Business News

Media Sciences Reports Second Quarter Financial Results.

Friday 13. February 2009 - Media Sciences International, Inc. [Nasdaq: MSII], the leading independent manufacturer of color toner cartridges and solid ink sticks for color business printers, today announced its quarterly financial results for the period ended December 31, 2008.

Financial results for the quarter ended December 31, 2008 include:
— Net revenues of $5,157,000, representing a $528,000 or 9% decrease
year-over-year and a $595,000 or 10% decrease over the prior quarter.
— Gross margin at 41.2% of net revenues, versus 45.8% for the same
period last year.
— Net loss of $517,000 versus net loss of $485,000 year-over-year.
— Loss per share of $0.04 basic and fully diluted.

The Company’s financial position and results for the quarter were adversely impacted by the following: (1) a general decline in the level of sales activity attributed to the deepening economic recession and a reduction in the level of inventories held by the Company’s distribution channel; (2) an increased level of customer rebates; and (3) an abrupt devaluation of the European currencies relative to the U.S. dollar.

CEO’s Comments

Michael W. Levin, President and CEO of Media Sciences International, Inc. noted,

“Clearly we are disappointed in our results for the quarter. We experienced a marked change in order volumes in November and December that we attribute to the impact of the global economic environment. We have anecdotal evidence to suggest that inventory levels both in the channel and at the end user contracted and that desktop print volumes, especially color print volumes, have decreased. These macro changes offset the growth that we did experience primarily in our office products channel resulting from new dealer relationships.

The impact of the economic slowdown was exacerbated by the rapid devaluation of the Euro and especially the British pound. The financial impact for the quarter of the strengthening dollar translated into a reduction in our reported net revenues of $261,000, a 280 basis point reduction in our gross margins, and below the line currency exchange losses of $186,000. All told, the devaluation of the Pound and Euro adversely impacted our reported operating pretax results by about $447,000 ($268,000 after tax or about $0.02 per share).

In response to these dynamics, we instituted a price increase in Europe effective January 1, and took additional actions to reduce our costs. Further we are reviewing a range of options for our China operation.

While the underlying thesis for Media Sciences – high quality color printer supplies at a significant savings to the printer manufacturers’ brand remains sound, the current economic environment imparts greater volatility and uncertainty into our business. Management is highly focused on identifying and addressing challenges quickly, while continuing to execute on new product and sales channel development seeking to overcome the macroeconomic environment and return to overall revenue growth and profitability.”

Additional Cost Reduction Efforts. In addition to our cost reduction plan implemented in the Company’s fiscal first quarter, management has implemented or is in the process of implementing the following additional cost cutting measures:

— An additional 7% reduction in force, on top of the approximate 20%
staff reduction implemented in July. This additional headcount
reduction was implemented in early January 2009. These headcount
reductions are expected to help the Company realize an additional
annual run-rate improvement in its pretax operating results of about
$650,000 and an improvement in its operating cash flows of about
$620,000. Severance costs associated with these staff reductions were
not material.
— A company-wide 10% salary, wage and bonus concession until certain
profitability measures are achieved over a contiguous six-month
period. This temporary measure was announced in early January 2009
and went into effect in late January 2009. This temporary measure is
expected to generate about $450,000 in annualized run-rate savings.
— The Company’s Directors waived their cash compensation effective
October 1, 2008 until they determine the present economic
uncertainties facing the company have passed. This temporary action
is expected to generate about $123,000 in annualized run-rate savings
and benefited the current quarter by about $31,000.
— The Company’s China manufacturing facility is complete and ready for
production. However, given the economic climate the Company is
evaluating the ongoing and likely increased costs of operating the
facility versus the short term benefits, which are expected to be
primarily operational in nature. The Company is considering a range
of options including, but not limited to, deferring commercial
production at the facility, conversion of the operation into a joint
venture, closure, and monetizing our investment. The process
associated with evaluating these options may take a number of months
to complete, during which time it is unlikely that commercial
production will commence at the facility.
— The Company is also pursuing other cost reduction efforts, including
concessions from its landlords and other vendors.




These new cost reduction efforts are expected to help the Company realize additional savings of about $1,200,000 on an annualized run-rate pretax and cash basis. About $600,000 of these new annualized cost savings are from temporary measures which will cease after certain profitability measures are achieved over a contiguous six-month period. These new cost reduction efforts are in addition to the cost reduction plan we implemented in July of 2008. Five months into the July cost reduction plan, the Company continues to track favorably with its original plan to realize run-rate pretax GAAP cost savings, versus its run rate at the end of its 2008 fiscal year, of about $1,600,000 and about $1,900,000 on a cash flow basis.

European Price Increase

In response to the precipitous 22% and 11% decline during the quarter in the value of the British Pound and the Euro (respectively) to the U.S. dollar, the Company competitively evaluated and selectively implemented increases to its Pound and Euro denominated prices. These price changes, effective January 1, 2009, are estimated to address about 60% to 70% of the U.S. dollar translated revenue impact of the devaluation experienced during the quarter.

