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| MERX > SEC Filings for MERX > Form 10-Q on 8-Jan-2009 | All Recent SEC Filings |
8-Jan-2009
Quarterly Report
Forward Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this Quarterly Report, other than statements of historical fact, are forward-looking, including, but not limited to, statements regarding industry prospects and cyclicality and future results of operations or financial position. We use words such as "anticipates," "believes," "expects," "future" and "intends" and other similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations, plans or projections and are inherently uncertain. Actual results could differ materially from management's expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Certain risks and uncertainties that could cause our actual results to differ significantly from management's expectations, plans and projections are described in Part II, Item 1A, "Risk Factors" under the subheading "Risk Factors Affecting Business and Results of Operations." This section, along with other sections of this Quarterly Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management's expectations, plans and projections. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended May 31, 2008.
Business
We are a leading global manufacturing service provider for technologically advanced printed circuit boards (PCBs) for original equipment manufacturer (OEM) customers and their electronic manufacturing service (EMS) providers. Our principal products are complex multi-layer rigid PCBs, which are the platforms used to interconnect microprocessors, integrated circuits and other components that are essential to the operation of electronic products and systems. The market segments we serve are primarily in commercial equipment in the communications and networking, computing and peripherals, industrial and medical, defense and aerospace, and automotive markets. Our markets are generally characterized by rapid technological change, high levels of complexity and short product life-cycles, as new and technologically superior electronic equipment is continually being developed.
Operating Segments
Today, our business has three operating segments: (1) Merix Oregon, (2) Merix San Jose and (3) Merix Asia. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by senior management. Each operating segment operates predominately in the same industry with production facilities that produce similar customized products for our global customers. The chief decision-maker for all of our operating segments is our Chief Executive Officer.
Markets and Customers
The following table presents the percentage of net sales, by segment, for
significant customers comprising greater than 10% of total net sales:
Cisco Motorola
Fiscal Quarter Fiscal Quarter Fiscal Quarter Fiscal Quarter
Ended Ended Ended Ended
November 29, December 1, November 29, December 1,
2008 2007 2008 2007
Merix Oregon 19 % 24 % 14 % 10 %
Merix San Jose * (1) * (1) * (1) * (1)
Merix Asia * (1) * (1) 9 % 3 %
Consolidated 8 % 11 % 10 % 6 %
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(1) Less than 1%
Cisco Motorola
Six Months Six Months Six Months Six Months
Ended Ended Ended Ended
November 29, December 1, November 29, December 1,
2008 2007 2008 2007
Merix Oregon 21 % 24 % 16 % 12 %
Merix San Jose 4 % * (1) * (1) * (1)
Merix Asia * (1) * (1) 12 % * (1)
Consolidated 9 % 11 % 13 % 7 %
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(1) Less than 1%
Approximately 46% and 55%, respectively, of our OEM sales in the second quarter of fiscal 2009 and 2008 were made to EMS providers and in the first six months of fiscal 2009 and 2008 approximately 51% and 55%, respectively, of our OEM sales were made to EMS providers. Although our contractual relationship is with the EMS provider, most of our shipments to EMS providers are directed by OEMs that negotiate product pricing and volumes directly with us. In addition, we are on the approved vendor list of several EMS providers and are awarded incremental discretionary orders directly from some of them.
Backlog
Backlog comprises purchase orders received and, in some instances, forecast requirements released for production under customer contracts. Backlog shippable within the next 90 days totaled $38.1 million and $66.3 million at November 29, 2008 and May 31, 2008, respectively. The decrease in backlog is due to a decrease in demand experienced in the second quarter as a result of the decline in general economic conditions, and also due to the reduction in lead times achieved over the first six months of fiscal 2009. Compared to the average booking rate, backlog was abnormally high at the end of fiscal 2008 due to extended customer lead times resulting from the fourth quarter closure of our Wood Village facility requiring customers to place orders over a longer-than-normal period of time. As the production lead times were shortened during the first six months of fiscal 2009, customers did not need to place orders as far in advance, leading to a reduction in orders placed in the current quarter that is shippable in future quarters.
Customers may cancel or postpone all scheduled orders, in most cases without penalty. Therefore, backlog may not be a meaningful indicator of future financial results.
Summary of Sequential Quarterly Results and Outlook for Third Quarter of Fiscal 2009
Net sales of $76.9 million in the current quarter decreased $13.7 million or 15% compared to net sales in the first quarter of fiscal 2009, resulting from a 21% decrease in net sales in our Oregon segment, a 12% decrease in net sales in our San Jose segment and a 11% decrease in net sales in our Asia segment. These decreases reflect softening demand for our products due to the deterioration of general macroeconomic conditions. With the exception a of 1% sequential increase in our defense & aerospace end market, all other end markets contributed to sequential reduction in net sales, led by a 23% decrease in communications & networking market. Net sales on quick turn and premium services was 17% of total net sales in the second quarter of fiscal 2009 compared to 20% in the first quarter of fiscal 2009, which primarily reflects a reduction in premium orders on which our customers pay a premium for compressed full-lead-time services.
