Badger Meter - Earnings Call - Q1 2020
April 16, 2020
Transcript
Speaker 0
Ladies and gentlemen, welcome to the First Quarter twenty twenty Badger Meter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Strategy and Treasurer. Please go ahead.
Speaker 1
Good morning, and welcome to the Badger Meter first quarter twenty twenty earnings conference call. I hope you are all healthy and staying safe. We certainly appreciate you joining our call today. On the call with me are Ken Bockhorst, Chairman, President and Chief Executive Officer and Bob Rockledge, Chief Financial Officer. The earnings release and related slide presentation are available on our website.
Quickly, I will cover the Safe Harbor reminding you that any forward looking statements made during this call are subject to various risks and uncertainties, the most important of which are outlined in our press release and SEC filings. The concept of risks and uncertainties really takes on new meaning as we navigate this unprecedented global pandemic, so I encourage you to read them in detail. On today's call, we will refer to certain non GAAP financial metrics. Our press release and the slides provide a reconciliation of the GAAP to non GAAP financial metrics used. With that, I'll turn the call over to Ken.
Speaker 2
Thanks, Karen, and thank you for joining our first quarter earnings call. I want to start off by thanking all of my Badger Meter colleagues across the globe for their commitment to our customers and for their adaptability and resourcefulness as we navigate these truly unprecedented times. Also, congratulations to our Nogales, Mexico team for celebrating forty years in operation this week. Business continuity, most notably in the water and wastewater utility sector has never been more critical. During the quarter, we mobilized quickly to adapt to the various government orders, social distancing procedures, cleaning protocols and other steps to keep employees safe while fulfilling customer requirements.
Our sales increased 3% in the quarter with municipal water sales up 6% year over year as activity levels continued largely intact. We delivered year over year improvements in operating profit margins and robust free cash flow. Our balance sheet is in excellent shape to weather the uncertainty of the days ahead. Bob will walk you through the details of the quarter and after that, I'll come back and talk further about the market outlook and our recent actions to respond to current conditions.
Speaker 3
Thanks, Ken, good morning, everyone. Turning to Slide four, Total sales for the first quarter were $108,500,000 compared to $104,900,000 in the same period last year, an increase of 3%. In municipal water, overall sales increased 6%, which was largely driven by continued adoption of smart metering solutions, including large diameter three and four inch E Series commercial meters, residential ultrasonic meters and Orion LTE M cellular radio endpoints. Sales mix remained positive with increased sales of meters with radios as well as increased beacon service revenue year over year. Flow instrumentation sales declined 4% year over year, sequentially improved from the prior quarter's 11% decline, but likely a short lived trend given COVID-nineteen and the global industrial market served.
Sales into the oil and gas market were down meaningfully, partially offset by robust growth in HVAC markets. Operating profit as a percent of sales was 14.8%, an increase of 110 basis points from the prior year's 13.7%. Taking a closer look at the drivers, gross margin for the quarter was 39.9%, up 130 basis points year over year and once again in the upper half of what we would call our normalized range of 36% to 40%. Positive sales mix, notably the overall trends of radio adoption and higher Beacon service revenues and lower commodity costs were the primary drivers. SEA expenses in the seasonally high first quarter were $27,300,000 an increase of $1,200,000 over the prior year due to higher personnel and new product development costs.
SEA as a percent of sales increased modestly from to 25.2% from 24.9% last year. The income tax provision in the 2020 was 25.6%, slightly higher than the prior year's 23.5% rate. In summary, EPS was $0.41 in the 2020, an increase of 11% from the prior year's EPS of $0.37 Working capital as a percent of sales was 22.8%, a significant reduction from 26.4% at year end, which helped drive an increase in free cash flow in the quarter to $28,600,000 from $15,700,000 in last year's comparable quarter. The working capital reduction was across all components of primary working capital. We are carefully monitoring customer cash receipts and supplier payment terms and do not expect any significant collectability or other issues as we move forward.
I'll take a minute to address liquidity. We ended the quarter with approximately $70,000,000 of cash on the balance sheet and a net cash position of approximately $66,000,000 We have $125,000,000 credit facility in place that is fully available. We are taking temporary cost reduction actions to preserve cash in response to currently anticipated demand trends and have multiple contingency plans in place to make sure that we have ample liquidity under a wide range of potential economic scenarios. With that, I'll turn the call back over to Ken.
