Inventory discussion. For what it is worth, someone on Yahoo claims to have talked to the BIOI CFO on the inventory charges. Here is his summary (I'll cut and paste the comments to preserve accuracy):
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Now, for those like myself who wondered about the inventory write-down. May told me that the company's antibody line is huge (over 1,000 of the company's 1,700 products are antibodies). Some of the antibodies were acquired with the TAGO acquisition in 1993 and others were obtained as part of the Medgenix acquisition in 1996. The broad line of antibodies represents excellent strategic value (a broad offering makes it more likely that the company can serve all of a customer's likely needs). Furthermore, the antibodies have great shelf life; they don't become obsolete. The problem is that antibodies need to be made in large enough batches to be economically feasible, but then they sell slowly (about 40 months to sell out a production run). This explains the high level of inventory vs sales. Antibodies represented only 20-25% of sales, but 50% of inventory.
May noted that the company wants to raise its return on capital employed to at least 15%. They feel that they are doing many things right. They have gotten more efficient at making antibodies. Costs today are lower than ever. The company used the average cost method of accounting for finished products. The improved efficiencies are a good thing, but they also resulted in the inventories becoming overvalued on the books. As the overpriced inventories moved, COGS no longer correctly represented the true costs of making the antibodies.
May finally decided that there was a need to remedy the situation once and for all. The decision was taken to write the antibody inventories down to $0. Going forward, COGS for antibodies will represent current manufacturing and storage costs. Antibody inventories will not be carried on the books as they will have already been expensed. Therefore, inventories will henceforth represent RIA and ELISA products and raw materials. The company does not separate these historically.
The write-down does not represent a cash charge, and in fact, inventories have not deteriorated in value, but by taking the hit all at once the company is able to reduce its capital, thereby improving the return on capital measures in the future. This is a nice way to create the illusion of improving profitability, when in fact, the company may just be plodding along. It will be hard to tell whether there is real growth or not.
Of course, the two new acquisitions further complicate matters. They should result in increased sales of at least $6 mio per annum, or 30%, if they simply maintain their historical trends. May hopes that 1999 sales will reach $30 mio, up from about $21 mio for the trailing 12 months. If this is achieved, it will indeed represent growth. But it will be hard to figure out how profitable the growth is because it will be affected by interest costs on the debt load and by the amortization of goodwill. I forgot to ask May how much goodwill would result from the acquisition.
May also expects EPS to grow as a result of the acquisition. Of course, EPS are often improved by stock repurchases. The question is whether it is the best use of the company's capital. If management can't find a way to put the capital to good use, then giving the capital back to shareholders via repurchases is a good idea. Until now, BioSource appears to have had more cash than it needed, and hadn't found good uses for it. This further supports my previous point that the company just isn't growing much. Growing companies usually need capital.
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Just an observation here - as noted in a previous note I'd rather have the company repurchase shares enhancing earnings and shareholder value than playing cowboy and acquiring companies at prices that make no economic sense just to grow the place.
The above poster has concerns about future growth - and goes on to elaborate - but at these values p/b of 1.1, p/e of 8, etc. the concern about the growth rate is already in the price of the stock IMO.
If I read the above analysis correctly the change in accounting will reflect the efficiencies of producing antibodies and should flow through to the bottom line in the future, along with the share buybacks, acquisitions, and new products. The antibody product that was written down has not become obsolete if I read the above analysis correctly - it will still sell - it is just how the marbles are being counted that has changed to more accurately reflect efficiencies. The shelf life of these products is 3-4 years.
With a new CFO accounting changes do not surprise me - I think this guy is sharp, at least the trade press seems to think so. I have an inquiry in with the company to confirm this interpretation regarding the inventory.
I'm still comfortable here with management, the company, and strategy.
Best - Joe |
