Business News

Media Sciences Reports Q2 Results

Friday 15. February 2008 - 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 financial results for its second fiscal quarter ended December 31, 2007.

Financial results for the quarter ended December 31, 2007 include:
— Net revenues of $5.7 million, a decrease of $0.4 million or 6% year- over-year and 12% versus the prior quarter.
— Gross margin at 46% of net revenues, a 1,200 basis point decrease, year-over-year and in-line with the prior quarter.
— Net loss of $0.49 million versus net income of $0.63 million year-over- year.
— EPS loss of $0.04 basic and fully diluted.

Results for the quarter were adversely impacted by weak post-Thanksgiving order activity and the following expense items:

— Costs of expedited shipping associated with launch of new toner-based
products and clearing associated backorders totaled about $230,000
(about $138,000 after tax or $0.01 per diluted share), adversely
impacting our margins by about 300 basis points;
— Litigation costs totaling $352,000 (about $211,000 after tax or about
$0.02 per diluted share);
— Business start-up costs associated with Asian manufacturing operations
of $196,000 (about $118,000 after tax or $0.01 per diluted share);




Collectively, these expense items reduced the Company’s pretax income by $778,000 and reported net income by about $467,000, or about $0.04 per diluted share.

Michael W. Levin, President and CEO of Media Sciences International, Inc. commented on the Company’s performance, “We are very disappointed with our performance during the quarter. We have analyzed sales during the weak post- Thanksgiving time period looking for geographic, customer and product trends and found no apparent single significant contributing factor – it appears the weakness during this period was broad-based. The noted weakness in order activity was unexpected and inconsistent with the periods leading up to that time and the order activity we have experienced since then in January and in February to date. “

Revenues

Net revenues for the three months ended December 31, 2007 compared to the same period last year, decreased by $393,000 from $6,078,000, or 6% to $5,685,000. For the three months ended December 31, 2007 as compared to the same period in 2006, sales of color toner cartridges increased by about 18%, while sales of solid ink sticks decreased approximately 19%. Net revenues for the six months ended December 31, 2007 compared to the same period last year, increased by $414,000, or 4% from $11,702,000 to $12,116,000. For the six months ended December 31, 2007 as compared to the same period in 2006, sales of color toner cartridges increased by about 46%, while sales of solid ink sticks decreased approximately 19%. Sequentially for the second fiscal quarter versus the first fiscal quarter, solid ink revenues increased by 9%, while toner revenues decreased by 22%.

Gross Margin

For the three and six months ended December 31, 2007 our gross margin was 46% of net revenues as compared with 58% and 57% of net revenues for the three and six months ended December 31, 2006, respectively. The 1,100 – 1,200 basis point decrease in margin is primarily attributed to: (1) our sales mix; (2) the higher year-over-year production and shipping costs; and (3) slightly greater comparative warranty costs.

The Company’s greater mix of toner-based versus solid ink product sales was the greatest driver of the year-over-year margin decline. On a portfolio basis, toner-based products typically carry lower margins than solid ink products. Our sales mix of products resulted in about 500 basis points of year-over-year change in our margins.

Year-over-year, we experienced increases in our delivered material and finished goods prices as well as in our out-bound shipping costs that we pay on behalf of our customers due to higher shipping costs. The impact of these greater shipping costs was about 300 basis points of year-over-year change in our margins. We recognized about $230,000 of expense associated with importing toner-based products from Asia. This compares with about $221,000 in the preceding quarter ended September 30, 2007. Respectively, these costs, although similar in amount, represented about 4% and 3% of each quarter’s reported net revenues.

The impact of higher production costs represented about 200 basis points of year-over-year change in our margins. These increased costs included (1) the costs of labor and supplies associated with custom labeling for certain new private label customers; (2) additional quality assurance labor associated with the growth of our toner-based product volumes; (3) domestic personnel to fill and package limited quantities of toner-based product for sale to U.S. military and governmental entities; and (4) during the three months ended December 31, 2007, we incurred substantial overtime and temporary labor costs on production earmarked for our newly established European distribution operation.

