Pemstar reports Q3 results
Jan 29, 2004
Strong revenue performance, improved profit and cash cycle performance PEMSTAR Inc. (Nasdaq:PMTR) today reported financial results for its fiscal 2004 third quarter ended December 31, 2003. Financial Results PEMSTAR reported net sales of $187.3 million for the fiscal 2004 third quarter, compared to $171.8 million in the prior-year period. These amounts include sales of excess inventory of $1.3 million and $5.6 million, respectively. The company's net income was $.02 million, or $.00 per diluted share, versus a net loss of ($1.9 million), or ($.05) per diluted share, for last year's fiscal third quarter. PEMSTAR's reported fiscal third-quarter earnings were in the range of prior guidance and met the analysts' consensus estimate; revenues exceeded PEMSTAR's guidance and the consensus estimate. Fiscal 2004 third-quarter net sales were up 9.0 percent year over year and up 24.4 percent sequentially due to strength in the computing and data storage business, as well as the ramp-up of numerous programs including the company's recent Austin, Texas, acquisition. PEMSTAR's December-quarter net income versus the prior year's net loss was due to the impact of restructuring efforts, higher net sales, and reduced inventory and accounts receivable write-offs. Gross profit for the third quarter of fiscal 2004 versus the year-earlier period rose to $13.7 million from $12.6 million. This increase stemmed from stronger net sales, restructuring benefits and lower inventory write-offs, partially offset by strength in lower margin computing and data storage business and startup expenses related to numerous programs including the Austin, Texas, acquisition. Due to the overall margin gain, operating income rose. During the December quarter, PEMSTAR obtained more favorable financial covenants under its domestic credit facility with Congress Financial Corporation, a subsidiary of Wachovia Bank N.A. The new terms replaced monthly financial reporting requirements, which were in effect during PEMSTAR's September quarter, with quarterly reporting requirements. Also, the company's consolidated and domestic EBITDA (earnings before interest, taxes, depreciation and amortization) covenants were reduced. "We're delivering solid sequential and year-over-year financial and operational improvements. Our restructuring program is generating cost savings, we negotiated more favorable financial covenants and we're profitable for the first time in nine quarters," said Al Berning, PEMSTAR's chairman, president and CEO. "Our revenue base also continues to diversify with growth in both the industrial, and computing and data storage sectors." Cash generated from operations for the fiscal third quarter was $1.7 million. The cash balance at December 31, 2003, was $18.9 million, up from $17.5 million at September 30, 2003. Accounts receivable increased $8.8 million in the quarter, with days sales outstanding (DSO) improving to 57 days from 66 days at September 30, 2003. As of December 31, 2003, net inventories of $83.0 million were up from $77.8 million at September 30, 2003, with a turn rate of 8.4 times, improved from 7.1 times at September 30, 2003. The gain is partially attributed to strength in the high-turning computing and data storage business. Because of better DSO and inventory turns, the company's cash cycle improved significantly from 56 days for the fiscal 2004 second quarter to 46 days for the December quarter. Debt (long-term debt plus capital leases including, in both cases, current maturities) as of December 31, 2003, was $90.6 million, compared to $82.4 million at September quarter-end. This increase wasdue to higher borrowings on PEMSTAR's revolving lines of credit to fund growth and working capital requirements. Debt to total capital (debt plus shareholders' equity) at December 31, 2003, was 35.4 percent, up 2.0 percent from 33.4 percent for the September quarter, and net book value was $3.67 per outstanding share, with tangible book value at $2.92 per outstanding share. In the second quarter of fiscal 2004, PEMSTAR changed the classification of the borrowings under its domestic credit facility from long-term debt to current liabilities. Similarly, in accordance with the requirements of the Financial Accounting Standards Board's Emerging Issues Task Force conclusions in Issue Number 95 - 22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement", which states that credit facilities with both a subjective acceleration clause and a lock-box arrangement, whereby customer remittances are applied against the borrowings under the facility are considered short term obligations, PEMSTAR expects to file shortly amendments to its Form 10-K for the year ended March 31, 2003 and its Forms 10-Q for the quarters ended June 30 and September 30, 2003, to reclassify its borrowings from long-term to current obligations in those filings.This debt reclassification will not affect PEMSTAR's statement of operations, shareholders' equity or liquidity as previously disclosed in PEMSTAR's filings. For the first nine months of fiscal 2004, net sales were $483.4 million, compared to $501.3 million for the same period last year. These amounts include sales of excess inventories totaling $6.5 million and $21.5 million, respectively. PEMSTAR reported a net loss of ($17.8 million), or ($.43) per diluted share for the first nine months of fiscal 2004, versus a net loss of ($37.1 million), or ($1.00) per share (including a loss on the cumulative effect of an accounting change of ($5.3 million) or ($.14 per diluted share)), for the prior-year nine months. Net loss for the nine months ended December 31, 2003, of ($17.8 million) included $7.7 million of restructuring charges. Net loss before the cumulative effect of an accounting change for the nine months ended December 31, 2002, of ($31.7 million) included $4.4 million of restructuring charges. Excluding restructuring charges, the net loss year-to-date for fiscal 2004 narrowed from fiscal 2003, with improvements generated from restructuring efforts, both lower inventory and accounts receivable write-offs, and increased gross profit from a more diversified customer base. Business Update "PEMSTAR's improvement strategy centers on alignment of resources with current revenue, continued industry diversification and rigorous financial management. Our third-quarter performance shows the benefits of this three-pronged approach," said Berning. "We're encouraged by the opportunities that are emerging in the marketplace. PEMSTAR is poised for growth with a solid infrastructure, comprehensive capabilities and a global reach." During the third fiscal quarter, sales to the industrial sector accounted for 30.2 percent of net sales, computing and data storage was 38.7 percent of net sales; communications was 26.5 percent of net sales; and medical was 4.6 percent of net sales. From a geographic perspective, 69.2 percent of fiscal third-quarter net sales were derived from product sold in North and South America, 22.2 percent generated in Asia, and 8.6 percent in Europe. PEMSTAR started work with 15 new customers during the December quarter, and began numerous new projects with existing customers across all industries served. Fiscal 2004 Fourth-Quarter Outlook The following statements are based on current expectations, and today's economic uncertainties make it difficult to project results going forward. PEMSTAR currently expects net sales in the fiscal 2004 fourth quarter ending March 31, 2004, of $175 million to $185 million, and net income of $.01 per share to a net loss of ($.04) per share. This compares with net sales of $166.8 million and a net loss of ($.04) per share for the fourth quarter of fiscal 2003. PEMSTAR is normally affected by seasonality in certain industries, which historically results in reduced sales in the fiscal fourth quarter.