May 7, 2010
Executives
Dennis Bunday – Chief Financial Officer Pat Cavanagh – Chief Executive Officer
Analysts
John Nobile – Taglich Brothers
Dennis Bunday
Good afternoon, everyone. And welcome to Williams Controls Second 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, May 6, 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 costs of materials and labor, and 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. How are you?
It’s been an interesting day in the markets today. I’d like to welcome everyone to our second quarter conference call.
This morning we released our financial results for the second quarter of fiscal 2010. We’ve seen a continued improvement in our sales starting in the quarter ending September 2009.
Our second quarter sales were $12.6 million up 38% from the same quarter of fiscal 2009, and 8% from the first fiscal quarter this [Audio Gap]. Year to date sales compared to last years first six months are up 23%.
During this quarter there were several factors that drove the 6% per share loss. Dennis will these factors in his remarks after mine.
But we don’t breakout revenues in individual markets. I want to share with you some relevant sales comparison and market projections.
Compared to the first six month period last year our NAFTA truck sales were up 4%. I recently have the opportunity to review the Heavy Duty Manufacturers Association, supplier parameter, with surveys executives of many of the suppliers to the truck industry in North America.
The results of the survey for North American class 8 market for 2010, is that it will improve modestly from 2009 to 121,000 units, while the class 5 to 7 markets will reach 94,000 units this year. The Heavy Duty Manufacturers Association member forecast for the North American class 8 production in 2011, is 160,000 units, while the class 5 to 7 forecast is a 103,000 units.
While these forecasts are not as optimistic at some of the more scientific market forecasters this is still welcome change from where we are today. The NAFTA truck market is almost 20% of our business, and we were preparing ourselves to take advantage of the rebound in this market when it occurs.
The off-road market was up 42% for us in the first half of the year, compared to the same period last year, driven by an improving economy, new customers and the recent military vehicle contract. We see the military business has remained stable throughout this fiscal year.
We were particularly impressed with the strength of our international sales in the first six months of this fiscal year when compared to the same period last year. The European business is rebounding from extremely depressed period last year.
It is up 28%, compared to the same six month period last. With the current fundamentals, we really don’t see much more improvement in this market until mid to late 2011.
One bright spot is, that we have been selected by a number of European construction equipment OEMs to be the supplier on equipment using the new Phase IIIb, I’m sorry, Phase IIIb electronic engines that would be execute in January of 2011. Our business in China was up 77% during the first six months of the year, compared to last year.
This was a result of improving penetration of European engines at the truck OEMs and the addition of two new off-road equipment customers last year. Our sales in India for the first six months were up a 145%, compared to the same period last year, while this is a large increase.
It’s from a relatively small base. We have been very successful in India securing business at major OEMs in this market as we have discussed in previous calls.
Current phase, a mission mandated trucks that will use electronic pedals will begin in October 2010. Last month we announced the opening of our plant in Pune, India to supply the commercial truck in automotive industry.
We will be in production later this year. We saw a substantial increase in the Korean market.
It was up 128% as the market rebounded from the same six month period last. As you may know, we have a strong position in the Korean market with sales of almost $2 million in the first six months.
We will also benefit from new business in Korea that will impact sales in 2011. After the clash of the Russian business last year as a result of lower oil prices, our business is up substantially this year from the same six month period last year.
We are also working hard to increase our share of this market. Overall, compared to the six month period of fiscal 2009, our sales in North America and Europe were up 13% and 28%, respectively, while our Asian sales were up 95%.
We currently see sales in our third quarter in the $3.8 to $4.4 million, a month range. But is really too early to tell this is sustainable throughout the year because of the lingering effects of the 2010, a mission mandate of North American truck sales.
I’ll now turn the call over to Dennis to provide some details on our financial results. Dennis?
Dennis Bunday
Thank you, Pat. Sales have continued increase each quarter since our low point in the third quarter of fiscal 2009, to $12.6 million in the second quarter of fiscal 2010, and we are up 38% from the prior second quarter sales of $9.1 million.
