Plan for profitable growth driven by Agriculture focus, streamlined operations and market driven innovation.
Hemisphere GPS today provided an update on its corporate restructuring and new corporate strategy, along with its financial results for the third quarter ended September 30, 2012.
All currency amounts are expressed in U.S. dollars.
New Agriculture Corporate Strategy
On September 5, 2012, the board of directors of Hemisphere GPS initiated a restructuring mandate with the directive to implement a new profit-focused corporate strategy under the leadership of incoming CEO Rick Heiniger, formerly vice chairman of the company and founder of the Outback Guidance precision agriculture business.
The agricultural industry is entering a period of exceptional opportunity. We're in the early stages of transformational adoption of high definition production practices. We are a data driven society, and agriculture is no different. Agronomic specialized data-management and cloud information services, combined with a new generation of connected devices and machines, will not only enable emerging technologies, but will simplify existing workflows and deliver productivity gains for the industry, stated Hemisphere GPS new CEO, Rick Heiniger. We believe Hemisphere GPS is perfectly positioned. To that end we have launched a new corporate strategy building on our world-class positioning, guidance and steering solutions to provide seamless integration with cloud computing and information services. This integration will break the barriers which have long challenged the mainstream adoption of precision agriculture. We will be wholly focused on the essential core technologies while at the same time assisting the industry in its adoption.
Under Mr. Heiniger's leadership, the company has implemented a new corporate strategy built on three core principles to achieve profitable growth and market leadership:
Focus exclusively on the Agriculture business. Streamline and simplify operations. Implement market-driven innovation.
Focus on Precision Agriculture
For over a decade Hemisphere GPS has been a leading solutions provider to the precision agriculture market. In the first nine months of 2012, 81% of Company revenue was derived from the agriculture business, most of which comes from the North American market. Past diversification into marine, construction and other industries increased costs, absorbed cash and distracted management focus from its core agriculture business. To focus exclusively on agriculture, the Company will:
Exit the non-agriculture-related business. An investment banking firm has been engaged to pursue strategic alternatives for the Precision Products business. Given the agricultural focus of the company, the Board believes that the Precision Products business can grow more quickly with another organization that is more strategically aligned. Relocate Company headquarters to Hiawatha, Kan., where Hemisphere GPS agricultural operations are already strategically located, in the heartland of the North American agricultural industry. An abundant supply of agriculture trained and passionate talent, along with the pro-business climate in the state of Kansas, are two key factors for the site selection.
Streamline and Simplify Operations
As part of the company's initiative to ensure profitable and sustainable growth:
All production activities currently conducted in Calgary will be transitioned to Hemisphere GPS primary outsourced manufacturing partner. The Calgary office, which currently supports manufacturing, the Precision Products business and the corporate administration functions, will be closed following the relocation of key functions to Kansas, thereby reducing overhead. The two-business-unit and supporting structure will be reduced to a single business, thereby eliminating redundancies, reducing costs and achieving operating efficiencies. The company will rationalize products, engineering projects and geographic markets.
These initiatives will simplify the overall business and are expected to reduce manufacturing costs, improve gross margins and reduce operating overhead.
Market Driven Innovation
The company will adopt a market responsive product development focus with a customer-driven culture. As such:
The marketing function will become a core competency of the company. A seasoned executive has already been hired to lead this initiative as vice president of marketing. Increased emphasis will be placed on focused market and customer research driving greater innovation in, and higher returns from, the product development process.
The restructuring will take place largely over the next 12 months, with the bulk of the costs being recorded in the fourth quarter of 2012. Total workforce, including employees and contractors, will be reduced from 273 to about 170. Of the reduction in workforce, approximately 40 employees are associated with Precision Products, and approximately 60 are associated with the outsourcing of manufacturing, closure of the Calgary office and streamlining of the organizational structure. The existing agricultural business will not be interrupted during this process.
Upon completion, the savings from the overall restructuring are estimated to be approximately $7 million per annum through reduced manufacturing costs, improved gross margins and reduced operating overhead.
The cash cost of the restructuring is estimated at $5.5 to $6.5 million. Non-cash costs of the restructuring are expected to be $4 to $5 million. The Company believes it has sufficient capital to complete the restructuring without the need for additional capital.
