Zytec
Q2
| Zytec
Q2
|
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* by Greg Marcus (MF Boring) Zytec Corporation ALEXANDRIA, V.A., July 23, 1996/FOOLWIRE/-- Last night, Zytec Corp. reported 2Q earnings $2.26 million (excluding one-time gains), or $0.22 per share, on revenues of $61.1 million. These results were in line with analysts' expectations.
Gross margin improved sequentially and relative to 2Q:95, to 14.6%. Pre-tax income of $3.25 million also represented a sequential and year-over-year increase. As a percentage of sales, pre-tax earnings of 5.35% compare with 1Q's 4.81% and 2Q:95's 1.40%. Net margin was 3.72%, an improvement over last quarter's 3.45%.
In its press release, the company cautioned that slowing earnings from two of its largest customers "may cause our second half results to be lower than originally expected, but materially above revenues and margins for the comparable period last year."
In the Wednesday morning conference call, the company noted that start-up of the new Broomfield, CO, facility is proceeding well and that the facility began shipping products on April 1. This has not only enabled the company to begin realizing some income from that capital investment, it has also reduced overtime pressure at the Minnesota facility.
In addition, the shortage of power semiconductor components that crimped Zytec's production late last year is no longer in evidence, although chip prices remain somewhat higher than they were prior to that shortage.
Due to a recent change in Austrian law that affects tax accounting at Zytec's Austrian plant, Zytec elected to recognize deferred tax loss carry-forwards in 2Q:96. The company noted in the conference call that its consolidated tax rate should stabilize at 38-39%, which is a bit higher than last year's 36.2% (based on my calculations).
As to the slowing orders from two large customers, I infer that those customers are DEC and H-P. The slowdowns those two companies experienced have been amply reported recently. Last year, the two large customers accounted for approximately one-quarter of Zytec product sales. (Zytec also derives income from servicing equipment.) Partially offsetting these slowing orders, Zytec continues to win new customers, including one unnamed company that aims to be a major presence in the server market, according to the conference call.
Through six months, sales totaled $121.8 million. Based on the wording of the press release, my personal projection would be for something like $105 million in sales for the balance of the year -- or around an 8% gain over last year's second half. That would work out to $227 million for the full year.
As I understand it, prior to the 2Q report, analysts had been expecting something on the order of $245 million in sales for ZTEC in 1996. Please note that such projections are quite tenuous, because a large share of the company's business is "just in time" turnaround of new orders, which can change rapidly one way or the other.
Based on a net margin of 3.5% for the year (my number), $227 million in sales would translate into $7.95 million in earnings. Divide that by the current 10.3 million shares, and you've got EPS of $0.77, as compared with last year's (split-adjusted) $0.42 on $170.5 million in sales.
Recall that on June 13, the company filed to offer 2,000,000 shares of stock, along with sales by insiders of another 272,000 shares. That offering has been delayed due to weakness in ZTEC's share price and generally turbulent market conditions. Should the secondary go forward (which is not a sure thing, in my opinion) the new shares would result in an approximate 17% dilution in EPS, net earnings held constant. Since the income from the equity offering would be used to pay down debt and thereby reduce interest expenses, however, the secondary would indirectly have some off-setting benefit for net earnings.
If and when the secondary occurs, EPS estimates would have to be recalibrated in light of new information. As it is, though, my ballpark guesstimate is that a plausible post-secondary EPS target for FY96 would be around $.68 -- or around a 12% net dilution, short-term. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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The Motley Fool |