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Technology Stocks : THREE FIVE SYSTEM (TFS) - up from here? -- Ignore unavailable to you. Want to Upgrade?

To: Noblesse Oblige who wrote (1440)	5/4/1998 12:27:00 PM
From: Noblesse Oblige	Read Replies (1) \| Respond to of 3247

To the "thread," TFS has filed its 10Q for the first quarter. I have copied the first paragraph of the "Management Analysis" section below: "Three Months Ended March 31, 1998 Compared with Three Months Ended March 31, 1997. Net sales were $18.5 million for the quarter ended March 31, 1998, an increase of 14.9 percent compared with net sales of $16.1 million for the quarter ended March 31, 1997. The Company believes that it may have some seasonality to its sales. Many of the Company's products are components in retail products such as cellular phones and office automation equipment for which sales in the first calendar quarter are historically slow. In addition, several new programs, previously expected to begin manufacturing in the first quarter of 1998, were delayed by customers for a variety of reasons. During the first quarter of 1998, sales to Motorola were 45.2 percent of the Company's revenue, sales to Hewlett-Packard were 14.7 percent of the Company's revenue, and sales to all other customers were 40.1 percent of the Company's revenue." ____________________________________________________________________ The salient portion of the paragraph is the multiple customer new program delay. It isn't clear to me whether these programs have yet begun shipping, but it is obvious that there hasn't been any news about new production orders in some time. Having said that, it should be noted that inventories had a very strong rise in the quarter, moving up approximately 70% from the fourth quarter of 1997. This clearly portends management's belief that sales will be rising very strongly in the not-too-distant future. As an aside, I also found the following quite interesting, coming from the same section of the report but one paragraph later: ______________________________________________________________________ "...In the first quarter of 1998, however, those unabsorbed costs were more than offset by inventory management strategies. Specifically, the increased backlog reduced the need for certain inventory reserves taken in the fourth quarter of 1997 pursuant to the Company's inventory reserve policies." ______________________________________________________________________ It isn't clear from this reference what level of reserves were reversed during the quarter, but it should be noted that without the taking of the reserves and their one-quarter-later reversal, that fourth quarter earnings would have been higher and first quarter earnings would have been lower. Accordingly, initial estimates by analysts following the company (as well as myself, as I lowered my judgement of fourth quarter earnings following the third quarter report), might well have been accurate without the movement between reserve accounts. I don't want to make the point too fine, but I have to wonder when TFS learned of the delay intentions of its customers and the black hole that might otherwise develop in first quarter sales and earnings. Anyway, smart readers of the thread will certainly get my drift. It should be obvious in retrospect why TFS stock has been somnolent for the last six months. Though the fundamentals continue to improve (as witness to the significant purposeful increase in inventory levels, expansion at all the major plants and the addition of the new China facility, and the acceleration of expenses necessary to bring China on in a more timely way), it is clear that the company has found it easier to communicate the positive aspects than the multiple program delays. However, shareholders should note that analysts do not like "surprises," and though in general we can overlook modest changes to the game plan, the building of credibility and trust requires that all material issues be communicated on a timely basis... ...Even if the information disseminated has short-term negative connotations. Have a good day.