Gross margin decreased to 7.8% in the current quarter compared to 11.3% in the first quarter of fiscal 2009, reflecting a decrease of approximately 7 percentage points in our North American segments, with the Asia segment maintaining its gross margin at approximately 11%. The decreases were due primarily to reduced fixed cost absorption on lower production volumes in each of our segments. Operating expenses of $10.3 million remained stable compared to the prior quarter. Selling, general and administrative expenses decreased by $1.7 million primarily due to lower compensation expenses as a result of headcount reductions, the reversal of incentive compensation accruals recorded in the first quarter as well as reductions in bad debt expense as a result of improved collection efforts, and the timing of our year end audit expenses which resulted in the majority of our annual fees being incurred during our first quarter. These decreases were substantially offset by $1.1 million in severance and asset impairment charges recorded in the second quarter, as well as the first quarter benefit of a $0.6 million gain on sale of assets from our closed Hong Kong facility. Net non-operating expense of $1.0 million decreased by $0.2 million due primarily to a $0.3 million reduction in foreign exchange losses, offset by a $0.1 million increase in interest expense due to increase borrowings on our revolving line of credit compared to the prior quarter. Net loss for the quarter totaled $6.1 million or $0.29 per diluted share, compared to $2.1 million or $0.10 per diluted share in the first quarter of fiscal 2009.
In the third quarter, we expect continued softness in demand, particularly in our communications & networking market, as well as continued reduction in demand in our automotive market. We expect that operating expenses will remain relatively unchanged compared to the second quarter of fiscal 2009. No significant changes are expected for other non-operating expenses and the income tax provision compared to second quarter levels.
Results of Operations
The following table sets forth our statement of operations data, both in
absolute dollars and as a percentage of net sales (dollars in thousands).
Fiscal Quarter Ended(1) Fiscal Quarter Ended(1)
November 29, 2008 December 1, 2007
Net sales $ 76,900 100.0 % $ 97,378 100.0 %
Cost of sales 70,865 92.2 87,855 90.2
Gross profit 6,035 7.8 9,523 9.8
Engineering 697 0.9 486 0.5
Selling, general and administrative 7,989 10.2 10,628 10.9
Amortization of identifiable intangible
assets 520 0.7 645 0.7
Severance and impairment charges 1,089 1.4 980 1.0
Operating loss (4,260 ) (5.5 ) (3,216 ) (3.3 )
Other expense, net (1,029 ) (1.3 ) (1,045 ) (1.1 )
Loss from continuing operations before
income taxes and minority interests (5,289 ) (6.9 ) (4,261 ) (4.4 )
Income tax expense 693 0.9 546 0.6
Loss from continuing operations before
minority interests $ (5,982 ) (7.8 )% $ (4,807 ) (4.9 )%
Six Months Ended(1) Six Months Ended(1)
November 29, 2008 December 1, 2007
Net sales $ 167,527 100.0 % $ 196,808 100.0 %
Cost of sales 151,218 90.3 176,242 89.6
Gross profit 16,309 9.7 20,566 10.4
Engineering 1,260 0.8 950 0.5
Selling, general and administrative 17,691 10.6 22,231 11.3
Amortization of identifiable intangible
assets 1,040 0.6 1,258 0.6
Severance and impairment charges 562 0.3 1,221 0.6
Operating income (loss) (4,244 ) (2.5 ) (5,094 ) (2.6 )
Other expense, net (2,218 ) (1.3 ) (2,170 ) (1.1 )
Loss from continuing operations before
income taxes and minority interests (6,462 ) (3.9 ) (7,264 ) (3.7 )
Income tax expense 1,421 0.8 956 0.5
Loss from continuing operations before
minority interests $ (7,883 ) (4.7 )% $ (8,220 ) (4.2 )%
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(1) Percentages may not add due to rounding.
Net Sales
Net sales decreased by $20.5 million, or 21%, to $76.9 million, in the second quarter of fiscal 2009 compared to $97.4 million in the second quarter of fiscal 2008. Net sales of $167.5 million in the six months ended November 29, 2008 decreased by $29.3 million, or 15%, compared to net sales of $196.8 million in the comparable period of the prior fiscal year.
These decreases in net sales are primarily due to reductions in net sales for our North American segments of 32% and 26%, respectively, for the three- and six-month periods ended November 29, 2008 compared to the same periods in the prior fiscal year. Net sales in our Asia segment decreased by 8% in the current quarter compared to the second quarter of fiscal 2008, and decreased only 1% in the six months ended November 29, 2008 compared to the six months ended December 1, 2007.
