direct labor, scrap and warranty, we are on track with last year with no significant variances. On a dollar basis, overhead was down 8% from the fourth quarter and 14% from the first quarter of 2009.
That, combined with the higher sales levels, drove the improved gross profit percentages during the quarter. Operating expenses, which include engineering and development, sales and administration, were up $239,000 during the quarter from the fourth quarter of fiscal 2009.
Comparing this quarter's operating expenses last year's first quarter, this quarter was down $400,000. However, a portion of that difference relates to a $275,000 deferred compensation charge in 2009.
Other than higher spending on legal expenses related to our defense of the quest of class action, the majority of the first quarter increase was in the engineering and sales areas. Those costs will vary from quarter to quarter with the timing of new product development and sales activities.
During the economic downturn, we carefully had selected the overhead and operating expenses. One of our primary focuses was and continues to be to strategically invest in our longer-term goals of product line and geographic expansion.
Therefore, sales and engineering costs did not decline as much as manufacturing overhead in 2009; and the increase this quarter is due mainly to the timing of activities, rather than a significant re-instatement of curtailed programs. Our operating expense as a percent of sales is still relatively high at 26% of sales this quarter.
Although down from the low 30% ranges last year, this ratio is still above the 19% range in fiscal 2008, when sales were approximately 30% higher. We anticipate we will be able to return to the sub 20% range if sales improve.
The tax rate for the quarter was 23.7%. This rate of course includes provisions for US bedroll, state and foreign taxes, and due to the relative weighting of each, will cause larger variations in the rate when operating relatively close to breakeven levels.
For this quarter, our China income, which is at a lower tax rate than the US rate, was a proportionately larger percentage of the total income, causing the lower rate. There are several factors that can cause the rate to fluctuate during the year, but I anticipate that the rate will be between 20% and 30% for the full year.
Looking at the balance sheet and cash flow, cash declined to $200,000 during the first quarter of this year. Income before taxes, depreciation, and a non-cash charge for stock option expense or EBITDA contributed $1.1 million.
However, the first quarter is when we normally pay a number of once-yearly payments, including property taxes, annual bonuses, and insurance payments, and a small decline in cash is not unexpected. Even though we experienced a slight seasonal decline in our cash, our overall financial structure remained solid, with $9 million in cash, no debt, and a current ratio of 3.3:1.
The $300,000 increase in trade accounts receivable is due to the higher sales volume in the first quarter as compared to the fourth quarter, and the timing of sales within each quarter. The increase would have been larger, but during the quarter, we were able to reduce a portion of our overdue balances from some of our smaller accounts.
Overall, receivable aging has improved over the last six months. The largest component of other receivables on both the December 31 and September 30 balance sheets is a $1.1 million federal income tax refund receivable for tax payments made in early fiscal 2009, which we will collect later this year.
Depreciation and amortization for the quarter was $524,000, and non-cash stock option expense was $138,000. CapEx for the quarter was $372,000.
This is a lower-than-normal and more reflects timing of expenditures, rather than a reduction in overall spending. For the full year, I expect we will spend approximately $2 million to $2.5 million on capital projects.
This concludes our formal comments. We would now like to turn the meeting over to questions.
Operator
(Operator Instructions). Your first question comes from the line of John Nobile.
Your line is now open.
Pat Cavanagh
Hi, John, how are you doing?
Howard Halpern -- Taglich Brothers
This is actually Howard. I am pinching in for John today, he wasn't able to make the call, but he did leave a couple of questions and wanted it answered.
His first question was with regard to you needing to be I guess Sarbanes-Oxley compliant this fiscal year and what the annual expense might be.
Dennis Bunday
Well, you know, right now, the requirement is that all companies have to comply with Sarbanes-Oxley beginning I forget exactly when but essentially, we would be required to be compliant with Sarbanes-Oxley for our September 30 year. There is a proposal that has passed the House subcommittee that would permanently exempt any company that is a non-accelerated (inaudible) or in other words, under $75 million of non-affiliated market cap.
That has not made it through the full House or the Senate yet and it has not been signed into law, but this is kind of the same thing we have been dealing with for years and years, where this movement starts and it seems to make its way through, but no guarantees on that. If we do have to comply with Sarbanes-Oxley, and remember, we had to do that in 2008, so we already have a lot of the work done, it is probably going to be incremental of $70,000, $75,000, something like that for us for fiscal 2009 or for fiscal 2010 rather.
Howard Halpern -- Taglich Brothers
Okay. I also wanted to I guess get a little color on the industrial joysticks market and you know, how large that market is and how long would it take you to gain some momentum in that market?