Speaker 2
Thanks, Bob. As Bob mentioned, we have taken action to adjust our cost structure with demand. Like many other industries, overall activity in the end markets we serve is beginning to slow. As we exited March and into early April, customers started to signal potential project delays, deferral of orders and channel inventory destocking. Somewhat dependent on demand levels, there is also the potential for modest supply disruption, cargo capacity constraints and related shortages of components over the next several months.
We would expect demand to be most impacted the flow instrumentation product line given the various industrial end markets served globally, including oil and gas, which represents about 10% of that product line or 2% of consolidated revenue. However, municipal water customers are pairing back orders as well. Given these indicators, we implemented temporary cost containment actions. These include reductions in discretionary spending, of course, but also outside services, non essential contractors, hiring freeze and a reduction in the defined contribution portion of our ESOP. With regard to our employees, our goal is to manage through this pandemic without eliminating jobs and remaining fair and equitable in our required actions.
It is important that we retain our talented team to quickly ramp back up to serve customers when that time comes. As such, we temporarily reduced work schedules to four day work weeks across all personnel and related compensation by 20% for U. S. Employees, while non U. S.
Employees are deploying similar type arrangements. All executive salaries have been reduced by 20%. Our COVID-nineteen rapid response team meets at least daily as we continue to monitor the various developments across the globe, understanding their impact on our customers, operations, employees and the communities in which we operate. Like others, we are adhering to strict WHO and CDC guidelines for social distancing, cleaning and disinfecting protocols, hand washing and personal protective equipment. We believe these steps will be adequate to respond to the currently anticipated economic and business impact of the pandemic.
However, if the effects of COVID-nineteen on the global economy and Badger Meter become more severe than we currently anticipate, we are prepared to take additional cost actions. Turning to the outlook. Obviously, the ability to predict the impact of this pandemic on the economy or our business is impossible today, with the length and severity still highly uncertain. However, we do know that we just completed a record first quarter across all financial metrics. We also know that domestic municipal water sales growth over the past nine months averaged solidly in the mid single digits as we emerged from the innovation pause mid last year, and that our bid pipeline is the strongest it has ever been.
As I noted in the release, we believe two likely long term trends coming out of this pandemic will favor our solutions, including an accelerated transition to automated meter reading adoption and remote actuated flow restriction technology. Our balance sheet is rock solid and when the timing is right, we will deploy capital on strategic tuck in acquisitions. We are well positioned to emerge from this crisis as the financially strong innovation leader that we have always been and build on our exceptional one hundred and fifteen year legacy. With that, operator, please open the line for questions.
Speaker 0
And our first question comes from the line of Nathan Jones with Stifel. Go ahead please. Your line is open.
Speaker 4
Good morning, everyone.
Speaker 2
Hi, Nathan.
Speaker 5
I guess I'd just like to start off with questions on liquidity, free cash flow, how you're looking at that. Clearly, there's a lot of cash on the balance sheet, no debt. You've got a lot of access here to the revolver. Historically, Badger's produced positive free cash flow in pretty much every quarter. I think I counted one negative quarter over the last ten years.
Are you guys confident that you can produce positive free cash flow in 2Q twenty twenty? It's probably a little tough to speculate about the full year given we don't know what the downside is going to be. But just any short term kind of indicators you can give us on what you think cash flow is going to look like here?
Speaker 3
Yes. So this is Bob, I'll take that initially here. So Nathan, I'd start with your opening statement of our history of free cash flow generated. And granted, we're in unprecedented times, but ultimately, we're confident in our ability to generate cash flow. And so as we look out over the different scenarios that we're looking at, we see that continuing into the future and believe the combination of our current positioning with cash on the balance sheet, our historic ability to generate cash flow and availability positions us well.
Obviously, we also talked about cost actions. We have flexibility and nimbleness in our ability to respond. Our ability to we intimately understand our fixed and variable costs and we know the levers that need to be pulled in terms of different varying scenarios. And so I think we remain confident in that. But to sit here and predict a three month window or a nine month window with the uncertainty that we're in is just a bit challenging.
I would just look to history and say that has existed historically and that's where we're standing now.
Speaker 5
That's fair. Well, maybe we could talk a little bit about some of the scenarios. I mean, I know everybody is running their own scenarios and looking to see what happens under those circumstances. But maybe you could talk about the scenarios you've run. What kind of revenue decline does the business take before it gets to breakeven, before it starts to burn in cash?
Does revenue have to be down 50% or something like that before you would run into liquidity issues? Just any color you can give us on the scenario analysis you guys have run internally?
