FINANCIALS—Financials: Reality Bites

The first quarter of 2001 was filled with good news for Tekelec. The Calabasas-based developer of telecommunications components saw solid earnings growth and an impressive 40-percent increase in revenues. Officials braced to do even better in the second quarter. But what materialized was something no one had anticipated. “Very late in the second quarter we saw an abrupt change in customer behavior,” said Erik Randerson, director of investor relations for Tekelec. Instead of the $.16 per share it anticipated earlier in the year, Tekelec said it would end the quarter with per share earnings closer to $0.02 or $0.03 on revenue expectations that were reduced to around $70.5 million from original estimates of about $89 million. Tekelec, which will report its second quarter performance on July 26, expects to revise its third quarter guidance at that time too, in all likelihood, another downward adjustment. And the company is not alone. Amgen, Superior Industries International Inc., Pinnacle Entertainment Inc., K-Swiss Inc., Luminent Inc. and Vitesse Semiconductor Corp. have also issued warnings that their second quarter will not meet expectations set earlier in the year. “If you were to compare what people thought was going to happen in calendar year 2000 to where we are now, no one was able to call it,” said Dan Benson, partner in the technology group at Deloitte & Touche LLP. “The telecom industry didn’t just have a downturn, it drove off a cliff.” Looking out over the horizon at the end of 2000, most expected an economic slowdown that would last one or two quarters at the most. What unfolded instead is a sagging economy with no foreseeable letup, and one that has left virtually no industry sector untouched. “This year is kind of a write-off,” Benson said. “Then it’s a question of whether it’s going to happen in Q1, Q2 or Q3 of next year. Everyone seems to hope you just need to get through this year, and hopefully things will be better next year.” Somewhere between the now-optimistic predictions of 2000 and the current slowdown, California’s economy came face to face with a number of unforeseen circumstances: an energy crisis that drove up costs for manufacturers and threatens to create even more problems as the summer wears on; an oversupply in telecommunications that put an abrupt halt to orders and to the capital these companies need to further expand the infrastructure; a strong U.S. dollar that that has busted the export market; a threatened entertainment strike that left companies scrambling for product they are unlikely to replace until the fourth quarter or later; and a consumer that has proven to be more fickle than even the naysayers predicted. To be sure, there are some bright spots. Health care, a big player in the San Fernando Valley economy, is prospering. Countrywide Credit Industries Inc. saw an 18-percent earnings boost to $1.00 per share in its first quarter ended May 31 and anticipates another rise to $1.15 to $1.20 per share in the second fiscal quarter. And The Cheesecake Factory Inc. saw earnings per share climb 30 percent to $0.25 in its most recent quarter ended April 3. But the number of entertainment and telecommunications companies in the San Fernando Valley threatens to make what is a national economic downturn an even tougher pill for the Valley to swallow. “You have two issues,” said Jack Keyser, chief economist at the Los Angeles Economic Development Corp. “The East Valley is a hotbed of motion picture and television production activity and then, of course, you have concerns over what’s happening in the tech industry, so you have some over-concentration and you may be feeling a little more of the pain than firms in other areas might be feeling.” Some of that pain has already unfolded. & #711;Van Nuys-based auto components manufacturer Superior Industries in June warned that its second quarter revenues and earnings would not meet consensus estimates, largely because of the company’s increased energy costs. As revised, the company reported net income of $13.3 million or $0.51 per diluted share in the second quarter of 2001, down nearly 40 percent from $21.9 million or $0.83 per share for the comparable period last year. & #711;Camarillo-based chipmaker Vitesse was anticipating turning a pro-forma profit of anywhere between 3 cents and 7 cents a share on sales of $90 million to $110 million in the third quarter ended June 30, 2001. But late last month, the company revised its outlook. Vitesse met its revised guidance when, on July 19, the company reported a net loss of $11.9 million or $0.06 per diluted share compared to income of $32.0 million or $0.17 per share for the same period last year. Sales plummeted to $60.1 million for the most recent quarter, versus $114 million a year ago. & #711;Luminent, a Chatsworth-based provider of fiber optic components also lowered its revenue projections for the second quarter to $41 million. The company will report its full second quarter financial performance on July 23. & #711; Biotech giant