Carl, FWIW here's my take on the JV arrangement. You're absolutely right about the gross margin on the JV goods not really being a function of their cost of production (looking at it in "big picture" terms of earnings impact. In term of "nitty gritty" impact, they recognized a $5 mil. loss on joint venture investments last Q in the line item "other operating expenses", explained in the notes to the financial statements in the 10-Q; in the section marked "Joint Ventures" they put the figure at $5.4 mil. I'm assuming these are from Tech Semi and KMT). But I think they negotiate the purchase price at a discount to the general market price and then are left to sell the goods on their own.
Because the quarter started w/ ASP's just under 9 (?), my guess would be that they got crunched on the JV goods, but that assumes that they can't renegotiate the discount as the quarter goes on and that the discount isn't some ridiculous number like 50%, which I don't think it is.
Here's a section from the most recent 10-Q:
In connection with the Acquisition, the Company acquired the right and obligation to purchase all of the production meeting its specifications from two joint ventures, TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KMT Semiconductor Limited ("KMT"), formerly KTI Semiconductor Limited. The Company purchases assembled and tested components from the joint ventures at prices determined quarterly and generally representing discounts from the Company's average sales prices. These discounts were lower than gross margins realized by the Company in the second quarter of 1999 on similar products manufactured in the Company's wholly-owned facilities, but were higher than gross margins historically realized in periods of excess supply. In any future reporting period, gross margins resulting from the Company's purchase of joint venture products may positively or negatively impact gross margins otherwise realized for semiconductor memory products manufactured in the Company's wholly-owned facilities.
So my read is that it will be a net "bad thing" this Q.
If I could play "analyst for a day" on the upcoming call I'd like to ask:
1. What's the discount?
2. What was the GM on goods purchased from JV's?
3. What's the % of available for sale goods represented by products from the JV's for 2Q99 and the most recent quarter?
IMHO, being the myopic wonders that they are, they'd dodge those questions, even though obviously in a rising-to-stable price environment they'll benefit from the arrangement.
Good trading,
Tom |
