CellStar Reports 12% Higher Revenues, Loss for Third
Quarter
PR Newswire - September 27, 2000 00:48
- North America revenues up 66.4 percent
- Inventory levels decrease 18.8 percent; turns improve to 9.7 times
- Gross margins expected to firm modestly in fourth quarter
- Contracts, new-business pipeline strengthening
CARROLLTON, Texas, Sept. 27 /PRNewswire/ -- CellStar Corporation (Nasdaq: CLST) today
announced that revenues for the third quarter ended August 31, 2000, were up 12.4 percent, to $629.8
million, compared to $560.2 million for the comparable 1999 quarter. CellStar reported a net loss for
the quarter of $13.3 million, or $0.22 per diluted share. This compares with net income of $15.0 million,
or $0.25 per diluted share, for the third quarter last year.
Included in the pre-tax loss for the quarter of $14.1 million is $11.6 million from CellStar's Venezuela
operations, which the Company intends to sell, and pre-tax income of $1.4 million from the Company's
Brazil operations and the related gain on sale. Results from the Company's Venezuela operations
included a $4.9 million impairment charge to reduce the carrying value of those operations to their
estimated fair value, as well as a third-quarter pre-tax operating loss of $6.7 million. The aggregate
impact of these actions on the net after-tax loss for the third quarter was $10.2 million, or $0.17 per
diluted share.
CellStar's decision to exit Venezuela, along with the recently completed divestitures of the Company's
Brazil and Poland operations, is part of the Company's previously announced plan to rigorously evaluate
each region and country in its global operations, and to exit lower-potential businesses to focus
resources on opportunities that afford higher growth and profit potential and lower risk. The Company
expects to conclude its in-depth operational review by its fiscal year-end.
As illustrated in the chart below, results from ongoing operations in the third quarter include revenues of
$610.6 million, an increase of 19.9 percent, compared to $509.2 million in 1999, and a net loss of $3.1
million, or $0.05 per diluted share. Ongoing operations exclude the Company's recently sold operations
in Brazil and Poland, as well as its operations to be divested in Venezuela.
Quarter Ended August 31,
(U.S. Dollars in thousands, except per-share amounts)
2000 1999
Brazil, Poland, Ongoing Ongoing
Consolidated Venezuela Operations Operations
Revenues $ 629,793 $ 19,192 $ 610,601 $ 509,178
Cost of sales 605,600 21,460 584,140 466,999
Gross profit (loss) 24,193 (2,268) 26,461 42,179
Selling, general and
administrative expenses 33,815 7,398 26,417 20,920
Impairment of assets
(Venezuela) 4,930 4,930 --- ---
Operating income (loss) (14,552) (14,596) 44 21,259
Gain on sale of assets 6,200 6,200 --- ---
Other income (expense) net (5,758) (1,658) (4,100) (2,076)
Income (loss) before
income taxes (14,110) (10,054) (4,056) 19,183
Provision (benefit)
for income taxes (791) 182 (973) 4,083
Net income (loss) $ (13,319) $ (10,236) $ (3,083) $ 15,100
Earnings (loss) per
diluted share $ (0.22) $ (0.17) $ (0.05) $ 0.25
Gross margins were significantly below normal in the third quarter primarily due to the Company's
commitment to defend market share in the face of intense global industry price competition. Based on
last year's handset shortages and industry forecasts of higher demand, manufacturers significantly
increased production in 2000. However, worldwide handset sales, while up significantly this year, are
still below industry forecasts. This has resulted in a surplus of product driving stronger-than-usual
competition for market share, mainly in the Asia-Pacific Region and to a lesser extent in Latin America.
In addition, manufacturers are shipping inventory aggressively into the market to make room for new
models scheduled for introduction in late 2000.
Gross margins also reflected the ongoing execution of CellStar's previously announced plan to reduce
the levels and improve the quality of its inventory. In particular, this effort focused in the U.S. and Latin
America on sales of analog, satellite and older-model handsets and accessories, often at a discount,
which lowered overall gross margins for the quarter. While inventory reserves were adequate, in most
instances sale of these products resulted in low or no margin.
