PEMSTAR reports fiscal 2003 Q3 results
Jan 30, 2003
EPS and Revenue Exceed Analysts' Consensus Estimates; Cash Flow Positive for 6th Straight Quarter PEMSTAR Inc. (Nasdaq:PMTR) reported financial results for its fiscal 2003 third quarter. The company's results, for both revenue and diluted net loss per share, are consistent with prior guidance and exceed analysts' consensus estimates. Financial Results PEMSTAR reported net sales of $171.8 million for the fiscal 2003 third quarter ended December 31, 2002, compared to $171.2 million in the prior-year period. The company narrowed its net loss to ($1.9million), or ($0.05) per diluted share, from a net loss of ($12.5 million), or ($0.34) per diluted share, for last year's fiscal third quarter. The analysts' consensus estimate was for a loss of ($0.08) per share. The current quarter included sales of $5.6 million of excess raw inventories billed at cost to customers in accordance with contract provisions. This compares to excess inventory sales of $12.7 million in the third quarter of the prior fiscal year. Excluding excess inventory sales, net sales for the fiscal 2003 third quarter grew $7.7 million, compared to last year's fiscal third quarter, due to strong sales in the computing, medical and industrial sectors, which were partially offset by decreased sales in the storage sector. Gross profit for the third quarter of fiscal 2003 versus the year-earlier period increased $11.6 million to $12.6 million, or 7.4 percent of net sales. Higher gross profit stemmed primarily from increased capacity utilization from growth in sales (excluding excess inventory sales), cost savings from current fiscal year restructuring actions and the decreased level of inventory write-offs. Operating income for the third quarter of fiscal 2003 rose $19.1 million to $0.3 million, or 0.2 percent of sales, compared to the same period of the prior fiscal year. This is the first time PEMSTAR reported operating income in five quarters. The company's higher operating income is a result of the higher gross profit, cost savings from current fiscal year restructuring actions and a decreased level of accounts receivable write-offs. "We delivered significant improvement in the third quarter from the year-ago period and narrowed our loss sequentially, as well," said Al Berning, PEMSTAR's chairman, president and CEO. "In addition, we exceeded the consensus estimates for both revenue and diluted earnings per share." Cash flow from operations for the fiscal third quarter was $11.5 million, representing the sixth consecutive quarter in which PEMSTAR was operating cash flow positive. As of December 31, 2002, net inventories of $78.5 million were down from $82.6 million at September 30, 2002, with a turn rate of 8.1 times, consistent with 8.2 times at September 30, 2002. Accounts receivable increased $3.3 million in the quarter, with days sales outstanding rising slightly to 62 days from 58 days at September 30, 2002. Net debt (bank debt including capital leases less cash) as of December 31, 2002, was $69.0 million, compared to $73.3 million at September quarter-end. Debt to total capital at December 31, 2002, was 36.5 percent and net book value was $4.45 per outstanding share, with tangible book value at $3.33 per outstanding share. The company has revolving credit obligations totaling $57.0 million with its existing lenders that mature on December 31, 2003. The company has received several nonbinding proposals for refinancing, extending and expanding its credit facilities under proposed terms and conditions provided from current and prospective lenders, that are in general, more favorable than PEMSTAR's existing credit facilities. The company anticipates that it will take several months to negotiate and close on these new credit facilities. Because the existing credit agreements mature in less than 12 months, these obligations are shown as current liabilities on the company's financial statements for the third quarter of fiscal 2003. The company is in compliance with all financing covenants. For the first nine months of fiscal 2003, net sales were $501.3 million, compared to $511.8 million for the same period last year. PEMSTAR reported a net loss of ($31.7 million), or ($0.86) per diluted share, versus a net loss of ($7.0) million, or ($0.21) per share, for the prior-year nine months. Business Update Consistent with the strategy to diversify PEMSTAR's revenue base, fiscal third quarter sales grew in the computing, medical and industrial sectors from the year-ago period. Sales to the computing, medical and industrial sectors contributed 36.2 percent, 7.4 percent and 16.9 percent of total sales respectively, up from 31.8 percent, 4.1 percent and 12.7 percent respectively. Sales to the communications industry accounted for 34.7 percent of total sales, down from the year-earlier period when communications industry revenue totaled 40.7 percent. The remaining 4.8 percent of sales were to the data storage industry. From a geographic perspective, 73.9 percent of fiscal third quarter revenue was derived from product sold in North and South America, 12.8 percent generated in Asia, and 13.3 percent in Europe. Sales in Europe benefited from the companies increased Asian manufacture of subassemblies. On the customer side, PEMSTAR began work with 11 new customers, five of which are in the industrial sector. In addition, during the quarter, PEMSTAR strengthened relationships with existing customers. The company experienced continued success in its European operations including new strategic partnerships in development and manufacturing with Rohde & Schwarz and with Assembleon. Also during the quarter, PEMSTAR unveiled its latest original design for manufacturing (ODM) development platform at the Electronica show in Munich, Germany. The PEMSTAR ODM Development Platform is a production-ready platform for handheld products, compact operating consoles and wearable devices. PEMSTAR's engineering team based the platform design on the latest Windows® CE .NET operating system and the low power, high performance 32-bit Intel® XScale(TM) core-based CPU. This leading-edge technology, combined with an award-winning design, provides the basis for multiple end-use applications including smart phone solutions and industrial PDA applications, medical front-end display modules, and point-of-sale and portable data terminals. PEMSTAR also received two distinguished awards during the second quarter. The company was selected as a Medtronic Cardiac Surgery Speed to Market 2002 Partner of the Year. According to Berning, "We are very proud to be the recipient of this important award. The credit for this award goes to our exceptional engineering team for once again demonstrating that PEMSTAR has one of the top medical design groups in the electronics manufacturing services (EMS) industry." CIENA® Corp. awarded PEMSTAR a Supplier Performance Award, recognizing the critical role that suppliers play in helping the company to exceed customers' expectations. Award criteria include flexibility and responsiveness, quality, teamwork and customer service as well as overall supplier performance. "Customers recognize the strength of our Concept to Customer business model," said Berning. "Our goals for the future are fundamental: continue to align our cost structure with the current environment; diversify our business by growing sales with new and existing customers; and enhance our liquidity by continued focus on cash cycle management, in order to consistently improve our financial results. With the infrastructure that we have in place along with our global presence in our customers' key markets, we believe that we are well positioned for growth and a return to profitability." Fiscal 2003 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 2003 fourth quarter ending March 31, 2003, of $155 to $160 million, and breakeven to a net loss of ($.06) per share. This compares with net sales of $145.7 million and a net loss of ($1.28) per share for the fourth quarter of fiscal 2002 and does not reflect potential charges for asset impairments (below). Goodwill and Other Intangible Assets Effective April 1, 2002, PEMSTAR Inc. adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." As required by the statement, a transition date review is being performed to assess the amount of any indicated impairment loss related to goodwill and other intangible assets. PEMSTAR Inc. has completed step one of the review, which has indicated the potential for an impairment loss related to certain of its recorded goodwill. The amount of any such loss will be determined during the fiscal fourth quarter and, if indicated, recorded as an adjustment adding a "cumulative effect of a change in accounting principle" to the statement of operations of the fiscal first quarter previously reported. Management currently believes that the net book value of goodwill potentially affected by this transitional adjustment totals approximately $5.5 million.