> was the $0.13/share that good to boost this 40% in a few days???
For those wondering why 13 cents per share is so much greater than the analysts estimates of 10 or 11 cents, you need to consider implications of postponed infrastructure sales to NorTel for the Sprint PCS. The market is allowing for what the EPS would have been if the sales had been accrued, and apparently likes what it sees. Want to know how to adjust EPS to account for the postponed sales that we all know are valid and probably will be during the current quarter? Here we go.
Start with an analysis of recent inventory, because the postponed sales were treated as Finished Goods still in inventory. For the periods ending June, September and December inventory was reported as $129.7, $171.7 and $241.0 million, respectively. For the first two periods, we know Raw Materials accounted for $91 and $98 million, respectively; Work In Progress accounted for $22 and $35.7 million; and Finished Goods the remainder of $16 and $38 million. This suggests that Raw Materials in inventory was about $105 million ending December 1996, Work In Progress about $40 million, and Finished Goods about $96 million. As you can see, Finished Goods jumped dramatically over the last two periods. Further, some of the Finished Goods in the September quarter no doubt also were infrastructure base stations destined for use by Sprint PCS. Therefore, a reasonable guess for the cost of postponed infrastructure sales is about $75 million.
By definition, the cost of Finished Goods consists of all direct (raw materials, shipping, etc.) and indirect costs (allocated labor and other costs of running the factory, etc.) of producing the goods to be sold. Thus the revenue associated with postponed infrastructure sales would have been about $75 million plus the Gross Margin. Stated differently, the missing revenue was about R = $75/(1-X/100), where X is the unknown Gross Margin Rate (as a percentage).
To calculate a pro forma replacement operating statement for the quarter, which provides an estimate of EPS adjusted for the missing sales, simply add R to reported revenues and $75 million to reported cost of "Communications Systems", the effect of which is to add the Gross Margin on $75 million of infrastructure sales to Pre-tax Earnings. Assuming the tax rate stays about 25%, take 75% of this number and divide by the number of shares, 70.759 million.
The conference call discussed Gross Margin Rates in the context of infrastructure manufacturing still being a loosing operation, slightly under 10% margin. But the questioner seemed to be referring to Operating, not Gross Margin, which would be considerably less than the gross. Since the overall Gross Margin was 20%, a low estimate for the Gross Margin Rate for infrastructure base stations is 10%. Using this figure the adjusted EPS is 22 cents. If gross was 15%, then the best guess for the adjusted EPS is 27 cents. A gross of 20% yields 33 cents for adjusted EPS.
Thus, the adjusted EPS was probably in the range of 22 to 33 cents, which is dramatically better than 13 cents.
The implications for FY 1997 are intriguing. The adjusted Q1 revenues are between $472 million and $482 million, meaning that the full year should bring in revenues in the neighborhood of $2 billion. Recalling that the Gross Margin Rate on Communications Systems was reported to be 20%, but pro forma may have been as low as 18%, what will the margin be for the year as a whole? During the conference call, management indicated they would be concentrating on improving margins. Also, one expects margins to improve rapidly from startup results of manufacturing through so-called Learning - a proven Industrial Engineering concept. To see why this will get management's attention, note that for each percentage point management reduces the Gross Margin for Communications Systems, EPS for the year will be increase about 16 cents. (This ignores changes in Minority Interest charges due Sony that would result from changes in profitability at QPE.)
The answer is, the 13 cents reported was good enough to push the stock 40%, since the 13 cents likely equates to 22 to 33 cents.
Allen |
