Global Graphics Reports 3Q Results, Sales Down 18%
Press release from the issuing company
The Company is amortizing purchased goodwill and purchased intangibles at a fast pace, over periods principally ranging between 3 to 5 years, resulting in significant amortization expenses in the periods following acquisitions. Total amortization for the third quarter was Euro 9.5 million, for both unallocated goodwill and intangible assets (excluding the effect of deferred tax on it). Comments on profitability for the Company and each operating division mentioned in this press release are excluding the impact of these amortization expenses on results. EBITA is defined as Earnings Before Interest, Tax and intangibles Amortization. Current net income is pro forma income computed by adding back to the reported net income amortization expenses for intangible assets and unallocated goodwill as well as restructuring charges, net of deferred tax impact on these expenses, when applicable.
Total sales were Euro 17.5 million for this quarter, 18% below sales of Q3 2000, which were Euro 21.8 million. Current net loss per share computed as described above was Euro 0.15 for this quarter, versus current net earnings of Euro 0.31 per share in Q3 2000. Hardware sales were Euro 11.1 million, versus Euro 15.6 million in Q3 2000. Printing software sales reached Euro 6.0 million, versus Euro 5.8 million in Q3 2000. Xanalys had revenues of Euro 0.4 million for this quarter comparable to those for the same period of last year.
During the quarter, the company recorded significant one-time charges amounting to a total of Euro 11.8 million before tax effect and of Euro 9.6 million after tax. This resulted in an adverse effect on the company's earnings per share of Euro 0.96 for this quarter.
Almost all these charges related to the Hardware division where the effect of such one-off expenses on EBITA was Euro 6.2 million, and the effect on pre-tax result (including a goodwill impairment charge of Euro 4.1 million) was a total of Euro 11.2 million, resulting in an effect after tax of Euro 8.9 million for the division, or Euro 0.89 per share.
Comments by division
Hardware sales dropped sequentially to Euro 11.1 million and a loss for the quarter on current EBITA level (computed as excluding the above-mentioned one-off Euro 6.2 million impact) of Euro 1.8 million. Sales volume, which had dropped significantly in the second quarter, remained at that same low level without dropping any further. Because of the August vacation shutdown in France and Italy, factory output sequentially declined. Early September, a manpower reduction program was announced in France, as well as the transfer of production from the UK Thetford facility to the Halifax plant. Combined, these will result in a manpower reduction of more than 80 people. Both programs were well under way at the end of the third quarter and initially have caused expenses and inefficiencies to increase, predominantly because of the UK move. Both plans are scheduled to be completed well before year-end, and corresponding expected benefits should accrue from early 2002 onwards. In mid-October, the French Technotol and Tecnolak units, respectively a sheet metal unit and a paint shop, were sold to local investors for Euro 1.4 million cash at closing, plus the assumption of Euro 1.0 million of financial debt. This sale will result in a further manpower reduction by an aggregate of 59 people, in addition to lowering the fixed cost base of the division. By year-end, manpower levels are expected to have dropped to below 340, from 557 on January 1, 2001.
As announced in late Q2 2001, significant one-time charges were recorded during this quarter, which included the cost of the restructuring (redundancy plans together with any necessary plant exit costs in the UK) for a total of Euro 1.2 million, inventory write-offs for Euro 3.1 million, write-off of license costs amounting to Euro 1.1 million relating to the R&D program regarding dUV technology which has been discontinued, and tangible and intangible asset write-offs for an aggregate of Euro 1.2 million.
Of these amounts, only Euro 1.0 million are cash items, the balance being asset write-offs.
There were almost no redundancies in Engineering and R & D functions, which were also substantially reorganized in order to improve efficiencies and accelerate product re-engineering programs with a view to significantly improve margins as from 2002.
For Q4 2001, no improvement in sales levels is expected, and another EBITA loss is likely to occur since manpower reductions, reorganizations and other cost saving programs will be reaching their final stages during that quarter. However, no significant additional one-time charges should be recorded during that quarter.
Order intake is normalizing again, albeit at 25% to 30% below second half 2000 levels. For 2002, visibility is slightly improving and division management is in advanced stages of supply contract negotiations with several major, existing OEM customers. There are nevertheless no clear indications at this stage that sales of equipment would return to previous year's levels within the near future.
Revenues in the third quarter were Euro 6.0 million, below previous quarter levels because of the continuing decline of RIP software sales in the high-end market segment. The running rate of sales to that market segment is now 20% to 25% below last year's, this decline being compensated by the division's growth in the middle market and PDF segments which have been successfully penetrated since the beginning of the year.
Operating expenses stayed in line with Q2 2001 levels if excluding the Euro 0.7 million intangible asset impairment charge recorded during this quarter (which had a corresponding adverse impact on EBITA together with an unfavorable effect on the division quarterly earnings per share of Euro 0.07) and are expected to remain so in coming quarters.
Current net earnings for the software division were Euro 0.13 per share for this quarter and Euro 0.51 on a year-to-date basis (excluding the above mentioned intangible asset impairment effect on earnings per share calculation) against Euro 0.26 and Euro 0.49 for the same periods of 2000 respectively.
It remains almost impossible to forecast revenue levels for the near future, and division management is much more cautious for Q4 2001 than 4 months ago, because there are no clear signs that revenues from the high-end market segment have yet stabilized at current levels. This is not due to any loss of customers by the division, but rather by a general decline in demand for commercial print digital output devices and related software products.
Xanalys had revenues in this quarter of Euro 0.4 million, causing an EBITA loss of Euro 1.2 million and a current net loss slightly above Euro 0.7 million (or a loss of Euro 0.08 per share). The Canadian Campbell software contract was due for final acceptance in Q3 2001, and revenues for Euro 1.1 million were expected to be recorded in the quarter for this contract. The September events in the US caused a postponement of final acceptance and related revenue recognition to late Q4 2001. Xanalys has enjoyed a significant growth in enquiries for its products by government agencies, and division management is optimistic that this will positively impact sales in 2002. The strategic options for Xanalys are currently under review, with the minimum objective to freeze the cash drain on Global Graphics at current levels. Such options include inviting outside investors to take an equity stake in Xanalys.
Commenting on the outlook, Johan Volckaerts, Chairman and CEO said: "In Hardware we believe we have reached the bottom, but the expected Q4 2001 technical turnaround is unlikely to happen. Visibility is slightly improving, as OEM customers have been adapting to the changed market environment, but the end of the contraction in demand is not yet in sight. Global Graphics Hardware will be entering 2002 as a different company with a much lower fixed cost structure, assuring profitability even at current depressed sales levels. For Printing Software, growth in the printer, digital copier, PDF and related software fields is accelerating and key contracts were signed with major players in this market segment which will result in significant revenue for 2002 and beyond. Non-disclosure agreements prohibit Global Graphics from publishing these customer contracts. As for software revenues for 2001, we are being much more cautious, because the steep increase in Q4 2001 revenue is unlikely to occur to the extent indicated in June 2001."
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