Attached files
| file | filename |
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| 8-K - Cyalume Technologies Holdings, Inc. | v194143_8k.htm |
| EX-99.2 - Cyalume Technologies Holdings, Inc. | v194143_ex99-2.htm |
Exhibit
99.1
MANAGEMENT
DISCUSSION SECTION
Operator: Good
day, ladies and gentlemen and welcome to the Cyalume Technologies Second Quarter
2010 Earnings Conference Call. My name is Tyrone and I will be your coordinator
for today. At this time, all participants are in a listen-only mode. We will be
facilitating a question-and-answer session towards the end of today’s conference
call. As a reminder, this conference is being recorded for replay purposes and
will be available on the company’s website in addition to a transcript of the
call.
With me
today are the President and CEO, Derek Dunaway; and Chief Financial Officer,
Mike Bielonko. Mr. Dunaway and Mr. Bielonko are going to discuss the company’s
financial results for the second quarter 2010.
In
compliance with SEC requirements, I’d like to read the following statement.
Except for historical information, the matters discussed in the conference call
are forward-looking statements that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. The factors that could cause
results to differ materially are included in the company’s filings with the
Securities and Exchange Commission.
Forward-looking
statements made during today’s conference call are only made as of the date of
this conference call and the company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.
In addition, please refer to the disclosures made in the press release issued
last night.
I will
now turn the call over to Derek Dunaway.
Derek
Dunaway, President and Chief Executive Officer
Thank
you, Tyrone. Let me give you the agenda for today’s call. First, I’ll provide a
brief summary and commentary on the performance for the quarter after which I’ll
turn it over to Mike to discuss the financial performance in some detail. And
then I’ll discuss in further detail our performance along our different product
lines and comments on the outlook for Q3.
Overall,
we remain encouraged by our performance thus far this year. All areas of our
business are performing well relative to the same period in 2009. Total revenue
was up 18% versus Q2 of 2009 and 25% year-to-date. EBITDA was up over 100% from
Q2, 2009 and is approximately 5 million year-to-date.
I’ll
provide more detail and insight on the overall performance shortly, but first
I’ll hand it off to Mike to discuss the financial results in some more detail.
Mike?
Michael
Bielonko, Chief Financial Officer
Thank
you, Derek. Good morning. Revenues for the second quarter of 2010 were
approximately $9.4 million, representing an increase of $1.4 million or 18% from
the second quarter of 2009. This increase was driven predominantly by increases
in product demand, but was also due to price increases implemented in a number
of products during the fourth quarter of last year as well as the first quarter
of this year.
Revenues
for the second quarter of 2010 also represent an increase of approximately
$500,000 over revenues for the first quarter of the year for a 6% improvement.
Derek will address in his talk more details about revenues.
Our gross
profit for the second quarter was approximately $4.8 million representing an
increase of $1.4 over quarter two of 2009. Our gross margin improved to 51% from
42.5% in the prior year. The majority of this improvement in margins is due to a
combination of several things, including additional sales of higher margin
products, the previously mentioned price increases and cost controls. In
addition, the amortization of inventories step up to fair value contained in the
cost of sales for 2009 lowered last year’s number by about 4%, such amortization
was completed in 2009.
Let me
now turn to expenses. Combined expenses for the second quarter of this year for
selling and marketing, general and administrative and research and development
amounted to about $2.4 million. This represents a decrease from the prior year
of about a $150,000 due to a number of items including timing differences, none
of which are significant.
Interest
expense for the second quarter was essentially flat with the prior year. The
impact of higher rates on our senior debt that went into affect in the second
half of 2009 were offset by lower principle balances that resulted from our
monthly principle payments.
Amortization
expense declined to $456,000 from $739,000 due to the impairment charges
recorded for 2009 which lowered the amount of intangible assets remaining to be
amortized. Pre-tax income improved to $1.4 million from a loss of $500,000 for
2009 due primarily to the increase in gross profit but also due to the lower
expenses. Correspondingly the tax provision increased to $357,000 from a benefit
in the prior year of $57,000.
Our
effective tax rate for the second quarter of 2010 was approximately 26%. The
difference from the statutory rate of 34% was largely due to changes and
repatriated earnings and valuation allowances against foreign tax credits, all
associated with our French subsidiary.