Third Quarter Financial Results
For the three months ended September 30, 2012, revenue was $14 million, compared to revenues of $14.1 million for the same period of 2011. Segmented revenue contribution from the agriculture business segment grew year-over-year to $10.5 million, up 5% from $10.0 million for the third quarter of 2011 while revenue from the Precision Products business was $3.5 million compared to $4.1 million in the third quarter of 2011.
Consolidated revenue growth was 22% in Canada and 6% in the United States. European sales were down 1% due to Europe struggling economies, and sales to other international regions including Australia, Asia and South America decreased by 25% compared to the third quarter of 2011 primarily due to a single large order in the previous year that wasn't repeated this year.
Segmented revenues from the Company's core Agriculture business increased revenue contribution to 75% of total third quarter revenues, compared with 71% in the third quarter of 2011. Precision Products contributed 25% of total revenue in the third quarter of 2012 compared to 29% in 2011.
On August 27, 2012, Hemisphere GPS announced the launch of Outback its new flagship product for the precision agriculture market. Market and customer reception has been positive and initial sales have been encouraging, building optimism for 2013.
Third quarter gross margin of $6.7 million and 48% was unchanged from the third quarter of 2011. Inclusive of restructuring costs, operating expenses in the third quarter were up by 16% year over year at $9.5 million in the third quarter of 2012 compared to $8.2 million in 2011. The company incurred $0.5 million of restructuring costs in the third quarter. Excluding restructuring costs, operating expenses increased by 10% from 2011, primarily due to the addition of Ag Junction operations.
Research and Development expenses increased by $0.3 million or 10% year over year to $3.4 million compared to $3.1 million in 2011. Sales and Marketing expenses for the quarter increased by $0.3 million or 8% to $3.7 million from $3.4 million in 2011. General and Administrative expenses increased by 13% to $2.0 million compared to $1.7 million in 2011 with the increase arising primarily from increased staffing and other administrative costs.
Hemisphere GPS incurred a loss of $2.8 million, or $(0.04) per share (basic and diluted) in the third quarter of 2012 compared to a loss of $1.6 million, or $(0.03) per share (basic and diluted) in the third quarter of 2011.
For the nine months ended September 30, 2012, Hemisphere GPS reported revenues of $56.2 million, a 1% increase from $55.5 million for the same period in 2011. Gross margin for the first nine months of 2012 was 46% compared to 48% in the first nine months of 2011. Operating expenses of $27.4 million for the nine months ended September 30, 2012 increased $2.3 million, or 9% over the same period of 2011. The acquisition of Adjunction at the beginning of 2012 added operating costs, including amortization, to the nine-month period. The Company reported a loss of $1.8 million in the first nine months of 2012 or ($0.03) per share (basic and diluted), compared to a profit of $1.1 million, or $0.02 per share (basic and diluted) in the nine months of 2011, before the deduction of one-time expenses related to strategic initiatives in 2011 of $0.8 million.
At September 30, 2012, the Company held cash of $4.3 million, compared to $6.7 million at December 31, 2011. Working capital was approximately $25.9 million, debt was $1.3 million and the Company maintains an unused operating line of credit with its bank with a maximum borrowing limit of $3million.
The Company had 66,280,777 common shares outstanding at September 30, 2012.
As a result of lower than expected growth in the third quarter, we no longer expect to meet our prior 10% revenue growth target for the year, said Mr. Heiniger. Due to the restructuring we will not be providing further guidance for 2012.
Hemisphere GPS provides world-class positioning, auto-steering and an enabling software platform to deliver easy-to-use applications for Precision Agriculture. The Company holds numerous patents and intellectual property and owns several leading brand names, including Outback Guidance a key brand in precision GPS for agriculture. The Company's products and services are sold globally to farming operations through OEM, dealer, retailer and industry advisor channels. The Company is currently headquartered in Calgary, Alberta, with operations, product development, and sales and marketing facilities in Kansas, Arizona, Manitoba and Queensland, Australia. Hemisphere GPS is listed on the Toronto Stock Exchange (TSX) under the symbol HEM and is one of the TSX Cleantech designated companies. For more information about Hemisphere GPS, please go to