Speaker 3
I'm sure Ken will jump in here, but let just start and talk about obviously, we're running many scenarios. But I think the thing or the scenario I'm hanging my head on most, we don't give guidance historically and I don't think right now is the time to start giving guidance. So I think I'll probably stay fairly high level in these comments, but we're really utilizing customer intimacy and regular and frequent contact with our customers across both product lines. So that's talking to utilities on a daily basis and talking to flow instrumentation customers on a daily basis, not just here in The U. S, but globally.
And we're really trying to use that information to inform a most likely scenario. And effectively, as we look at that most likely scenario, we're making decisions on an hourly daily, if not hourly basis. And the decisions that we've taken in terms of cost and cash burn rate and preservation of cash to date are largely commensurate with our outlook on what the current outlook on that severity and duration is. So to get into, again, individual quarter by quarter revenue and margin performance, we don't do that in normal times, and I don't think we're going to start doing that today.
Speaker 2
Yes. And to add to that, Nathan, over the past couple of years, I think everyone has recognized we've done a really nice job of really tightening up our processes and making sure that we have great cash flow. So from all the points that Bob just brought up, plus the procedures we have in place, we feel pretty confident about our ability to continue to operate really well. As Bob pointed out, it's difficult to put a guidance level on it, but we feel pretty comfortable.
Speaker 5
Fair enough. I'll just sneak one more in on new product development and R and D. Is that something you're continuing to fund at the same level during the downturn here? Has there been any cuts in that, engineers furloughed? Or is that just are you going to go through the downturn without hair cutting that at all?
Speaker 2
We are not going to hair cut our R and D department. So we innovation has been our hallmark, and it will continue to be so. So the projects that we came into the year planning to do, remote control valve, continuing to build out our ultrasonic large meter size on the back of the success we've had on the three and four inches, continuing to improve our products and reduce costs, all those things are still in there. Now having said that, every employee, when I talked about being fair and equitable in our work schedules, we're sharing that across the business 100%. So we are working reduced hours in the engineering department, but we've cut no projects and we still expect to complete those on time.
It's critically important for us, I feel, to continue to invest during the downturn because we came into this with a great amount of momentum and a lot of that was on the back of the LTE M radios we did last year, the three and four inches meters, the position that we've had. We're not going to give up our innovation leader status regardless of the pandemic.
Speaker 5
Great. Thanks very much for the color. I'll pass it on.
Speaker 0
Our next question comes from the line of Richard Eastman with Baird. Go ahead please. Your line is open.
Speaker 6
Yes. Thanks, Ken, for the question. Just a couple of things about as we kind of look into the spring here. My thought is, again, we probably not see a lot of seasonal improvements, certainly even in the water business. But I would still kind of question, again, most water utilities at least have some ability to raise capital, some independence from municipality that they're in.
So how do you see all this kind of shaking out from an availability of funds perspective perspective from your customers themselves on the muni side?
Speaker 2
Yes. So we are very close with our customers. We spend a lot of time talking to them in normal conditions and even more so now. And one of the things that we're hearing is that budgets are not being cut. Many of our customers are frustrated that they've been I would say our business on the utility side hasn't been slowing.
Our business has been slowed by the pandemic. So many of our customers are definitely wanting to get out there and work in some of the places where the stay at home orders are a little tighter, some of the places perhaps where the meters in the basement people right now aren't really going in homes. But several parts of the market are continuing to work and in some cases even trying to go faster while they can. So it's really a mix of where people are, but we're not seeing budget cuts and we're not seeing cancellations. We're seeing deferrals and generally sensing that people want to be working and that they will do so when they're allowed to.
Speaker 6
So it's really the capacity of the customer, not the demand. I mean that's for the budgets. It's just the capacity of the customer to deploy.
Speaker 2
That's correct.
Speaker 6
Yes, fair enough. And is there as we kind of look out to I don't know if we'll see this infrastructure follow on stimulus, But is there any money is there any history there of in the infrastructure bill, I think in the past, they've always included something for the SRF funds, the state FRS funds. But it would need or be captured in an infrastructure stimulus?
Speaker 2
So that's a hard question to ask because it's based on history. One thing I can tell you that we're hearing some positives about is around the whole AMI infrastructure. And especially now if you can imagine in this heightened sense of social distancing, cash flow for municipalities, the ability to have AMI and not have to go out and talk to your customers or allow your customers to be able to manage their water on a daily basis to know how much they're using so they can monitor it because they're all now at home instead of at work, not having to go out to the utility to check on it. Other things, which we're very far down the line on releasing our remote control valve. I'm sure you've heard about some of the municipalities that turn the water on for all of their customers that had been turned off.
