MERX Merix (MM)

Merix Corporation (NASDAQ:MERX) : Merix will conduct a conference call and live webcast on Thursday, March 30 at 2:00 p.m. PT. To access the webcast, log on to www.merix.com. A replay of the webcast will be available beginning at 5:00 p.m. PT on March 30, 2006. A phone replay will be available until approximately midnight on April 6, 2006 by calling (719) 457-0820, access code 3290409. Merix Corporation (NASDAQ:MERX) today announced financial results for the third quarter of fiscal 2006, ended February 25, 2006. Sales for the third quarter increased 90% to $95.1 million compared to $50.0 million for the third quarter of fiscal 2005, due primarily to the inclusion of the sales activity for Merix Asia which was acquired in September 2005. On a GAAP basis, net income in the third quarter of fiscal 2006 was $809 thousand or $0.04 per fully diluted share compared to net income of $393 thousand or $0.02 per diluted share in the third quarter of fiscal 2005. On a non-GAAP basis, Merix had income of $2.7 million, or $0.14 per diluted share, in the third quarter of fiscal 2006 compared to non-GAAP income of $876 thousand, or $0.04 per diluted share, in the third quarter of fiscal 2005. Merix defines its non-GAAP income as GAAP net income before amortization of intangibles, inventory purchase accounting adjustments resulting from acquisitions, and the earnings effect of the valuation allowance against deferred taxes. Management believes the excluded items are not representative of underlying trends in the Company's operating performance and that excluding them provides investors with additional information to assess the Company's results over multiple periods and compare the Company's results with the results of its competitors. See Related Financial Highlights in this earnings release for a reconciliation of GAAP to non-GAAP results. Operating results for the third quarter include the operations of Merix Asia for a full quarter. As permitted by the Securities and Exchange Commission, Merix consolidates the results of Merix Asia on a one-month lag. Accordingly, Merix' third fiscal quarter ending February 25, 2006 included the operating results of Merix Asia for the period October 23, 2005 through January 21, 2006. In addition to the revenue impact of Merix Asia sales, a strong North American printed circuit board market, and a strategic emphasis on quick-turn market share, resulted in an approximate 30% increase in sales in these more profitable product offerings over the prior year quarter. Gross margin was 17.4% in the third quarter of fiscal 2006 compared to a gross margin of 14.8% in the third quarter of 2005. Included as a charge to cost of goods sold during the third quarter of fiscal 2006 was an inventory purchase accounting adjustment due to the acquisition of Merix Asia in the amount of $2.2 million related to the write-up to fair market value of inventories. Excluding this charge, for which there will be no further earnings impact, gross margin in the third quarter of fiscal 2006 would have been 19.7%. The improvement in gross margin over the prior year resulted primarily from higher margins generated from increased quick-turn and premium services revenues. Total operating expense for the third quarter of fiscal 2006 was $13.5 million compared to $7.0 million for the third quarter of fiscal 2005. Operating expense in the third quarter of fiscal 2006 includes operating expense for the Merix Asia operations. In addition, operating expense in North America increased due to increased general and administrative headcount required to support global operations and incremental selling expenses attributed to higher sales volumes. Net interest and other expense of $1.8 million in the third quarter of fiscal 2006 reflects increased interest expense from borrowings and reduced interest income associated with lower cash balances, in each case resulting from the acquisition of Merix Asia. EBITDA, which is adjusted for the exclusion of $2.2 million expense related to purchase accounting entries as discussed above, was $11.3 million in the third quarter of fiscal 2006. Merix generated cash from operations of $1.7 million in the third quarter. Cash and short-term investments were $32.3 million at the end of the quarter, which was a decrease from the end of fiscal year 2005 due to the use of cash for the Merix Asia acquisition. Total debt increased to $103.0 million at the end of the quarter compared to $27.0 million at the end of fiscal 2005 as a result of incurring additional debt to finance the acquisition of Merix Asia. Debt, net of cash and investments at the end of the third quarter fiscal 2006 was $70.7 million, down from $73.5 million at the end of the second quarter of fiscal 2006. Incremental borrowing capacity under revolving lines of credit was $18.1 million at the end of the third quarter fiscal 2006, compared to $11.6 million at the end of the second quarter 2006. Mark Hollinger, Chairman and Chief Executive Officer of Merix, stated, "We are pleased with our third quarter results. The increased profitability from North American quick-turn and premium services drove global performance above our expectations." Hollinger added, "We have focused on expanding our quick-turn business in North America with the objective of establishing ourselves as the number one quick-turn manufacturer globally. The operating