Net sales by segment were as follows (in thousands):
Fiscal Quarter Fiscal Quarter Six Months Six Months
Ended Ended Ended Ended
November 29, December 1, November 29, December 1,
2008 2007 2008 2007
Merix Oregon $ 29,431 $ 44,566 $ 66,674 $ 91,906
Merix San Jose 6,720 8,329 14,394 17,165
Merix Asia 40,749 44,483 86,459 87,737
$ 76,900 $ 97,378 $ 167,527 $ 196,808
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Selected statistical information is summarized below. We define "unit" as the number of panels. Percentage increases (decreases) in unit volume and pricing were as follows:
Fiscal Quarter Ended Six Months Ended
November 29, 2008 November 29, 2008
Compared to Fiscal Compared to Six
Quarter Ended Months Ended
December 1, 2007 December 1, 2007
Merix Oregon:
Unit volume (38 )% (31 )%
Average unit pricing 6 % 5 %
Merix San Jose:
Unit volume (24 )% (26 )%
Average unit pricing 6 % 13 %
Merix Asia:
Unit volume (16 )% (10 )%
Average unit pricing 9 % 9 %
Overall:
Unit volume (18 )% (12 )%
Average unit pricing (4 )% (4 )%
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Consolidated
Consolidated unit sales volume decreased 18% in the current quarter compared to the second quarter of fiscal 2008 and 12% in the first six months of fiscal 2008 versus the comparable period in the prior year, driven primarily by decreases in our North American segments as further discussed below. Consolidated average unit pricing decreased by 4% in both the three- and six-month periods ended November 29, 2008, compared to the same periods of the prior fiscal year, despite increases in average unit pricing reflected for each of our segments as discussed below. An overall shift in product mix from higher-technology, higher-priced PCBs produced by our North American facilities to generally lower-technology, lower-priced PCBs produced by our facilities in Asia results in a lower consolidated average unit price. Our Asia segment's average price per unit is significantly lower than both the Oregon and San Jose segments. Our Asia segment comprised 53% of net sales in the second quarter of fiscal 2009 compared to 46% in the second quarter of fiscal 2008, and comprised 52% of net sales in the first six months of fiscal 2009 compared to 45% in the first six months of the prior fiscal year.
In addition, the prior fiscal year-to-date period ended December 1, 2007 benefited from one extra week of activity compared to the first six months of fiscal 2009.
Merix Oregon
Merix Oregon net sales of $29.4 million decreased by $15.1 million or 34% compared to the first quarter of fiscal 2008. Net sales of $66.7 million in the first six months of fiscal 2009 decreased $25.2 million or 27%. The decreases in net sales at Merix Oregon were primarily due to decreases in unit volume of 38% and 31%, respectively, for the three- and six-month periods ended November 29, 2008 compared to the same periods in fiscal 2008 resulting from:
• demand decreases resulting from the deterioration of macroeconomic conditions;
• a strategic decision to rationalize our production with a focus on more profitable parts;
• strategic efforts to transition production to our Asia manufacturing facilities;
• capacity decrease as a result of the closure of our Wood Village facility in the fourth quarter of fiscal 2008; and
• ongoing impact to customer relationships of the extended lead time issues experienced in the fourth quarter of fiscal 2009 which resulted in lower quick-turn revenue in the first quarter of fiscal 2009.
The volume decreases were partially offset by increases in average unit pricing of 6% and 5%, respectively, for the three- and six-month periods ended November 29, 2008 compared to the same periods in the prior fiscal year. These average unit pricing increases resulted primarily from our efforts to be more selective on orders and utilize plant capacity for more profitable parts and due to increases in higher technology production that generates higher average prices.
Merix San Jose
Compared to the same periods in the prior fiscal year, net sales at Merix San Jose decreased by $1.6 million (19%) to $6.7 million in the second quarter of fiscal 2009 and decreased by $2.8 million (16%) to $14.4 million in the six months ended November 29, 2008. These decreases were due to soft demand for quick-turn services resulting from the impact of the global recession. Compared to fiscal 2008, unit volume declines of 24% on a quarterly basis, and 26% on a fiscal year-to-date basis were offset by unit pricing increases of 6% on a quarterly basis and 13% on a fiscal year-to-date basis as a result of sales of higher-layer count, higher-technology products.
Merix Asia
Net sales at Merix Asia of $40.7 million in the second quarter in fiscal 2009 decreased by $3.7 million or 8% compared to the second quarter of fiscal 2008. Net sales of $86.5 million in the six months ended November 29, 2008 decreased by $1.3 million or 1% compared to the first six months of fiscal 2008. The decreases in net sales at Merix Asia in the three- and six-month periods ended November 29, 2008 compared to the same periods of the prior fiscal year were primarily due to a 16% and 10% increase, respectively, in sales unit volumes, due primarily to a drop in demand in the second quarter of fiscal 2009 due to deteriorating global economic conditions. The unit volume decreases were offset by efforts to improve our product mix through enhanced technology offerings from our Asia manufacturing operations over the past year which resulted in a 9% increase in average unit pricing for both the second quarter and first six months of fiscal 2009.