Although, we have seen improvement from our low point the industry is still significantly below the levels of the pre-economic downturn and as a comparison our second quarter run rate is still approximately 23% below fiscal 2008 sales levels and 31% or $5.7 million below the second quarter of fiscal 2007, when the world-wide markets were healthier. Sales for the first six months of fiscal 2010 were [20.4] million or 23% higher than the same period in fiscal 2009, where sales were $19.8 million.
The net loss for the quarter was $432,000 or $0.06 per diluted share, compared to a loss of $1.2 million or $0.17 per diluted share in the second quarter of 2009. The quarter-over-quarter improvements are due primarily to the higher sales volumes with pricing remaining stable, when I require a special note.
For the last several months we have been involved in settlement discussions with the plaintiffs in the Cuesta class action lawsuit. You may recall this was a claim brought against Ford and Williams in Oklahoma over five years ago relating to pedals produced by our automotive supply group in Florida, which we sold in 2004.
Although, we have always felt this case to be without merit, we also feel that settlement is a reasonable outcome and it appears we are very close to a settlement, therefore during the second quarter we recorded a $775,000 pre-tax provision or $478,000 after-tax for our portion of settling the case. It will most likely still be a few months before this case is finally close, but we will certainly be glad to get this distraction behind us.
For the first six months of fiscal 2010, our net loss was $37,000 or $0.01 per share, compared to a net loss of $2 million or $0.28 per share in the same period of fiscal 2009. Included in the first six months of fiscal 2010 was the provision for the Cuesta class action lawsuit, or as the first six months of fiscal 2009 included a write-down of marketable securities of $317,000.
For the quarter the basic and fully diluted EPS share count was 7,273,320 shares, at quarter end we had 7,273, 320 shares outstanding. Second quarter 2010 gross profits were $3.4 million, a significant improvement over the second fiscal quarter of 2009 gross profits of $1.2 million.
For this year’s second quarter gross margins were 26.5% of sales, compared to 13.4% in the second quarter of last year. As a percent of sales, materials and direct labor were on track with last year with no significant variances.
Overhead costs were down 13% from the second quarter of 2009. Repair and maintenance costs and pension costs were both lower in the second quarter of fiscal 2010.
The second quarters of both 2010 and 2009, however, were impacted by some negative factors. In 2010, we incurred approximately $100,000 of additional costs, as a couple of our suppliers struggle to meet our accelerated delivery schedules.
We also revised the first quarter pricing for one of our customers which totaled $165,000. Finally, warranty was approximately $200,000 higher due to a specific issue with one customer.
Excluding this, gross margins would have been 3.7% higher or at 30.2%. And included in the second quarter of fiscal 2009, were severance costs totaling $275,000.
And $116,000 write-down to our capital license fee related to adjustable pedal technology, which lowered 2009 margins by 4.3%. For the six-month, gross profits improved to $6.9 million or 28.5% gross margin, on $24.4 million of sales, compared to $3.8 million or 19.1% on $19.8 million of sales for the first six months of fiscal 2009.
Engineering, sales and administration expenses were up $268,000 during the quarter, from the second quarter of fiscal 2009. The majority of the second quarter increase was in engineering and sales.
And the engineering increase was in part timing of new product development spending, but we've also added three new engineering technical positions to accommodate the higher volume of new product development activities. Selling expense was higher because of increased sales commissions associated with the higher volumes in the quarter.
For the first six months of fiscal 2010, engineering, sales and administration expenses were down a $136,000, compared to the first six months of 2009. Similar to what we've seen in the quarter, there were increases in engineering and sales expenses, however, there was a $334,000 reduction in administrative expenses, primarily due to the first six months of fiscal 2009, including a non-cash $275,000 deferred compensation charge.