Research and Development

Versus the same quarter last year, research and development spending increased by $97,000 or 26% to $469,000 from $372,000. Sequentially, as compared with the prior quarter, our research and development spending decreased by $28,000, or 6% to $469,000 from $497,000.

Selling, General and Administrative

Selling, general and administrative expense, exclusive of depreciation and amortization, for the quarter, compared to the same period last year, increased by $712,000 or 33% to $2,877,000 from $2,165,000. The increase in selling, general and administrative expense was primarily driven by greater year-over-year compensation and benefits costs and increased professional fee spending, including litigation costs.

For the three and six months ended December 31, 2007 as compared to the same period in 2006, compensation and benefit costs, including sales commissions, increased by about $482,000 and $1,118,000, respectively. This increase was driven by the hiring of additional: (1) sales and marketing personnel; (2) management personnel associated with the start-up of our operations in China; and (3) some operations personnel. For the three and six months ended December 31, 2007, start-up costs associated with our toner-based manufacturing operations in China totaled about $196,000 and $346,000, respectively (compensation and benefits costs representing $147,000 and $264,000, respectively, of these costs). In the comparative year ago period, we had no start-up expenses.

Most of the increase in professional fees was attributed to legal fees associated with the Xerox litigation; for the three and six months ended December 31, 2007 litigation costs totaled $352,000 and $593,000, respectively. In the prior fiscal year, litigation costs totaled $124,000 for the three months and $260,000 for the six months ended December 31, 2006.

Sequentially, as compared with the prior quarter, selling, general and administrative expense for the three months ended December 31, 2007, increased by $185,000, or 7% to $2,877,000 from $2,692,000. This increase was primarily driven by greater litigation costs, travel and entertainment costs, and shipping costs associated with moving inventories to our third-party logistics facility in Europe. These increases were partially offset by lower non-legal professional fees, advertising, and sales commissions. Legal fees associated with our Xerox litigation increased by $107,000 or 45%, to $343,000 for the three months ended December 31, 2007 from $236,000 in the prior fiscal quarter.

Net Income

For the quarter, we lost $485,000 or $0.04 per share basic and diluted. This compares with the $625,000 or $0.06 per share basic and diluted earned for same period last year.

Effective Tax Rate

For the quarter, the Company’s blended effective tax rate was 42.5% versus 35.0% for the same period last year. The Company’s blended effective state and federal tax rate varies due to the magnitude of various permanent differences between reported pretax income and what is recognized as taxable income by various taxing authorities. The availability of tax credits associated with manufacturing, research and development activities, as well as exclusions, such as the Extraterritorial Income Exclusion, can result in an effective rate that is lower than the statutory rate.

CEO’s Comments

Commenting on the Company’s strategy, Mr. Levin noted, “Approximately one year ago, we embarked on two key initiatives; (1) build a sales team capable of addressing the largest channels for color workgroup printer supplies – office and computer; and (2) build Asian based manufacturing. These significant undertakings were and are fundamental changes to Media Sciences’ business, and intended to provide Media Sciences with a platform for sustainable growth and profitability. The opportunities and challenges we encounter on a daily basis reinforce this strategy.

These efforts have taken longer to yield results than we had anticipated. That said, our commitment to these initiatives is unwavering, and our expectations for meaningful and tangible results as measured by revenue growth, margin enhancement, inventory reductions, operational leverage and profitability are unchanged.

Non-Executive Chairman

Media Sciences President and CEO Michael W. Levin continues, “I called upon Willem van Rijn to assume the role of non-executive Chairman, which he has agreed to do. During his two years as a Media Sciences Director, I have come to admire Willem’s experience and style, and believe he is uniquely suited to lead Media Sciences’ active and diverse Board. This change will allow me to focus on the execution of our strategy, while bringing more attention to our daily operations.”