THE REVISED COLD HARD NUMBERS:
In my previous analysis (referenced by this post), I came up with a best case scenario (before one-time charges) of:
eps, primary: $0.22 to $0.32 if gross margins range from 26% to 29%.
With a little more time evaluating the numbers, I think that was too optimistic. Here are some reasons to revise these numbers downward.
Gross margins will really be hurt. In the previous qtr, APM had gross margins at 26.7% due in part to poor yields of their MR and 1.7 TFI. Another determing factor of gross margins is volume production. As I read in the June 97 10-Q, the great margins achieved that quarter was due to "higher inductive thin film disk head sales volumes, resulting in economies of scale, coupled with cost controls." With the reduction in orders together with the increasing shift to relatively immature MR lines, APM has neither economies of scale nor a large volume of mature (worked out) lines. Last qtr had high volumes but poor yields. This qtr might see better yields (perhaps offset by relatively more of the poorer yield MR line) but with lower volumes. As a result, I believe gross margins could be below last qtr, but in practically all cases would not be the higher 29% yields.
New gross margin ranges: 24% to 27%.
R&D expenditures are likely to increase with MR transition. As stated in the June 10-Q: "The Company expects that total R&D expenditures in absolute dollars for fiscal 1997 will exceed fiscal 1996 as it increases its efforts on development of MR product technology and production processes." That said, I think R&D is one area where APM might try to better the bottom line. So I'll call R&D flat from last quarter.
Revised BEST CASE estimates:
Net sales for upcoming qtr < $85,980
Gross margins: 24% to 27%
Gross profit < $20,635 to $23,215
R&D + SG&A: $16,900
Net profit < $3,735 to $6,315
revised estimated eps, primary < $0.15 to $0.25
The high-end estimate of the best case situation is still significantly below even the revised earnings estimates for this quarter (~$0.40). I would wager that APM comes in below $0.15 eps because of their "more than 30%" comment.
I have no idea how to interpret their "up to 20%" rebound statement for the qtr ending Mar 98. For those asking questions to Crisman, I'd ask:
1) How are the yields for MR faring compared to last quarter?
2) Is APM having to quickly move away from more mature TFI processes and if so, will this affect gross margins for this quarter?
3) [A better question for our estimates would be:] How are gross margins for this quarter shaping up compared with last quarter? [This would be the most important piece of information for us to figure likely income.]
4) Please clarify the "more than 30%" reduction. Is this closer to 35% than 30%? Are you still operating at high capacity or is the decrease in orders going to effect economies of scale and hence margins?
-Bill |