For the quarter, we recorded a tax benefit at a rate of 41% and a benefit at a rate of 82% for the first six months. At close to breakeven level, the interrelationship of federal, state and international taxes can produce unusual tax rate percentages as we see here, and is not indicative of our long-term rate.
Overall, on a long-term basis we should have normalized tax rates in the mid 30% ranges. Now, turning to the balance sheet and cash flow.
Cash is up a modest $315,000 from last year ended $9.6 million. We were up $515,000 from the first quarter of this year, as the first quarter is typically when we pay a number of once yearly payments, including property taxes, insurance and annual bonuses.
Overall, we weathered the financial difficulties of 2009 very well and our financial structure remained solid. Our current ratio is 2.8 to 1 and we have no short or long-term debt.
Trade accounts receivables are up $1.3 million, which is due solely to the higher sales volumes and the timing of sales within each quarter. Overall the receivable aging has continued to improve over the last six to nine months.
The largest component of other receivables both on the March 31 and September 30th balance sheet is a $1.1 million federal income tax refund receivable per-tax payments made in early fiscal 2009. We will collect this amount later this fiscal year.
Trade payables were up approximately $900,000 from increase component purchasing to support the higher sales levels. And accrued liabilities are up mostly because of the $775,000 accrual for Cuesta class action.
Depreciation and amortization for the second quarter was $531,000 and non-cash stock option expense was $156,000. CapEx for the quarter was $626,000.
For the full year, I expect we will spend approximately $3 to $3.5 million on capital projects, which is higher than we have seen in prior years as we invest in our new India facility tooling for several new projects and manufacturing improvements. This concludes our formal comments.
We would now like to turn the meeting over to questions. Shannon, could you turn the meeting over to questions, please.
Operator
(Operator Instructions) Your first question or comment comes from the line of John Nobile from the Taglich Brothers. Your line is now open.
John Nobile – Taglich Brothers
Hi. Good afternoon.
Pat Cavanagh
Hi, John. How are you?
John Nobile – Taglich Brothers
Good. Thanks.
I just wanted to go one point with you. I kind of missed, you said gross margins in the second quarter would have been about 13.2%.
Dennis Bunday
Yeah.
John Nobile – Taglich Brothers
Without the special items, if you could just give me the quick run down of the dollar amount of those items, I mean…
Dennis Bunday
Yeah. Absolutely, the first one was -- let me get too, I’m sorry, make sure, I’ve got the right numbers and I don’t mess it up really here.
Pat Cavanagh
We really enjoy the conference this week John.
John Nobile – Taglich Brothers
It was very good. I thought it was going overwhelmed.
Dennis Bunday
What we had there John was -- we have some freight cost and other logistics costs and inefficiencies about $100,000 because a couple of suppliers, our sales as you can tell ramped-up pretty quickly and we have a couple of suppliers that have little bit of difficulty keeping up with that. And so, there were some additional cost there.
We also had the pricing revision of $165,000 and our warrantee was $200,000 higher.
John Nobile – Taglich Brothers
Okay. Warrantee $200,000.
And the freight cost that’s not or I can say recurring, there is a $100,000 increase was?
Dennis Bunday
The large portion, John – a large portion was driven by large IC chip manufacture and he’s having some problems in keeping up with a demand, its increased very quickly. And we told at this point that he will have this result in June and July.
John Nobile – Taglich Brothers
Okay. Of the class action provision, $775,000 charge this quarter?
Dennis Bunday
Yes.
John Nobile – Taglich Brothers
Do you feel that it’s a one-time charge here or might be there will be more to follow in the following quarters?
Dennis Bunday
Well, John, obviously, what you do, and you make a provision as you take your best estimate on this thing. But I would have to say, the documents have not been finalized, but I feel we are very, very close.
And I don’t anticipate that number change and I don’t anticipate that we are going to have any further charges going forward.
Pat Cavanagh
Of course, it’s not done yet, I have to say the same is gorgeous, it’s not totally done yet, but I have to feel pretty good about that 7, 75 number.
