Merix announces Q2 results
Jan 10, 2008
Merix Corporation (NasdaqGM:MERX) announced consolidated financial results for the fiscal 2008 second quarter ended December 1, 2007.
The Company reported a loss from continuing operations of $5.0 million or $0.24 per share on revenue of $97.4 million for the second quarter of fiscal 2008, which compares to income from continuing operations of $3.0 million or $0.14 per share on revenue of $103.7 million for the second quarter of fiscal 2007. Included in the second quarter of fiscal 2008 loss was $1.0 million of severance costs associated with the previously announced Hong Kong factory closure.
For comparison purposes it's important to note that the Company's 52 week fiscal year reporting convention results in one additional week of reporting approximately every five years. As a result, the first quarter of fiscal 2008 contained 14 weeks compared to the standard 13 weeks.
Second quarter fiscal 2008 revenue declined 6% when compared to the second quarter of fiscal 2007. The decline was expected and is primarily a result of the normal cyclical slowdown that has been experienced in the North American printed circuit board markets over the last 12 months. On a sequential quarterly 13 week adjusted basis, second quarter revenue grew 5% when compared to the first quarter of fiscal 2008. North America quarterly revenue grew 1% on a sequential basis to $52.9 million. Fiscal 2008 second quarter revenue for Merix Asia was $44.5 million, which was the highest quarterly rate since its acquisition in September 2005.
"I am pleased with the revenue growth and operating improvement progress we have seen in our Asian operations," said Michael D. Burger, President and Chief Executive Officer. "However, I am very disappointed in the revenue and profit performance in North America. Our North American results fell below our expectations and were a key contributor to our continued net loss in the second quarter."
Merix' overall gross margin averaged 11.6% of revenue for the second quarter of fiscal 2008 compared to 18.1% and 13.0% in the second quarter of fiscal 2007 and first quarter of fiscal 2008, respectively. The decline in gross margin when compared to the second quarter of fiscal 2007 was primarily a result of the lower North American revenue and its impact on factory fixed cost absorption. The reduction from the first quarter of fiscal 2008 was a direct result of a 3.1 percentage point decline in North American gross margin to 12.2% resulting from lower than expected demand combined with an unfavorable change in the mix of business coming from several end markets. Partially offsetting the decline in North America gross margin was a modest sequential quarterly improvement to 10.7% in Asia gross margins. This improvement was expected and enabled by the successful completion of the first phase of our Chinese expansion plan that was completed ahead of schedule as the quarter ended.
"The Asia restructuring and planned profit improvements remain on track," commented Mr. Burger. "We've significantly grown our Asia revenues and have nearly doubled our Asia gross margins over the last 12 months. We anticipate further improvements in both revenue and margins as we complete the second phase of our planned expansion over the next 6 to 9 months."
Operating expenses, excluding $1.0 million of severance costs, declined $0.7 million to $13.5 million in the second quarter of fiscal 2008 when compared to the second quarter of fiscal 2007 as a result of the initial actions taken to improve our overall financial model.
"Our financial results fell short of the expectations set earlier in the quarter," commented Mr. Burger. "I am disappointed in the Company's overall financial performance and the speed to which we reacted in the quarter to the changing business environment. As a result, we are taking immediate action to improve our North American profitability."
This week Merix will begin the elimination of approximately 180 employees from our North America-based workforce. The reduction will primarily affect our North American manufacturing operations and to a lesser extent all other support functions enabling savings in both cost of sales and operating expenses. The work force reductions combined with other efficiency improvements are anticipated to reduce our annual cost structure by approximately $11 million. In addition, we are announcing our intention to close our Wood Village, Oregon mass lamination operation by March 1, 2008.
Mr. Burger continued, "As I mentioned above, our Chinese expansion has progressed well and remains ahead of schedule. This expansion gives us the additional flexibility of closing our Wood Village operation while still providing our customers with an improved Asian-based solution many of them are seeking. When complete, the Wood Village closure is anticipated to reduce our North American fixed cost base by over $7 million annually. In addition, it appears as though the excellent progress we are making on our Chinese expansion may enable the full closure of our Hong Kong factory to occur four to six months earlier than originally anticipated. Assuming the closure occurs this spring, we anticipate that it will enable the realization of an additional $1.0 million to $1.5 million of quarterly cost savings exiting our fourth quarter of fiscal 2008."
The Company completed the second fiscal quarter of 2008 with $63.7 million of backlog to be shipped during the third fiscal quarter of 2008. The third quarter is an inherently difficult period to estimate revenue given the holiday buying cycles. We currently estimate third quarter revenue to range from $94 million to $98 million. Net income is more difficult to predict. We are taking meaningful cost out of the Oregon factory, but we also appreciate disruption often occurs when there is a large reduction in force, which can impact output. The third quarter remains a quarter of transition and as such we anticipate financial results to approximate those reported in the second fiscal quarter. Our objective is to return the company to profitability in the first quarter of fiscal 2009 and achieve our financial model during the second half of fiscal 2009.
Commenting on the outlook, Mr. Burger stated, "The changing demand environment has delayed our expected return to profitability. However, I remain optimistic we are on the right path to achieving good financial returns to our shareholders in all market conditions with the plans and actions we have communicated to you today."