Amgen lowered its revenue and earnings per share projections for the year 2001. The company is projecting sales growth percentages in the low teens for the full year, down from earlier projections in the mid- to high teens and it adjusted its earnings per share projections downward to the low double digits, from the mid-teens it once expected. Amgen’s second quarter financials will be released on July 26. & #711;Pinnacle earlier warned that it will incur a net loss of $0.10 to $0.17 a share instead of the profit of $0.50 to $0.55 it forecast in mid-April. Pinnacle will release its results on July 24. Only K-Swiss turned in a happy surprise. The company had revised second quarter earnings per share estimates to $0.27 to $0.34, saying it would miss consensus estimates of $0.35. Instead, K-Swiss reported on July 20 that earnings per share reached $0.39, versus $0.37 a year ago. Other local companies began to see their fortunes shift in the first quarter of the year. & #711;Vertel Corp., a maker of telecommunications software, laid off about 15 percent of its workforce after posting a net loss of $2.9 million for the first quarter of 2001. & #711;Entertainment giant The Walt Disney Co. ended the first quarter with a net loss of $567 million, or $0.26 a share, on an 18-percent sales decline to $6 billion. Worldwide, Disney has laid off 4,000 staffers since the beginning of the year. & #711;Teradyne Inc., the Boston-based telecommunications company with facilities in Agoura Hills and Thousand Oaks, reported a net loss of $40.1 million or $0.23 per diluted share in its second quarter, the company’s first in over 10 years, and estimates losses through the rest of the year. Teradyne has already cut 1,225 from its payroll. & #711;Aurafin OroAmerica Inc., the company formed recently from the acquisition of Burbank-based jewelry manufacturer OroAmerica Inc., said in recent weeks that it plans an unspecified number of layoffs at its Valley facility. Aurafin OroAmerica said the layoffs are the result of duplications arising from the merger. Some of the other companies looking at shortfalls in the second quarter and beyond are blaming dynamics that do not appear to be the result of the general economic woes, at least not directly. Amgen lowered its expectations in part because a new drug, ARANESP, is taking longer than initially planned to get FDA approval and, therefore, will be slower coming to market. The company also said its projections for dialysis patient population growth are falling short as well. And Pinnacle said two of its casinos have been adversely affected by growing competition in the gaming industry. But for the most part, the thicket of financial worries in the Valley mirrors the economic malaise that has gripped the rest of California and, in some cases, the nation. Second quarter net income for Dole Food Co. Inc. in Westlake Village was $50 million, or $0.90 per diluted share, compared to $45 million or $0.81 per share a year ago, but revenues slipped to $1.23 billion from $1.24 billion, and Dole said its third quarter will likely fall below consensus estimates as a result of weak currency exchange rates and higher prices for fuel and electricity. Superior’s performance fell as a direct result of increased energy costs. Officials at Superior said they knew the company was unlikely to repeat the huge sales increases of 2000, and the company planned accordingly, but they did not plan for the energy crisis. “We knew last year was an outstanding year,” said Jeff Ornstein, vice president and chief financial officer. “We weren’t looking for a major increase. The one surprise was the energy (crisis) that happened very suddenly and was not forecast.” Superior instituted a number of cost-cutting measures including layoffs at its Midwestern plants and an extension of the company’s customary one-week plant shutdown in California to two weeks. All in all, Ornstein says the company’s performance in the second quarter “isn’t that bad considering the doom and gloom that’s been pervasive in the auto industry.” And with automakers now back on track, he is hopeful that the rest of the year will show improvement. Not so in the telecommunications sector. “The infrastructure build-out looked like it would go forever, and it stopped,” said Deloitte’s Benson. “That’s why you see these huge inventory write-offs.” Believing that the future lies with bandwidth, telecommunications firms from Nortel Networks to Verizon saw no limit to the networks they were building until demand came to a screeching halt. Some estimate that orders for components, a large part of the telecommunications industry in the Valley, have dropped by 50 percent as a result. Tekelec began to notice the change when its customers began kicking orders upstairs for signatures. By the second quarter, the orders just stopped coming, said Randerson. No one can say for sure when demand will pick up again. In the meantime, companies like Tekelec are just hoping to wait it out, Randerson said. “No one’s really expecting an uptick in the second half.”