Let me
now spend a minute on our financial condition. Cash flow improved during the
second quarter of 2010, compared to the first quarter of 2010. At June 30, our
cash balance was approximately $2.6 million versus $1.6 million at March
31.
During
the second quarter, we also paid down our revolving line of credit by $500,000
in addition to making the regularly scheduled principle payments. This left the
revolving line of credit balance at $2.7 million at June 30. Also in the first
half of July, we further paid down the revolving line of credit by an additional
$500,000.
On July
29, we closed on the issuance of $8.5 million of non-amortizing subordinated
convertible debt, with cash only interest at a rate of 11% per annum. Net
proceeds were used to reduce our senior debt, $7.2 million was applied against
the senior term loan and $500,000 was applied against the revolving line of
credit. With this transaction, the balance of our revolving line of credit now
stands at $1.7 million, compared to $3.2 million at December 31,
2009.
During
the reminder of this third quarter, we expect to make additional payments
against the revolving line of credit. This transaction fulfilled our obligation
to reduced senior debt by a minimum of $3 million. Given the favorable rate
terms and conditions, we went beyond this minimum requirement to accomplish
several other objectives. First, we were able to obtain reduced monthly
amortization payments going forward that will allow us to generate additional
cash flow to support operations on a timely basis.
Under our
amended senior credit agreement, we will have no monthly amortization payments
on the term loan until February 1, 2011, and at which time the monthly payments
will be less than half of the previous monthly amounts. We also retained the
right to pay down the term loan at any time without penalty should we deem that
the best use of the cash on hand.
Second,
we were able to revise our financial covenants. For example, what was a
quarterly test for EBITDA based on that quarters performance has been changed to
quarterly test based on trailing 12 month performance, which gives us much more
flexibility to manage the business through the normal fluctuations in military
purchasing patterns.
In
addition, we received a decrease in the rates of interest charged on our senior
debt, which largely offsets from a cash interest perspective, the higher rate on
the new subordinated debt. Overall, we believe that this transaction is very
beneficial for the company.
Thank
you. At this point, I would like to turn it back over to Derek.
Derek
Dunaway, President and Chief Executive Officer
Thank you
very much Mike. Now, I will provide more detail on the performance and outlook
for each of our revenue sectors.
First, I
will discuss our U.S. Military Chemical business. We experienced a slight
slowdown in the second quarter in the U.S. Military Chemical light sales, which
were down about 8% to $4 million for the quarter.
Year-to-date
revenues for U.S. Military Chemical are still slightly up from 2009. The reason
for the slowdown, however, in the second quarter, really is mostly a timing
issue that’s to do with the rollover of our main contract with the
military.
This
process has been completed and as a result some of the orders were pushed into
the third quarter. This will result in a very strong third quarter for this
business; in fact the preliminary results for July afford to be the best month
in the past two years. Overall I expect this business to continue to grow from
our 2009 levels.
Next,
I’ll discuss the reflective business. Reflective business performed in line with
expectations for the quarter, up 12% from last year of $600,000 of revenue and
up 32% year-to-date. We did receive word that the solicitation for the IR Flags,
which we have been pursuing, has actually been pulled and will be reissued
within the next few months.
Given the
unreliability that we have experienced over the past year with regard to the
solicitation we did not forecast or expect that this award to take place this
year, but we certainly had been hopeful it would happen. We do anticipate demand
for this product to continue and for the army to purchase IR Flags as they have
over the past year and a half through independent solicitations.
The
international business continued to rebound very strongly from 2009. Due to very
strong orders from the U.K., coupled with the fact that Q2 2009 was a slow
quarter, we were up over 240% from last year on $2.3 million of revenue and a
110% or 4.4 million for the year.
The U.K.
continues to be the main customer for the international business and we have
seen a resurgence of purchases from some of the other European militaries. The
outlook for the third quarter remained strong and we expect performance for Q3
to be on par with Q2.
The
commercial business had a strong quarter as well posting an increase of 20% from
last year to $800,000 in revenue. European commercial business is relatively
flat compared to 2009 with most of the growth coming from the U.S. market and
our new distributors there.