results this quarter demonstrate the strength of our strategy in offering our expanded customer base a range of capabilities that include reduced cycle times, advanced technology, and global manufacturing, and reinforces our commitment to shifting the balance of our mix towards quick-turn work in North America, complimented with high-technology volume production in North America and lower-cost, volume manufacturing in Asia. Our goal is to continue to capitalize on the opportunities and synergies presented by this model." Hollinger went on to say, "The acquisition of Merix Asia has also had the desired result of diversifying our customer base and industry concentrations. In the third quarter of fiscal 2006, five of our top ten customers were new to Merix via the Asian acquisition. In addition, our telecommunications market segment now represents 44% of total revenues, down from 77% last year, and the automotive market segment is now 20% of total revenues which was zero in prior years. We expect that this diversification will reduce the volatility of our business cycles and provide a platform for improved stability in our earnings." "The integration of the Merix Asia acquisition is progressing through our first six months of ownership. We have been successful in winning annual renewal contracts from previously existing automotive customers, qualifying two of our large traditional Merix customers and receiving expressions of interest in our Asian capabilities from several other customers who have visited our Asian factories. In addition, we have begun to capitalize on cross-selling opportunities among all of our factories. We continue our management focus on the successful integration of these combined operations," Hollinger concluded. Business Outlook For the fourth quarter of fiscal 2006, Merix expects sales to range between $91.0 and $95.0 million with GAAP net income of between $2.5 million and $3.5 million or between $0.13 and $0.17 per diluted share. Non-GAAP earnings are expected to range between $2.0 million and $3.0 million or between $0.11 and $0.15 per diluted share. EBITDA in the fourth quarter is expected to range between $10.0 million and $12.0 million. The outlook for the fourth quarter reflects the impact of factory holidays for Chinese New Year in Asia. Merix is a leading manufacturer of technologically advanced, multilayer, rigid printed circuit boards for use in sophisticated electronic equipment. Merix provides quick-turn prototype, pre-production and volume board production to its customers. Principal markets served by Merix include data communications and wireless telecommunications, automotive, high-end computing, and test and measurement end markets in the electronics industry. Additional corporate information is available on the Internet at www.merix.com. This release contains "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 relating to the Company's business operations and prospects, including statements related to estimates of financial results for the fourth quarter of fiscal 2006 that are made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements, which may be identified by the inclusion of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "goal" and other similar expressions, are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Many factors, including the following, could cause actual results to differ materially from the forward-looking statements: changes in customer order levels, product mix and inventory build-up; lower than expected or delayed sales; the ability to realize the anticipated benefits or synergies of the Merix Asia acquisition in a timely manner or at all; fluctuations in demand for products and services of the company, including quick-turn and premium services; the introduction of new products or technologies by competitors; the ability to successfully and timely integrate the operations of Merix Asia; the ability to avoid unanticipated costs, including costs relating to product quality issues and customer warranty claims; pricing and other competitive pressures in the industry from domestic and global competitors; foreign currency risk; all other risks inherent in foreign operations such as increased regulatory complexity and compliance cost and greater political and economic instability; our ability to fully utilize our assets and control costs; our ability to control or pass through increases in the cost of raw materials and supplies; our ability to retain or attract employees with sufficient know-how to conduct our manufacturing processes and maintain or increase our production output and quality; and other risks listed from time to time in the Company's filings with the Securities and Exchange Commission or otherwise disclosed by the Company, including those set forth in the Company's Annual Report on Form 10-K for the year ended May 28, 2005. Merix Corporation does not undertake to update any such factors or to publicly announce developments or events relating to the matters described herein. -0- *T MERIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share data, unaudited) Three Months Nine Months Ended Ended --------------------------------------- February February February February 25, 26, 25, 26, 2006 2005 2006 2005 --------- --------- --------- --------- Net sales $95,130 $50,008 $208,589 $135,382 Cost of sales 78,559 42,589 176,987 