Well, that all has to be done manually today, and then it'll have to be done manually to go back and when they want to shut it off again. Our remote control valve would allow them to do that from the desk downtown to turn it back on in a critical situation or to turn it back off. So I think there are certain things in the market today that we offer that are different than perhaps the last infrastructure bill.
Speaker 6
I see. Okay, very good. And then just a quick couple too for Bob. As we've taken some of this discretionary cost actions here on the compensation side and work week hours, How does this manifest itself here through the P and L here in terms of trying to model out SG and A? One would presume that we stepped down in dollars going forward.
What would be kind
Speaker 7
of order of magnitude here
Speaker 6
that you might suggest?
Speaker 3
Well, so just to be clear, the reduction in the work week, the thirty two hour work week, the salary cuts that we mentioned in the prepared remarks right now are temporary. So it's five weeks implemented beginning actually this week and extending through mid May. So that will help you size it. I'm not going to get into what the actual costs are. You can figure out the executive piece of it just by looking at the proxy and taking that 20% haircut, realize it's for five weeks at the current time.
As we've alluded to throughout, obviously, believe the current reductions are commensurate with facts and circumstances, but we'll be monitoring that weekly. And as we've communicated not only externally, but internally, we're reacting to the marketplace. So if that ends up needing to change, it will. But right now we're at that five week mark to size it for you. Right.
Speaker 2
And Rick, the way that we've designed this is to keep our entire workforce, right? So as much as things like I just talked about, some of our customers are being slowed, we are going to be we want to be ready to come out of this and ramp up quickly. So this isn't layoffs and those types of things. We're trying to make sure that we're balanced to keep our entire workforce because frankly, I couldn't be more pleased with the execution, not just in Q1, but over the last couple of years since I've been here. We have currently and consistently executed really well.
And that's something that I've taken very serious to make sure we preserve.
Speaker 6
Yes, seems very prudent. And then maybe just last one for Bob. The inventory in the channel, that's kind of seldom come up. Is that are you speaking to the water meter side? And I'm just curious, is that how big a problem is that?
Speaker 3
Yes. I don't see it as being significant. As you know, over the years, our business has shifted to much more of a direct model than a distribution model. I think it's just a reality of the times in terms of how distributors behave, and that's why it hits the wording in the press release. But as far as significance, again, I would think of us being much more direct than distribution based.
Speaker 6
Okay, fair enough. All right. Thanks again.
Speaker 2
Our
Speaker 0
next question comes from the line of Ryan Connors with Boenning. Go ahead please. Your line is open.
Speaker 4
Thanks for taking my questions.
Speaker 6
So
Speaker 4
I want to talk about your comments on no cancellations and so forth. I mean, you're fairly sanguine there in response to Rick's question on the decoupling of water utilities from general account budgets. And the problem is we made the mistake in the last cycle of making that call that Badger and others would be defensive because that would those budgets were independent. That turned out not to be the case. And obviously, this situation is much more dire than that was for state and local government revenue, tax revenue.
So I just want to kind of probe on that further. We're reading about police and fire being laid off and real cuts into absolute bone for some of these local governments. What gives you the confidence that, that won't have a more lasting effect and say somebody, well, yes, we still like AMI, but we're pushing that to 2023 or something like that. We're just going to take a pause for a couple of years. I mean, why would that not be happening to some extent?
Speaker 2
Yes. So if you look at the last downturn, I would certainly assume you're referring to 2008 and 'nine, things are quite a bit different in how we're operating. Back then, there was no Beacon revenue, which now is 4% of our total revenue. We weren't selling cellular radio. So there's a lot of things that are different in the space.
Our AMI customers are continuing to move forward. The bid pipeline is extremely strong. There's one was deferred and a large one to be certain. But for the most fact, feedback that we're getting is very positive that people still want to go forward with the AMI, particularly in this environment, which is completely different than the last downturn, I believe, right?
Speaker 3
And Ryan, to your question, what gives us the confidence? I'm not speaking necessarily to budgetary constraints and funding, but as it relates to the feedback that we talked about earlier, that's informing our outlook as on a real time basis. The overwhelming commentary we're hearing from our utility customers is, A, a heavy desire to get back to work, meaning get past shelter in place and work from home, a strong desire where it's applicable to not miss the summer install season, and the number of marquee projects that we've talked about recently, primarily the two big ones we've talked about, those are moving forward uninterrupted. And so, yes, we can all speculate and try cascade past practice on to current practice, but we're really trying to use the direct line up to the customer to inform our outlook. And when you hear those things, it just sounds different than perhaps what you're suggesting.