John Nobile – Taglich Brothers
Okay. So basically, all that you expected to take was taken and of course, till it finalized we shall see but if there is anything going forward, it should not really be significant as far as you can tell us at this time?
Pat Cavanagh
That’s exactly right. No, when you do this type of things when you have – when you book the estimate, the best guess you think there is and so, this looks, that look pretty solid.
Dennis Bunday
We are comfortable with the number, John.
John Nobile – Taglich Brothers
Okay. And I was curious if you could explain or just talk a little bit more about the lingering effects that you had mention from the 2010 the mission mandate, which obviously now we are into the second quarter after that mandate.
So, if you could just explain that little bit why…
Pat Cavanagh
Well, okay, I can, John, I’ll cover this best I can. There was a mission engine -- mission technology change at the beginning of the year.
John Nobile – Taglich Brothers
Okay.
Pat Cavanagh
The EPA allowed the engine manufacturers to build engines and installed them in trucks in 2010. So if they had built up had an inventory of trucks with or inventory of engines that were built in 2009, they can use them for a certain period of time in 2010, and they’ve been using those engines.
And those engines are basically are $7 to $12,000 less expensive than the 2010 engines. So a lot of sales, I saw one estimate that said 8 to 10,000 trucks will pulled into first half of late in 2009 and then about 10,000 trucks will pulled into 2000 – the first half 2010 from the second half because the trucks with those engines are less expensive.
So what we expect is that there is going to be a slowdown in the heavy duty NAFTA truck sales in the second half of the year because they are going to be driven – they are going to be, there was a kind of -- early pre-buy.
John Nobile – Taglich Brothers
Okay.
Pat Cavanagh
And the new 2010 engines will, the 2007 technology engines will be used up by the end of this month or next and so the more expensive 2010 engines will be use in the second half of the year. But there is significant pent-up demand in freight.
The amount of freight being hold is increasing. So we think and the trucks that are currently on the road are, at a record age level and we expect that their could be a small or a dip in the sales in the second half of the year and we expected to rebound in sometime in 2010.
So that’s kind of what we’ll see, you know.
John Nobile – Taglich Brothers
Okay. Yeah.
No. Understand.
Pat Cavanagh
I’m sorry 2011, 2011 John…
John Nobile – Taglich Brothers
All right. And I think market forecast or industry forecast for the heavy truck market were pretty robust 2011.
Pat Cavanagh
Yeah.
John Nobile – Taglich Brothers
Just one more question. You had mentioned, was it in October of 2010 there was going to be phase mission regulations, that was in India?
Pat Cavanagh
Right. That’s in India.
John Nobile – Taglich Brothers
Okay.
Pat Cavanagh
They are going to start moving to electronically controlled engines, the date is October of 2010, and they are going to phase those things. I think it’s by region.
John Nobile – Taglich Brothers
So it will be a gradual phase.
Pat Cavanagh
Right. It does not going to be an overnight switch.
John Nobile – Taglich Brothers
And then regard to China, do you have specific dates on when that would be mandated?
Pat Cavanagh
Well, that’s been a kind of all over the math, John, I mean, they’ve changed it several times. What we are seeing is that, there was an increasing number of, I guess in China, we call them Euro IV electronic engines being built by the manufacturers.
We don’t have a hard and fast date but we really believe that over the next two to three years, we are going to see, almost a complete change over in the new trucks that are built and they are going to move electronic engines. That’s our belief at this point in time.
John Nobile – Taglich Brothers
Okay. That’s all I have.
Thank you very much.
Pat Cavanagh
Thanks John.
Operator
(Operator Instructions) There are no further questions at this time.
Dennis Bunday
Okay. Well, I guess, this concludes our second quarter conference call and Pat and I would like to thank everybody for coming today.
Good-bye now.
Pat Cavanagh
Bye now.