Addressing your points in order:
A. Agree
B. As I explained part of the reason for the large inventory is that they "wrote up" the inventory as a part of the acquisition. As PMAT they typically held inventory in excess of 1 quarter of sales. But remember that inventory now includes Electrotech inventory as well, but that sales of both have plummeted. Year end inventory was $53,837,000 up from $15,766 in Q3. But $8m was ficticious writeup, so real inventory was up from about $16m to about $45m. Presumably Electrotech had about $30m in inventory, again a bit above one quarter's sales. But sales for both have plummeted, from a combined $40m to only $12m, and if you have $45m in inventory you can't cut it to $15 immediately if you aren't selling it.
Is there a chance of a writeoff? Sure? But they have indicated that they expect sales to return to $23m this quarter, which will allow a larger inventory drop than the $4m which happened last quarter. The scary part is that I suspect that of the $4m drop, $2m was due to the writeoff. Thus real inventory came down only a couple million dollars. At that rate we could see a drop in real inventory of maybe $4m this quarter, and a drop of say $3m in inventory writeup, dropping book inventory to about $42m after Q2, still 2 quarters of sales. If they stay in business that long, I think the inventory will be back in line by the end of 1997.
C. Regarding high AR/DSO, if you look at their history these levels are typical. See the following:
Sales AR Demo Systems AR+DSO in Days
----- ------ ----- --------------
3/31/96 7,753 13,800 1,955 183
6/30/96 10,653 16,592 3,078 166
9/30/96 16,519 16,519 4,478 214
12/31/96 14,998 27,230 6,080 200
3/31/97 11,952 22,936 5,267 212
Because they are typical, does that make them good? No. Probably we should have looked at the high numbers on 9/30 and seen the preciptious sales decline in PMAT equipment coming. Without Electrotech sales, Q4 sales were $6.2m, well down from $15m in Q3, and in Q1 they were maybe $3m (one system).
On the other hand, the main reason that they are so high in days appears to have more to do with slow sales that with booking ficticious sales. AR+DSO actually dropped by $5m in the quarter while sales fell by $3m, so collections improved somewhat. Are there more AR writeoffs coming - perhaps.
D. Running out of cash - I think that the cash situation will not be as bad as you think. They won't need to buy much inventory to build systems, and maybe they get more agressive about collecting AR. In any case, I think that they can get through Q2 without cash problems. The squeeze will get worse in Q3, though.
E. I agree. They need money, but have no good places to get it. The choices would seem to be to find a buyer for the company, or massive dilution.
F. There were several reasons for the decline in margin. Reason number 1 was that they wrote up inventory, then wrote it off through CGS. Without this effect, margin would have been more like 37% than 18%. Even 37% was a big decline from the 50-52% in the past for both Electrotech and PMAT. Why? Well, part of the production cost is variable, and part is fixed. Unless you shut down a plant completely the fixed part remains. IF the sales return to the pre-crunch levels of $40m/quarter combined, the margins will be back above 50%. In the meantime they either need to close a plant or slash costs some other way if they are to improve margins very fast. The inventory writeup will continue to make them show reduced margins all year, though.
G. That would appear to be the case. Combined sales are down almost 75% from the levels of last summer while NVLS is almost flat.
These concerns are not non-issues. There is a distinct chance of failure. There is also the possibility that a buyer could be found. At $5/share and 14m shares, the entire stock could be purchased for $70m. There is also $140m in liabilities, but there is $80m in short term assets. There is also a huge tax loss on the books, about $100m, which could be worth about $35m to a purchaser. Also the $30m is fixed assets no doubt have some value, call it $20m. Thus someone could buy this company at todays values for about $80m or so, or less than 1 times sales, if the technology has merit. Or alternatively they could have massive dilution by issuing a bunch more stock at current prices. So alot could happen other than failure.
Carl
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