Speaker 4
Yes. Yes, guess I'm trying to probe. I mean, I appreciate the comments about not giving guidance historically. But obviously, we're all going to have to try to go out and publish some kind of estimates on the company. And it seems like you're just giving a very sanguine estimate or take there, which suggests you think that those estimate cuts should relatively shallow and which is just surprising given that things look pretty dire.
I think we'd want to kind of clear the decks and just assume the worst, But that doesn't really seem to be the take you're telling people to come away with.
Speaker 2
Well, as Bob pointed out before, we haven't provided guidance all the other years. This would probably be the worst time to try to start. I think being able to try to understand the impacts of the pandemic are difficult. What we do know is what customers tell us. And it sounds like they're not cutting budgets, and they want to keep moving forward.
Speaker 4
Okay. Now my other question, just conceptually with this is big picture, but from a stock picking perspective, one of the ironies since we've come off the bottom is that it's been better to own names that aren't like Badger that Badger has been very well managed financially, balance sheet and now the Fed and the federal government are going to bail everybody out. So the names that have bounced the most have been highly levered frankly not companies of the quality of Badger. Mean, so what are the unique dynamics? Is there any kind of government programs that you're looking at?
Because again, it seems like the names that are going to benefit most are kind of the ones that need the help and Badger clearly does not from a financial perspective. Any comments on that?
Speaker 2
Well, one, I can tell you that I'm extremely thrilled to be the CEO of Badger and not needing that support and being here than probably the companies that you're talking about. I think we have a great competitive position. We still serve great markets. And we're a great conservative execution type company that we're going to continue to be that long into the future, right? So we're not viewing this for the next quarter, the next year.
Our strategy remains the same, and we're going to keep executing the way that we have.
Speaker 4
Got it. Okay. And then just the last one, was most of the stuff in the press release was predictable in terms of talking about project push outs or whatever. But the one that jumped out to me was the component shortages. I mean, that seemed like something we weren't expecting to see.
Any more color you can give us? I know for competitive reasons, probably don't want to drill down too far there. But any more color on where exactly that's happening? What types of things those are?
Speaker 2
Yes. So compared to most, we don't have as complex a supply chain as most people. But we do get parts from Europe and we do get parts from Asia and we do have a supply chain that we're doing we're really doing fine. But we can see that there are some potential cracks and logistics is backing up. And I think we're going to be better than most.
But I think given the current situation, pointing out that there's some potential challenges there, I think is the prudent thing to do.
Speaker 3
Which I don't view as being unique to Badger Meter and more or less being unique to anyone that's moving products through ports and using trucks and having a supply chain that's not just U. S. Based. So but it would would be be irresponsible and remiss if we didn't mention that as a potential risk as we talk about clarity and communication and forward thinking.
Speaker 4
Understood. Thanks for your time.
Speaker 2
Yeah, thanks.
Speaker 0
Our next question comes from the line of Richard Verdi with Coker and Palmer. Go ahead please. Your line is open.
Speaker 8
Hi, good morning and thank you for taking my call and also thank you for the color this far. It's been very helpful. I just have one follow-up question. And that is looking back at the first quarter and comparing the month of March to the month of January and February, can you just talk a little bit about what business trends look like in that month of March compared to the first two months in the first quarter?
Speaker 2
It was relatively flat. I mean, we got off to a pretty good start to the quarter. We finished the quarter pretty strong. I wouldn't say that there was any type of ramp up or ramp down. It was pretty constant.
Speaker 8
Okay. All right. That's good. All right. Thank you very much.
Speaker 2
Thanks.
Speaker 0
Our next question comes from the line of Franz Okonwanski from Friese Associates. Go ahead please. Your line is open.
Speaker 7
Quick question We're
Speaker 3
having a hard time hearing you. I don't know if you're on a cell phone, but we're only picking up every fourth word, it
Speaker 7
think I had you on speaker. I'm sorry. Is that better?
Speaker 3
That's much better.
Speaker 7
Okay. Sorry, I apologize. I just wanted to follow-up on the state municipality budgets questions. Is there anything structural that could happen in the coming months that we haven't yet seen perhaps where from what I understand the state municipal budgets need to be balanced at all times for perhaps certain funding initiatives. Maybe we're not at that point yet, but are there certain structural things that could change in the coming months that could sort of change the tune a little bit in terms of budget spending?
You're not seeing it now, but maybe folks could see it in the next quarter or two.