Pat Cavanagh
Well, the most recent work that we have done, and we have kind of done it a little bit differently just looking at the competitors in the market and trying to add up their sales and results. We think the market is somewhere in the neighborhood of $150 million in North America -- a $150 million market when you add up the competitors in the market, and based on that, it is a very, very high mix lower volume market, similar to our pedals.
And many of the customers are the same. If you look across the spectrum, they are mostly off-highway equipment manufacturers that are building forklifts and man lifts and all sorts of bulldozers and that type of equipment.
Typically, the development cycle is probably a couple of years to get into a major program, perhaps three. We introduced a product, we have been talking to a number of customers, we have a couple that are very interested, and we are moving forward with it, but I wouldn't expect to see significant sales for two years, perhaps three.
Howard Halpern -- Taglich Brothers
Okay, thanks, guys.
Operator
Your next question comes from the line of Michael Taglich. Your line is now open.
Michael Taglich -- Taglich Brothers
Hi, guys.
Pat Cavanagh
Hi, Mike, how are you?
Michael Taglich -- Taglich Brothers
You are one of the better foot pedal companies in the world today.
Dennis Bunday
It has been some interesting developments.
Michael Taglich -- Taglich Brothers
A couple of different things. First off, why won't that happen to you, in say 10 years ago or 15 years ago?
Pat Cavanagh
Yes, I wasn't here then, so I'm not really familiar with that, but something to what you are seeing in the market today is very, very high volume. You know, our business is really focused on high mix lower volume business.
I mean, a high volume application for us is 20,000, 25,000 units a year. But we are not in the millions and millions of units of year.
So you know, we have a very good handle on that kind of business, and the volumes are much lower. So you want to get into those kind of huge recall issues.
The second thing is, you know, the products that we build are for very abusive, very difficult environmental situation. I mean, as I said, bulldozers and heavy trucks, they get constant use.
So the testing, we do a lot of destructive testing, we have our own testing regimen, and you know, for us, I mean, some of these companies are -- especially in the automotive area, relatively new. They have been making pedals for four or five years, some of them came from a sensor background, but we came from a pedal background.
And we have been making pedals for 20-some years and we have a lot of experience in designing them for very, very rugged tough environments and we have developed a lot of our own proprietary testing and regimens to make sure that these products perform as they are intended to do over a very long period of time. You know, we typically test up to 20 million cycles, which is four or five times what the kind of automotive environment is looking at.
So, that is kind of where we come from and we constantly deliver the best quality systems that I feel that we can possibly afford and we do a very good job of monitoring and identifying the problem areas that we have seen in the past and using them in new developments to make sure that our products are as good as they possibly can be.
Michael Taglich -- Taglich Brothers
How do you see the truck market for this year? How much -- first of all, the pre-buy based on the omissions changed was how much, if you will?
Pat Cavanagh
Well, we made an estimate, for our business, based on what we saw in the marketplace and we think that in the first quarter, which was the fourth calendar year, we saw an approximately $0.5 million additional sales driven by this pre-buy, and that was the purchase of production slots to get 2009 pre-mandate engines and there were a number of pre-mandate engines made last year, and they are going to be shipped in trucks this year, and we expect that to last through the first quarter. So we're seeing approximately the same kind of thing.
We are expecting to see another $0.5 million in our second fiscal quarter as a result of this pre-buy.
Michael Taglich -- Taglich Brothers
How many trucks would that give you, without implying?
Pat Cavanagh
You know, Mike, we don’t usually give out our individual pricing for competitive reasons. So I don't want to comment on that, but I'm saying is about $0.5 million.
Michael Taglich -- Taglich Brothers
Right.
Pat Cavanagh
You know, you can make some estimates and the forecasts for the industry are out there, but I think more importantly for us, I mean we are looking forward to the third and fourth quarter, we are not quite sure -- that is a little bit cloudy at this point, we don’t know what that is going to be, but I think the estimates are and they are pretty good, you know, for 2010, and 2010 is kind of a transition year for everybody. You know, once the kind of the smoke clears in 2010 and some of the balance sheets of the fleets are better, the trucks are reaching a somewhat critical stage, both in mileage and age, and I think we are really looking forward to 2011 as being a relatively strong year, kind of back to normal, if you will, for this industry and a lot of people are talking in the 250,000 range for Class 8 in 2011.
But, you know, 2010, we are looking slightly better than 2009, probably in the 120,000 to 150,000 for Class 8.