During the third quarter, CellStar reduced inventories by $51.7 million to $223.9 million compared to
$275.6 million at the end of the second quarter, an 18.8 percent reduction. A significant portion of the
reduction was analog and satellite handsets. This resulted in a marked improvement in inventory turns to
9.7 in the third quarter, compared to 8.4 in the second quarter of 2000, both on an annualized basis.
Accounts receivable also improved, decreasing $25.9 million, or 8.6 percent, to $276.7 million at the
end of the third quarter from $302.6 million at the end of the second quarter. As a result, accounts
receivable days outstanding for comparable periods improved to 42 days compared to 49 days.
CellStar expects its commitment to sustain market share in key areas will result in continued strong sales
through the end of its fiscal year on November 30, 2000, and into 2001. The Company is cautiously
optimistic that the imbalance in handset supply and demand will improve during the fourth quarter, which
should result in some modest firming of handset prices and margins. At the same time, its plan to further
improve the quality of inventories by reducing stocks of slower-moving older-model product should be
completed in the fourth quarter and will somewhat suppress margins. Overall, the Company anticipates
improved margin performance for the fourth quarter, compared to the third quarter of 2000.
"We're on track to conclude our in-depth review of global operations in the fourth quarter," said Alan
Goldfield, chairman and chief executive officer. "Simultaneously, we have been strengthening controls
and accountability aimed at driving improved performance and profitability in our ongoing operations.
We are also intensifying our focus on external opportunities, including new business potential. We are
determined to return CellStar to a profitable level of performance and to improve long-term stockholder
value."
"Our decision to exit Venezuela was based on an overall assessment of the current and future economic
and political climate of the country," said Dale Allardyce, president and chief operating officer. "Having
reviewed Venezuela's potential, we concluded it is in our stockholders' best interest to focus our
attention on lower-risk growth markets in the region and elsewhere in the world.
"While players throughout our industry are experiencing short-term margin pressures, growth in the
wireless communications sector continues at a strong rate," Allardyce continued. "Our new-business
pipeline is strengthening, including higher-volume distribution and value-added agreements with a
number of carriers, manufacturers, dealer-agents and Internet retailers. In particular, stronger revenue
trends have emerged over the past quarter in the North America and Asia-Pacific Regions. Our North
America operation is expanding its customer base, and our Asia operation, while hampered by price
competition, is adding new points of sale and showing good revenue gains. Overall, we see substantial
business opportunities in markets where risk and market conditions meet our criteria."
Ongoing Operations
Third-quarter revenues of $610.6 million increased from $509.2 million in the prior year's comparable
quarter primarily due to increases in the United States ($62.1 million), the People's Republic of China
(PRC), including Hong Kong ($46.8 million), and Mexico ($27.2 million). Revenue increases were
partially offset by decreases from the Company's operations in the United Kingdom ($50.8 million) and
Miami ($18.2 million).
Revenues in the third quarter from sales of handsets and accessories were $550.6 million and $37.1
million, respectively. Activation, residual, prepaid and fulfillment revenues were $17.2 million, and other
value-added service revenues were $5.7 million.
Gross profit declined to $26.5 million, or 4.3 percent of revenues, in the third quarter of 2000,
compared to $42.2 million, or 8.3 percent of revenues in last year's third quarter, primarily due to
competitive margin pressures in the Asia-Pacific Region and, to a lesser extent, the Company's
previously discussed actions to reduce the levels and improve the quality of its inventory.
Selling, general and administrative expenses for the three months ended August 31, 2000, were $26.4
million, or 4.3 percent of revenues, compared to $20.9 million, or 4.1 percent of revenues, for the same
quarter last year, primarily reflecting an increase in personnel costs of $2.3 million and in bad debt
expense of $2.6 million.
Interest expense in the third quarter was $4.1 million, compared to $3.4 million in 1999. This increase
reflects higher interest rates and higher levels of borrowing. At August 31, 2000, the Company had
$44.4 million of loans to support operations in the PRC. The loans were collateralized by $40.8 million
of restricted cash. Interest expense of $0.4 million on these loans was almost entirely offset by interest
income on the restricted cash.
Ongoing Regional Operations
Asia-Pacific: The Asia-Pacific Region contributed 44 percent of total revenues for the third quarter.