Speaker 2
Well, I'm going go back to the comment earlier about how we generally stay very close to our customers and we talk to them quite often. The other thing about these utilities is most of the times they're run by the same person for years and years and years who have been through several downturns. So when they're talking to us about their confidence in the budgets being maintained and those types of things, that's a pretty strong indicator to me that they're not anticipating something structural over the next couple of months that would significantly change that.
Speaker 7
Okay. And I guess in terms of water infrastructure, somebody else mentioned earlier that fire, police, other things were maybe being cut back. Your vertical is a little bit more of a priority perhaps than some of the others?
Speaker 2
Well, so one thing I know there was a time in my life where I used to work with a company that also sold rescue tools and some of those things. And I saw what happened in February. And sure, they don't buy new fire trucks, but they still have enough fire trucks to put fires out and they maybe don't buy new equipment. But they still did a lot of the water infrastructure work that they needed to do because people still need clean drinking water, people still need to move their wastewater. So it is a little bit of a different space where you're buying maybe equipment versus keeping your water your essential water functions running.
Speaker 7
Okay. Thank you. Sure.
Speaker 0
Our next question comes from the line of Andrew Buscaglia from Berenberg. Go ahead please. Your line is open.
Speaker 9
Hey, guys. I wanted to ask on kind of parsing out how discretionary versus non discretionary spend. And I remember, if you go back last year, some customers were waiting for your new technology to come out. And I'm wondering if there's still an element of customers who have kind of waited and this crisis hit, but they still need to upgrade. Is there a factor is there something like that going on, a dynamic where customers will be more likely to spend than you'd expect in an environment like this, like due to new technology that you guys have put out there?
Speaker 2
Well, think if I'm understanding your question correctly, that's when I talked earlier about, I think, the adoption that we're going to see on more AMI would go in line with what you're talking about. The LTE M radio that we put out is very supportive of better technology, and we saw that momentum coming into this pandemic. The remote control valve, think, is going to provide fantastic benefits for customers that will have payback that they're going to want to do. So quantifying that, Andrew, I don't know that I can quantify, but I do know that the newer technologies we've seen, we've certainly seen customers value what they offer.
Speaker 9
Yes, okay. And so and the gross margins were also very good in the quarter. You almost broke 40%. What so what in there you talked about the pricing dynamics. I guess what in there is there anything in there that's structural that these gross margins could hang in there despite volume declines?
Is there can you talk a little bit more, I guess, about how you're thinking about that?
Speaker 3
Yes. So if we just think about our gross margin commentary, not only for this past quarter, but really the last seven quarters where we've been in the upper half of that normalized range. It's really a story of mix. And so I wouldn't view that as structural. I would view that as being indicative of the products that are moving and we're selling.
So we've consistently talked about mix. We've got copper. When we talk about price cost, we're obviously talking about commodity costs and primarily in copper. So there was a year over year improvement as well as sustained improvement in that in terms of a cost advantage. And quite frankly, probably goes under the radar a little bit, but we are we haven't yet anniversaried the LTE M product launch, which had a cost dynamic to it as well.
So that's part of the year over year improvement. As we've consistently talked about probably the last five or six calls about how to model out again before the pandemic what that margin profile looks like. We've kind of talked about a tightening of the normalized range, but not necessarily a continued expansion. I always use the phrase the stairway to heaven. And there's a variety of factors that bat that expansion down over time.
But there we're talking under normal conditions. I think when we talk about a pandemic, obviously, the uncertainty, the duration and severity of that will be determined and will ultimately impact or could potentially impact margins going forward. But ultimately, there's nothing one time or unique or discrete about what we experienced in Q1 nor kind of the past quarters.
Speaker 9
And presumably, some of the cost actions that you're taking currently, we're going to help your operating margin line, but on a gross margin line, guess, was there anything I guess you mentioned the constraints that could impact it, but is there something in those cost actions that help your gross margins going forward?
Speaker 3
Well, clearly, reduced work week and the 20% salary cut is universal. It's across the board. Again, very temporary, but I would view that to be response lower volume and to manage absorption versus a structural expansion.
Speaker 0
And with that, there are no further questions in queue at this time. I'd like to turn the call back over to our presenters.
Speaker 1
Great. Thanks everyone for joining our call today. For your planning purposes, our second quarter call is tentatively scheduled for Thursday, July 16. Please feel free to reach out to me with any follow-up questions. Thanks.
Have a great day.
Speaker 0
This concludes today's conference call. You may now disconnect.