Revenues

For the quarter, as compared to the same period last year, the Company experienced a nominally higher level of gross revenue generation and product sales volumes. However, due to an increased level of customer rebates and the revenue impact resulting from the significant devaluation of the British Pound and the Euro during the quarter, our net revenues for the three months ended December 31, 2008 as compared to the same period last year, decreased by $528,000 or 9% from $5,685,000 to $5,157,000. Year-over-year, sales of color toner cartridges increased by about 14% and solid ink product sales decreased by about 15%. For this same period, the Company also experienced declining revenues from its INKlusive program. The decline in the volume of INKlusive revenue reflects the general trend toward lower printer prices which inherently reduces the value of the “free printer” incentive that is core to the INKlusive program.

Net revenues for the six months ended December 31, 2008, as compared with the same period last year, decreased by $1,207,000 or 10% from $12,116,000 to $10,909,000. This decline in net revenues was primarily driven by an increased level of customer rebates, the revenue impact resulting from the significant devaluation of the British Pound and the Euro during the fiscal second quarter, and a decrease in revenues from the INKlusive program. Also contributing to the decline was the discontinuance of sales directly to end users by the Company’s Cadapult subsidiary in the comparative year ago period ended September 30, 2007. It is also noteworthy that in the year ago fiscal quarter ended September 30, 2007 that the Company benefited from the launch of three new products which contributed to the realization of a record net revenue quarter.

The Company ended the quarter with an order backlog of $343,000, representing a $120,000 decrease over the prior quarter ended September 30, 2008. Since the Company does not recognize revenues until orders are shipped, revenues associated with these unfilled orders were not recognized in the quarter ended December 31, 2008. For the comparative period, the Company had $235,000 of order backlog at December 31, 2007.

Gross Margin

Consolidated gross profit for the quarter, compared to the same period last year, decreased by $480,000 or 18% to $2,122,000 from $2,602,000. For the quarter, the Company’s gross margin declined by about 460 basis points to 41.2% from 45.8% in the comparative year ago period. Consolidated gross profit for the six months ended December 31, 2008 compared to the same period last year, decreased by $804,000 or 14% to $4,743,000 from $5,547,000. For the six months ended December 31, 2008, the Company’s gross margin declined by about 230 basis points to 43.5% from 45.8% in the comparative year ago period.

These declines in the gross margins were primarily attributed to the year-over-year increase in customer rebates combined with the revenue and margin impact resulting from the significant devaluation of the British Pound and the Euro during the quarter. To a lesser extent, some of the year-over-year decline was the result of our continued sales mix trend toward a greater proportion of toner-based products; the effects of which were more than offset by year-over-year reductions in our product costs, particularly inbound freight costs.

The Company’s margins reflect a portfolio of products. Generally, solid ink products generate greater margins than do toner-based products. While margins within the solid ink product line are very consistent, margins within the toner-based product line vary quite significantly. As a result, our margins can vary materially, not only as a function of the solid ink to toner sales mix, but of the sales mix within the toner-based product line itself. The Company expects to see changes in its margins, both favorable and unfavorable, as a result of continued changes in its sales mix.

Research and Development

Research and development spending for the quarter, compared to the same period last year, decreased by $121,000 or 26% to $348,000 from $469,000. For the six months ended December 31, 2008 as compared to the same period last year, decreased by $245,000 or 25% to $721,000 from $966,000. The decrease in our research and development costs was the result of the Company’s cost reduction efforts. Looking forward, the Company expects its research and development spending to represent a similar to slightly declining proportion of its net revenues.

Selling, General and Administrative Expense

Selling, general and administrative expense, exclusive of depreciation and amortization, for the quarter, compared to the same period last year, decreased by $381,000 or 13% to $2,496,000 from $2,877,000. For the six months ended December 31, 2008, Selling, general and administrative expense, exclusive of depreciation and amortization decreased by $321,000 or 6% to $5,248,000 from $5,569,000 for the same period last year.

The decrease in selling, general and administrative expense was primarily driven by lower year-over-year costs of litigation and the results of the Company’s cost reduction efforts partially offset by greater year-over-year business formation and start-up costs associated with the Company’s China manufacturing operations and foreign currency translation losses.

Selling, general and administrative expense, exclusive of depreciation and amortization, for the three and six months ended December 31, 2008 includes about $176,000 and $321,000 of non-cash stock-based compensation expense, respectively. This compares with about $124,000 and $200,000 of stock-based compensation expense in the comparative year ago three and six months ended December 31, 2007.

Net Income

For the three and six months ended December 31, 2008, the Company lost $517,000 ($0.04 per share basic and diluted) and $39,000 ($0.00 per share basic and diluted). This compares with a net loss of $485,000 ($0.04 per share basic and diluted) and $672,000 ($0.06 per share basic and diluted), respectively, generated in the prior year for the three and six months ended December 31, 2007. Excluding the benefit of the non-recurring litigation settlement recognized in the prior fiscal quarter, the Company would have generated a net loss for the six months ended December 31, 2008 of about $939,000 on a pro forma basis.