Michael Taglich -- Taglich Brothers
All right. So we still should see a significant jump off of your crappy levels last year.
Pat Cavanagh
Well, it was a tough year last year, Mike, I will say that, and you know, one of the areas that we focused on during that year is developing our business in the off-road area and internationally. And you know, there were a number of people worried that the Class 8 North American market was too big a segment for us at about 40%.
Right now, it runs at about 19%. So you know, --
Michael Taglich -- Taglich Brothers
Yes, for the wrong reason.
Pat Cavanagh
We have developed our business in a couple of areas to -- it has obviously dropped significantly because of the volumes, I mean, we went to 360,000 Class 8 trucks in 2006 to 100,000 last year. So –
Michael Taglich -- Taglich Brothers
One last question and I will get back in the queue. China; how do you see this year versus last year?
Pat Cavanagh
Well, we are seeing an improvement in China because of the penetration of electronic engines. There is no doubt about that.
We are seeing net improvement. The other thing is, we are seeing clearer than we originally thought, we see some OEMs in the off-road area going to electronic engines, which they are using our pedals and hand controls and we are really pleased that.
As I mentioned in the comments, we have a new very large Chinese OEM that has began using our products, and it has had an impact on our off-road sales and we expect it to continue going forward. So you know, we are seeing an improvement in that market, both from you know, it is going to come off its low, but we are seeing it increase penetration over there as we have expected all along.
Michael Taglich -- Taglich Brothers
All right, thanks guys. Good job, and I am looking forward to things continuing to get moderately better from here.
Pat Cavanagh
Thanks, Mike.
Operator
Your next question comes from the line of Peter Nitz [ph]. Your line is now open.
Peter Nitz
Gentlemen, thank you. Last quarter, you talked about small truck market, which you were just starting to penetrate, and you had a new contract which you were able to talk about.
How is that going on in this quarter and for the future?
Pat Cavanagh
Well, we like that market very well, it plays to our strengths, we think. As part of that, I think that I mentioned last quarter, we launched into that market as a result of the expiration of a non-compete agreement that we had that went back to an operation that we sold in Florida years ago.
But in fact, Dennis and myself are leaving on Sunday for both China and India and we are going to be starting to bring our plant in India, which we are just launching up to speed. So our plan at this point is production in the fourth quarter or late fourth quarter, first quarter of 2011 for that program.
And we will actually start producing products in I believe our China facility before that, but we will transition production to the Indian facility in the fourth quarter or first quarter of 2011. So we like that.
We are continuing to look at other opportunities for that same product. So if there is a much higher volume and our estimates are kind of maybe a smaller margin than your typical Class 8 product, but it is something that we see as a natural force and plays to our strengths.
Peter Nitz
Thank you.
Pat Cavanagh
Thank you.
Operator
Your next question comes from the line of Michael Taglich. Your line is now open.
Michael Taglich -- Taglich Brothers
Hi, it may sound like a silly question, but you had interest expense of $5000 and negative interest income on a $9 million change balance, I am reading it. Can you give me a little background on that?
Dennis Bunday
The interest income, we just did the little bit of interest we get on our cash balances. And of course, as you know right now, I am pretty conservative on this, I don't want to risk losing any principal and with rates pretty low, I don’t want to risk the company’s cash balances chasing a percentage, you know, a point or so.
And so we don’t make -- you know, we don’t have much in the way of interest income, and the interest expense with the interest on some small interest I believe on amortization of a lease payment, but it is not a very big number.
Michael Taglich -- Taglich Brothers
So the interest income as reported, it has got brackets around it.
Dennis Bunday
Yes, that is right, because anything below the operating income line, if it is income, it is a bracket, and if it doesn't have, it is an expense, okay?
Michael Taglich -- Taglich Brothers
All right. You don't have any uses of that cash in the next six months, right?
Pat Cavanagh
You know, there is nothing we have specifically identified. I mean, we have ideas and things like this, but nothing that I would say we are preparing to announce or anything.
You know, we haven’t gotten to that point, really.
Michael Taglich -- Taglich Brothers
All right. Thanks for the hard work, guys; and I'm looking forward to talking to you in the future.
Pat Cavanagh
Okay, thanks, Mike.
Michael Taglich -- Taglich Brothers
Pleasure.
Operator
(Operator Instructions). There are no further questions at this time.
I turn the call back over to you.
Dennis Bunday
Well, this concludes our first quarter conference call and I would like to thank everyone for attending today. Bye now.
Operator
This concludes today's conference call. You may now disconnect.