Revenues were up 32.7 percent to $270.8 million compared to the prior-year quarter; however, gross
margins fell under severe pressure. The Company is cautiously optimistic that price competition will ease
somewhat in the fourth quarter as the balance between supply and demand returns and new products
are introduced in the market. The Greater China market, comprised of the PRC and Taiwan, accounted
for the region's largest percentage of revenues at $246.9 million, 29.9 percent higher than last year's
third quarter.
North America: In a significant turnaround over last year's performance, the North America Region
reported $155.7 million in revenues for the third quarter, 26 percent of total revenues, up 66.4 percent
from $93.5 million for the comparable prior-year period. The region was the Company's second-largest
revenue contributor for the quarter. U.S. revenues benefited from strong promotional activity by several
customers, as well as the addition of new customers and expanded markets in several areas. In addition,
revenues increased, but margins were depressed, by the Company's actions to reduce analog, satellite
and older-model inventory.
Latin America: Latin America Region revenues from ongoing operations were $117.4 million for the
third quarter ended August 31, 2000, 19 percent of the Company's total revenues, and an 11.2 percent
increase from prior-year quarter revenues of $105.6 million. Revenues in Mexico, the region's largest
revenue contributor, increased $27.2 million, or 53.4 percent, over the previous year's comparable
quarter. Although third quarter 2000 revenues were higher than third quarter 1999 revenues, delayed
promotional activities scheduled for the quarter by a major customer in Mexico caused a drop from
second-quarter sales and resulted in ending inventories at higher-than-planned levels. Scheduled
resumption of those promotions, combined with improving supply/demand balance in certain parts of the
region, are expected to result in better overall performance for the region in the fourth quarter.
Combined revenues from CellStar's Argentina, Chile, Colombia, and Peru operations increased to
$18.8 million from $16.0 million in the year-earlier quarter. Revenues from the Company's Miami
export operations declined $18.2 million, reflecting the Company's decision in the second quarter to
phase out a major portion of its redistributor channel.
Europe: Revenues from ongoing operations for the Europe Region decreased to $66.7 million in the
third quarter, or 11 percent of total revenues, from $106.0 million the prior comparable quarter, due
primarily to actions taken by the Company in the last quarter to significantly curtail its U.K.-based
international trading operations. Operations in Sweden and The Netherlands performed well during the
quarter, and revenues from its core distribution business in the U.K. also improved.
Consolidated Balance Sheet
Accounts receivable were $276.7 million this quarter, compared to $302.6 million at May 31, 2000.
Comparing the same periods, accounts receivable days sales outstanding were 42 at quarter-end, down
from 49 days. Inventory decreased to $223.9 million at August 31, 2000, compared to $275.6 million
at the end of the second quarter. Inventory turns increased to 9.7 from 8.4 in the second quarter, both
on an annualized basis.
Cash, cash equivalents, and restricted cash for the quarter increased 37.5 percent to $109.6 million,
from $79.7 million at the end of the second quarter.
At August 31, 2000, notes payable to financial institutions of $109.7 million included $64.8 million
under the Company's revolving credit facility and $44.4 million in loans to support growth in the PRC.
The loans to support growth in the PRC are collateralized by restricted cash of $40.8 million. As of July
12, 2000, the Company had negotiated an amendment to its revolving credit facility that assists the
Company in complying with certain covenants. The amount of the facility was reduced from $115
million to $100 million, and interest rates were increased by 25 basis points for the balance of the year.
The Company and its banking syndicate are in negotiations to address a longer-term solution to
covenant concerns. However, no assurance can be given that the Company and its banking syndicate
will achieve a longer-term solution.
CellStar will broadcast its third-quarter conference call for investors over the Internet at
www.streetevents.com and on AOL, Netscape, Wall Street City, Motley Fool and CompuServe, on
Wednesday, September 27, 2000, at 10:00 a.m. CDT. To listen to the live call, please go to the Web
site at least 15 minutes early to register, download and install any necessary audio software. A replay
will also be available for 90 days after the conclusion of the call at these Web sites.
CellStar Corporation is a leading global provider of distribution and value-added logistics services to the
wireless communications industry, with operations in Asia-Pacific, North America, Latin America and
Europe. CellStar facilitates the effective and efficient distribution of handsets, related accessories and
other wireless products from leading manufacturers to network operators, agents, resellers, dealers and
retailers. In many of its markets, CellStar provides activation services that generate new subscribers for
its wireless carrier customers. For the year ended November 30, 1999, the Company had sales of $2.3
billion. Additional information about CellStar can be found on its Web site at www.cellstar.com.