117,885 --------- --------- --------- --------- Gross profit 16,571 7,419 31,602 17,497 Engineering 1,756 1,656 4,647 4,993 Selling, general and administrative 10,909 4,714 22,507 12,741 Amortization of identifiable intangibles 854 635 2,432 635 Restructuring and related activities - - 1,135 - --------- --------- --------- --------- Total operating expense 13,519 7,005 30,721 18,369 Operating income (loss) 3,052 414 881 (872) Interest and other income (expense), net (1,834) (21) (2,483) (27) --------- --------- --------- --------- Income (loss) before taxes and minority interest 1,218 393 (1,602) (899) Income tax expense 391 - 449 1 --------- --------- --------- --------- Income (loss) before minority interest 827 393 (2,051) (900) Minority interest expense 18 - 31 - --------- --------- --------- --------- Net income (loss) $809 $393 $(2,082) $(900) ========= ========= ========= ========= Net income (loss) per diluted share $0.04 $0.02 $(0.11) $(0.05) ========= ========= ========= ========= Shares used in per share calculations 19,766 19,476 19,459 19,193 ========= ========= ========= ========= MERIX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, unaudited) Feb. 25, May 28, 2006 2005 --------- --------- Assets Cash and short-term investments $32,337 $77,685 Accounts receivable, net 73,060 37,338 Inventories 22,621 11,227 Other current assets 8,726 2,451 --------- --------- Total current assets 136,744 128,701 Property, plant and equipment, net 128,830 88,132 Goodwill 82,725 25,551 Identifiable intangibles, net 17,223 9,754 Leasehold land use rights 6,483 - Other assets 2,236 1,803 --------- --------- Total assets $374,241 $253,941 ========= ========= Liabilities and Shareholders' Equity Accounts payable $47,696 $16,957 Other accrued liabilities 10,902 4,773 Accrued compensation 8,042 4,721 Accrued warranty 3,120 1,519 Current portion of long-term debt 17,473 1,000 --------- --------- Total current liabilities 87,233 28,970 Long-term debt 85,517 26,000 Other long-term liability 980 960 --------- --------- Total liabilities 173,730 55,930 Minority interests 3,560 - Shareholders' equity 196,951 198,011 --------- --------- Total liabilities and shareholders' equity $374,241 $253,941 ========= ========= MERIX CORPORATION RELATED FINANCIAL HIGHLIGHTS (dollars and shares in thousands, except EPS) --------------------------------------------------------------------- Q3 05 Q2 06 Q3 06 --------------------------------------------------------------------- SUMMARY OPERATING RESULTS --------------------------------------------------------------------- Net sales 100.0% $50,008 100.0% $61,672 100.0% $95,130 Cost of sales 85.2% 42,589 88.0% 54,256 82.6% 78,559 Gross margin 14.8% 7,419 12.0% 7,416 17.4% 16,571 Engineering expense 3.3% 1,656 2.3% 1,399 1.8% 1,756 Selling, general & administrative expense 9.4% 4,714 10.9% 6,723 11.5% 10,909 Restructuring and related activities 0.0% - 0.0% - Amortization of identifiable intangibles 1.3% 635 1.3% 827 0.9% 854 Total operating expense 14.0% 7,005 14.5% 8,949 14.2% 13,519 Operating income (loss) 0.8% 414 -2.5% (1,533) 3.2% 3,052 Interest and other income (expense), net 0.0% (21) -1.2% (746) -1.9% (1,834) Income (loss) before taxes and minority interest 0.8% 393 -3.7% (2,279) 1.3% 1,218 Net income (loss) 0.8% 393 -3.8% (2,346) 0.9% 809 Effective tax rate 0.0% 2.4% 32.1% Shares for diluted EPS 19,476 19,475 19,766 Diluted income (loss) per share $0.02 ($0.12) $0.04 --------------------------------------------------------------------- SALES BY END MARKETS (% of Sales) --------------------------------------------------------------------- Communications 77% $38,321 62% $38,304 44% $42,221 Automotive 6% 3,958 20% 19,020 High-end computing & storage 9% 4,257 7% 4,498 10% 9,271 Test & measurement 3% 1,730 7% 4,264 6% 6,107 Aviation & aerospace 3% 1,587 2% 1,616 Other 11.4% 5,700 15% 9,061 18% 16,895 --------------------------------------------------------------------- OTHER FINANCIAL DATA --------------------------------------------------------------------- Cash provided by operations $1,186 $1,777 $1,743 Capital expenditures $1,511 $1,108 $3,121 Depreciation and amortization (% of sales) 8.4% $4,191 9.3% $5,722 6.7% $6,354 --------------------------------------------------------------------- NON-GAAP EARNINGS RECONCILIATIONS --------------------------------------------------------------------- EPS Net EPS Net EPS Net Income Income Income (Loss) ------------------------------------------- GAAP net loss $0.02 $393 $(0.12) $(2,346)$0.04 $809 Adjustments: -Amortization of identifiable intangibles 0.03 635 0.04 827 0.04 854 -Legal fees for defense of securities litigation - - 0.03 575 - - -Restructuring and related activities - - - - - - -Purchase adjustments 0.02 320 0.09 1,727 0.11 2,158 -Adjustment to valuation allowance on deferred tax asset (0.02) (472) (0.01) (274)(0.05) (1,083) ------------------------------------------- Non-GAAP net income (loss) $0.04 $876 $0.03 $509 $0.14 $2,738 --------------------------------------------- --------------------------------------------- GAAP net income $393 $(2,346) $809 Add back items: Interest expense 428 1,108 1,987 Interest income (472) (448) (360) Income taxes - 54 391 Amortization 725 843 1,121 Depreciation 3,466 4,055 5,233 Asia purchase adjustments - 1,727 2,158 ------------------------------------------- EBITDA (adjusted) $4,540 $4,993 $11,339 *T