The
second quarter ammunition revenue was flat with last year, and we remained about
20% up on the first six months from 2009, and we are continuing to pursue
numerous new projects with our current partners in the ammunition business
Rheinmetall and General Dynamics.
While
many of these projects have multi-year development cycles, we do believe we are
on pace to demonstrate additional applications for the military before the end
of the year. We had hoped to see the awarding of our – of the contract for the –
our next round of 40 millimeter ammunition before the end of the second quarter.
This has been delayed but we still anticipate to see awarding of that contract
prior to the end of the year.
The
outlook for ammunition in Q3 is the continued strong performance in growth. In
fact, we expect by the end of the third quarter to have achieved 90% of our
total revenue for ammunition from 2009.
Lastly,
I’d like to comment on two other items, the debt that we raised which Mike
referenced, though it did not occur in the second quarter I just want to say a
word on that. As Mike mentioned, we raised 8.5 million at the end of July
through the issuance of convertible debt.
The money
was used to pay down our senior debt with TD and through the transaction we have
satisfied our agreements with Toronto Dominion. The transaction has afforded
Cyalume a restructuring of our debt payments and substantially reduced our debt
services resulting in improved cash flow to the company.
The
improvements are allowing Cyalume to execute on some key strategic initiatives,
including the recent hiring of Monte Pickens to the role of Executive Vice
President. Monte comes to Cyalume with a wealth of experience in the defense
sector as former Executive VP and Chief Operating Officer of the Allied Defense
Group and will play critical role in the execution of our strategies to grow our
military and the ammunition businesses.
So in
summary, Q2 was a strong quarter for Cyalume where we saw continued performance
improvements from 2009 on the top line. This translated into very good EBITDA
numbers and improved margins generated by growth in our high margin
international businesses, favorable U.S. product mix and the effect of
efficiency improvements since implemented last year. The overall outlook for the
third quarter remains strong and we anticipate positive year-on-year growth to
continue.
So with
that, I’d like to open it up for – open up the call for questions from the
audience.
QUESTION
AND ANSWER SECTION
Operator: Thank
you. [Operator Instructions] We have a question from Paul Johnson of Nicusa
Capital. Your line is open.
<Q – Paul Johnson>:
Thank you, Derek. Thank you. Congratulations on a great
quarter.
<A – Derek Dunaway>:
Thank you.
<Q – Paul Johnson>: I
assume between that and getting the bond deal done, you must be
happy.
<A – Derek Dunaway>: I
certainly I am, I think I’m very excited about where we stand right
now.
<Q – Paul Johnson>: I
would think. I just wanted to run through a couple of things just to make sure
on the revenue breakout, I think I got all the numbers U.S. military, four
million?
<A – Derek Dunaway>:
Yeah.
<Q – Paul Johnson>:
Reflective, 600,000.
<A – Derek Dunaway>:
Yes.
<Q – Paul Johnson>:
International, 2.3.
<A – Derek Dunaway>:
Yes.
<Q – Paul Johnson>:
Commercial, 800.
<A – Derek Dunaway>:
Yes.
<Q – Paul Johnson>: And
I didn’t get an ammo number?
<A – Derek Dunaway>:
1.7.
<Q – Paul Johnson>: 1.7,
okay. Next question. Price increases, can you talk a little bit about what you
did and why you did it, and it seems to be sticking, so talk a little bit about
why – how you could do it I guess?
<A – Derek Dunaway>:
Sure. Well, most of the price increases really called for in the
contracts that we have with the DLA. So within those contracts there are
provisions for some price increases, on one of the contracts they’re pretty much
set at 2.5% a year and then on the larger contract it’s actually negotiated each
year and that’s the contract that we have in partnership with the [inaudible]
two LC industries down in North Carolina. And they were able to receive a pretty
substantial price increase there. We also achieved price increases in our – in
the ammunition business this year in our agreements with Rheinmetall and selling
the 40 millimeter product.
<Q – Paul Johnson>: Got
it. Can you talk a little bit about gross margin, obviously, terrific gross
margin in the quarter, sustainable in this sort of area?