Net Sales by End Market
The following table shows, for the periods indicated, the amount of net sales to
each of our principal end-user markets and the percentage of the end-user
market's sales to our consolidated net sales (dollars in thousands):
Fiscal Quarter Ended
November 29, 2008 December 1, 2007
Communications & Networking $ 29,664 38.6 % $ 39,859 40.9 %
Automotive 17,449 22.7 % 20,855 21.4 %
Computing & Peripherals 5,984 7.8 % 8,375 8.6 %
Test, Industrial & Medical 9,366 12.2 % 10,783 11.1 %
Defense & Aerospace 7,299 9.5 % 6,528 6.7 %
Other 7,138 9.3 % 10,978 11.3 %
$ 76,900 100.0 % $ 97,378 100.0 %
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Six Months Ended
November 29, 2008 December 1, 2007
Communications & Networking $ 68,440 40.9 % $ 82,507 41.9 %
Automotive 36,862 22.0 % 41,063 20.9 %
Computing & Peripherals 12,569 7.5 % 16,384 8.3 %
Test, Industrial & Medical 19,785 11.8 % 22,269 11.3 %
Defense & Aerospace 14,522 8.7 % 12,293 6.2 %
Other 15,349 9.1 % 22,292 11.4 %
$ 167,527 100.0 % $ 196,808 100.0 %
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Compared to the second quarter of fiscal 2008, the decreases in net sales of $10.2 million (26%) in communications & networking, $2.4 million (29%) in computing & peripherals, $1.4 million (13%) in test, industrial & medical and $3.8 million (35%) in other end markets were due primarily to a reduction in end demand for our customers' products as a result of the global economic slowdown, as well as a strategic rationalization of our production to focus on more profitable parts. Automotive net sales, historically a steady end market, decreased by $3.4 million or 16% in the second quarter due primarily to efforts to advance ship certain orders at the end of the first quarter of fiscal 2009 in anticipation of a one-week shutdown related to the implementation of our ERP system at the beginning of the second quarter. We also began to see the early signs of an automotive demand slowdown that will further impact our demand in future quarters. These end markets also reflect decreases on a fiscal year-to-date basis compared to the prior fiscal year, driven by the same factors discussed above.
Defense & aerospace net sales increased by $0.8 million or 12% in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008 and increased by $2.2 million or 18% in the first six months of fiscal 2009 compared to fiscal year-to-date sales in fiscal 2008 due to strategic efforts to penetrate this market to diversify our customer base and provide a steady and profitable North American revenue stream.
We believe that our key competitive advantages include our reputation for product quality and our unique value proposition, which enables a seamless interface from quick-turn production at the beginning of product life cycles to lower-cost volume production in mature product life cycles. While the current global financial crisis has adversely impacted end customer demand and delayed our return to profitability, operating our restructured North American facilities and upgraded Asian facilities to leverage those competitive advantages should enable us to restore and grow our customer base in the future.
Net Sales by Geographic Region
Net sales to customers outside the United States totaled 50% and 31% of net sales in the second quarters of fiscal 2009 and fiscal 2008, respectively. Net sales to customers outside the United States totaled 44% and 32% in the six months ended November 29, 2008 and December 1, 2007, respectively. In the second quarter of fiscal 2009, sales to customers in China comprised 13% of net sales. In the second quarter of the prior fiscal year, as well as in the six-month periods ended November 29, 2008 and December 1, 2007, there were no countries outside of the United States to which sales totaled 10% or more of net sales.
Cost of Sales and Gross Margin
Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead.
A number of costs, including those for labor, utilities and manufacturing supplies, incurred by our plants in the People's Republic of China ("PRC") are denominated in Chinese Renminbi. Strengthening or weakening of the Chinese Renminbi relative to the U.S. Dollar affects our cost of sales and profitability. Increases in the value of the Chinese Renminbi relative to the U.S. Dollar in current fiscal periods compared to prior year have caused the costs of our Chinese operations to increase as stated in U.S. Dollars.
Cost of sales decreased $17.0 million, or 19%, to $70.9 million in the second quarter of fiscal 2009 compared to $87.9 million in the second quarter of fiscal 2008 and decreased $25.0 million, or 14%, to $151.2 million in the six months ended November 29, 2008 compared to $176.2 million in first six months of fiscal 2008.
Beginning in fiscal 2009, we recorded an allocation of certain costs . . .
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