This news release contains forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995. A variety of risk factors, including changes in foreign laws, regulations and tariffs,
new technologies, system implementation difficulties, competition, handset shortages or overages and
other risk factors, are discussed in the Company's Annual Report on Form 10-K and most recent
Quarterly Report on Form 10-Q, which are on file with the SEC. Any combination of these risk factors
could cause CellStar's actual results to vary materially from anticipated results or other expectations
expressed in CellStar's forward-looking statements.
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three months Nine months
ended August 31, ended August 31,
2000 1999 2000 1999
Revenues $629,793 560,222 1,781,022 1,645,895
Cost of sales 605,600 512,516 1,701,120 1,505,492
Gross profit 24,193 47,706 79,902 140,403
Selling, general and
administrative expenses 33,815 24,731 124,113 78,653
Impairment of assets
(Venezuela) 4,930 --- 4,930 ---
Restructuring charge --- 113 (157) 2,981
Operating income
(loss) (14,552) 22,862 (48,984) 58,769
Other income (expense):
Equity in income of
affiliated companies (408) (200) (789) 5,923
Gain on sale of assets 6,200 --- 6,200 8,247
Interest expense (5,676) (4,381) (14,449) (14,458)
Other, net 326 947 722 (1,356)
Total other income
(expense) 442 (3,634) (8,316) (1,644)
Income (loss) before
income taxes (14,110) 19,228 (57,300) 57,125
Provision (benefit)
for income taxes (791) 4,230 (13,748) 12,567
Net income (loss) $(13,319) 14,998 (43,552) 44,558
Net income (loss) per share:
Basic $(0.22) 0.25 (0.72) 0.75
Diluted $(0.22) 0.25 (0.72) 0.73
Weighted average number of shares:
Basic 60,142 59,848 60,128 59,659
Diluted 60,142 65,453 60,128 65,546
CELLSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
August 31, May 31, November 30,
2000 2000 1999
Cash and cash equivalents $68,814 44,284 70,498
Restricted cash 40,822 35,400 25,000
Accounts receivable, net 276,657 302,613 306,235
Inventories 223,867 275,566 189,866
Deferred income taxes 41,885 27,021 15,127
Prepaid expenses 27,978 26,759 32,029
Total current assets 680,023 711,643 638,755
Property, plant & equipment 23,453 25,320 27,481
Goodwill, net 26,678 31,222 32,584
Other assets 13,428 12,631 7,618
Total assets $743,582 780,816 706,438
Notes payable to financial
institutions $109,720 97,486 50,609
Accounts payable 232,670 285,707 212,999
Accrued expenses 28,441 25,502 24,864
Income taxes payable 2,437 1,781 8,646
Deferred income taxes 12,341 1,453 8,796
Total current liabilities 385,609 411,929 305,914
Long-term debt 150,000 150,000 150,000
Total liabilities 535,609 561,929 455,914
Common stock 602 602 601
Additional paid in capital 81,298 81,298 80,929
Cumulative translation adjustment (7,878) (10,283) (8,509)
Retained earnings 133,951 147,270 177,503
207,973 218,887 250,524
Total liabilities and
stockholders' equity $743,582 780,816 706,438
CELLSTAR CORPORATION AND SUBSIDIARIES
REVENUES BY REGION
(Unaudited)
(In thousands)
Three months ended August 31,
Percent Percent
2000 of 1999 of
Total Total
Asia-Pacific $270,787 43% $204,089 36%
Latin America 136,630 22% 154,577 28%
North America 155,653 25% 93,544 17%
Europe 66,723 10% 108,012 19%
Total $629,793 100% $560,222 100%
Nine months ended August 31,
Percent Percent
2000 of 1999 of
Total Total
Asia-Pacific $744,093 42% $531,372 32%
Latin America 452,362 25% 511,706 31%
North America 336,063 19% 296,487 18%
Europe 248,504 14% 306,330 19%
Total $1,781,022 100% $1,645,895 100%
CELLSTAR CORPORATION AND SUBSIDIARIES
ONGOING REVENUES BY REGION
(Unaudited)
(In thousands)
Three months ended August 31, |
