ESI boss insists Wall Street overreacted to results
Dan McMillan Business Journal Staff Writer
Electro Scientific Industries Inc. either performed admirably in a tough environment during fiscal 1998, or had a disappointing year, depending upon who you talk to. However, despite the continued support of one veteran securities analyst and a bullish outlook from the company's executive suite, ESI's performance apparently wasn't good enough for most investors.
ESI's stock fell $2.675 to a $28.875 close on Tuesday after the company announced its fiscal year results. Revenue set a company record. But earnings per share for the year ended May 31 fell compared with 1997 EPS, a serious transgression in the eyes of most investors.
Robert Toomey, an analyst with Piper Jaffray in Seattle, said the local maker of capital equipment for the electronic manufacturing industry is still a company worthy of investor attention. Toomey, a veteran follower of public companies, is maintaining his strong buy recommendation. That's because ESI still has strong management, a good understanding of its markets and a solid acquisition track record, he said.
"The problem is that the negative issues are outside of the company's control," Toomey said. Those issues are a weakening electronics industry and the Asian financial woes.
Donald VanLuvanee, ESI's chief executive, argued that one needs to look more closely at the company's FY98 returns to evaluate its performance. In addition to the record revenue in 1998, he said, ESI posted record earnings before merger- related expenses. During the fiscal year, ESI completed three mergers, which generated $14.6 million in merger-related costs.
On the year, ESI had revenue of $230 million and net income of $16.9 million, or $1.47 per share, compared with fiscal 1997 revenue of $180 million and net income of $11.5 million, or $1.79 per share. Excluding merger-related costs of $14.6 million, ESI posted net income of $27.8 million, or $2.41 per share.
For the quarter, ESI had revenue of $55 million and net income of $6.3 million, or 54 cents per share, compared with fourth quarter 1997 revenue of $54.2 million and net income of $7.3 million, or 67 cents per share.
The company will be doing some belt tightening, VanLuvanee said.
One way ESI will attempt to cut costs, VanLuvanee said, will involve more quickly integrating sales for products of acquired companies into ESI's internal sales operations, rather than maintaining acquired sales forces for an interim period.
The second measure involves trimming the number of contract and temporary employees. Currently, 10 percent of ESI's 900-strong work force is composed of contract and temporary employees.
Toomey said ESI likely would consolidate some operations, improve manufacturing efficiency and move personnel from slow-moving business areas into higher growth areas.
VanLuvanee emphatically ruled out any cuts of permanent workers.
"If we have to do that things will need to get a lot worse," he said.
"The fourth quarter was somewhat disappointing in sales volume," VanLuvanee acknowledged. In part, that reflects a shift in ESI's business. The company has long been tagged as a maker of capital equipment for the semiconductor industry, but it's moved beyond that market, VanLuvanee said.
Advanced electronic packaging is now ESI's largest business segment, and the percentage of sales from semiconductor equipment is less than 50 percent. But the advanced packaging business yields lower margins than some of the older business lines, such as systems for semiconductor production products.
The electronic packaging business is not yet as lucrative as the semiconductor equipment business, but has much growth potential, VanLuvanee said.
Companies are adding new capacity right now, particularly for packaging of smaller electronic components, and ESI has been the pioneer in that field, VanLuvanee said. Another cause for optimism is the continued strong demand for electronics products in America and Europe, he added.
Going forward, neither Toomey nor VanLuvanee expect ESI to post break-out numbers. VanLuvanee said business will be down about 10 percent in the next few quarters. Toomey is warning investors that the next several quarters will be difficult for ESI and the rest of its industry. He's expecting revenue declines of 10 percent in fiscal 1999's first and second quarters, a flat third quarter and growth in the fourth quarter.
ESI does have a long track record of survival in the technology business going for it. With 50 years of history, ESI has seen more than a few downturns. So far, it has survived and grown.
c 1998, The Business Journal |