<A – Derek Dunaway>:
Yes, I think it’s probably relatively sustainable. The product mix
definitely did help. Our international business does yield a slightly higher,
gross margin then some of our domestic business and that has represented
slightly higher percentage of our total overall business. So, it may come down a
little bit, but part of this is also driven by some of the efficiencies that
we’ve been able to create at the plants, which I do think will continue to see
as we go forward. So, while I could contract a little bit if the U.S. business
continues to rebound, which we’re starting to see. I don’t think it will erode
substantially.
<Q – Paul Johnson>: Got
it. So high 40s is you are comfortable with?
<A – Derek Dunaway>: I
think I’m comfortable.
<Q – Paul Johnson>:
Okay, perfect. Can you talk – you talked little bit about the ammo
business, obviously you have the relationship with Rheinmetall a couple of years
old. You got the GD relationship, which is fairly new. You’ve got lots of
different calibers that you’re working on. Can you just flush out the ammo
opportunity a little bit more than you’ve talked about it so far?
<A – Derek Dunaway>:
Yeah, sure and I guess, I’m being – I have to look somewhat vague on
specifics because there is a number of projects that we’re working, but I can’t
provide too much detail on at this point. What I can say is, we have a number of
projects that we’re working on with both Rheinmetall and with General Dynamics,
several of which are very well-defined and have scheduled to be showing
demonstrations before the end of the year. And we certainly are hopeful that
we’ll receive some direct funding from the military in the next year for some of
the development efforts.
<Q – Paul Johnson>: The
stuff coming out of all the efforts in military it sounds like there is a
renewed emphasis from Washington on efficiency on looking for cost savings
certainly in the conference calls I’ve been listening to you and the work you
guys put out in the white paper, your solution is a significant improvement over
historical ways of dealing with ammo and test. Obviously, you guys are small,
they are talking about big aircraft carriers and things like that, but is that
kind of emphasis filtering down to the ammo business and particularly the
practice rounds and things like that or not yet?
<A – Derek Dunaway>: I
think it’s starting to. I think — and we’re certainly seeing the philosophy
really pretty much everywhere that we’re dealing with from the military. People
are certainly looking for more efficient ways of doing contract. I’ve been to
several conferences where it certainly been a topic of discussion. While I don’t
see being much of an impact on our core business just because of the nature of
that business, yes I do think on the ammunition business, there is a substantial
impact to it and one that I believe long-term should be quite positive to
us.
The
economics of the solutions that we’re offering really do provide cost savings to
the military. Some of the parts that we’re working on currently are just exactly
targeted at that and just carving some cost out of the products. So I do think
that long-term it’s a — actually near-term it’s a benefit to Cyalume and
certainly ammunition. The ammunition budgets, there is a big budget for the
army, for the military. So it’s certainly an area they’re going to be looking to
create efficiencies, I think we’re well-positioned because of that.
<Q – Paul Johnson>:
Okay, perfect. Last couple of little questions, U.S. military a little
soft, a little bit lower than you expected in the June quarter, it sounds like
the July has made up for that. It sounds like just timing.
<A – Derek Dunaway>:
Yes.
<Q – Paul Johnson>:
Okay. International, U.K. being so strong is that just again a timing
issue or is there kind of a renewed focus on newer products?
<A – Derek Dunaway>:
There seems to be renewed focus on the products quite frankly. It’s —
last year we had a very slow year with the international business and largely
that was due to some of the tightening in the — some of the European military
budgets. The budget seemed to have freed-up a little bit with the U.K. We’ve
seen good ordering there and we’re even seeing some of the other European NATO
countries rebounding in terms of the orders that they are placing. So I do think
it’s more of a return to normalcy. I mean if you go back historically, these are
the types of levels that we’ve seen in 2005-2006.
<Q – Paul Johnson>: Got
it. Well, congrats on a great quarter. Thanks for the answers.
<A – Derek Dunaway>:
Great. Thank you, Paul.
Operator: Thank
you. [Operator Instructions]
And sir,
I’m showing no further questions or comments in the queue right now. I would
like to turn it over to Mr. Dunaway for any closing remarks.
Derek
Dunaway, President and Chief Executive Officer
Okay.
Thank you very much. Thank you everyone for attending the call. Hopefully we
answered all your questions and look forward to speaking with you again in three
months. Thank you.
Operator: Ladies
and gentlemen, thank you for your participation in today’s conference. This
concludes the program. You may now disconnect and have a wonderful
day.