Southwall reacts to 3Q loss with plans to cut spending, raise cash

In its preliminary results for the 3Q 2003, ended 28 September, thin-film coatings manufacturer Southwall Technologies Inc. posted net revenues of USD 11.9 million, down from the USD 15.3 million for …

In its preliminary results for the 3Q 2003, ended 28 September, thin-film coatings manufacturer Southwall Technologies Inc. posted net revenues of USD 11.9 million, down from the USD 15.3 million for the previous quarter and the USD 16.3 million for the year-ago quarter. Southwall, based in Palo Alto, California, blamed the fall on lower than expected sales across the automotive, electronic display and architectural segments of its business. The preliminary 3Q net loss will be subject to adjustment for an impairment charge related to the US plants, which is to be finalized and reported in mid-November 2003. In response to the results the company is planning to make urgent cuts in spending, to lay off employees in the US and to source new financing. Southwall“s preliminary 3Q net loss was USD 3.4 million, or a loss of USD 0.27 per share, compared with net income of USD 0.1 million, or USD 0.01 per share, for the same quarter a year ago and with a net loss of USD 1.7 million, or a loss of USD 0.14 per share, for the 2Q of 2003. Southwall is in the early stages of an evaluation of its long-term assets for impairment. The company expects to complete this evaluation prior to the filing of its Quarterly Report on Form 10-Q in mid-November 2003. If an impairment adjustment is required, Southwall expects to revise its preliminary 3Q results to include a non-cash charge for an impairment of value related principally to its U.S. production facilities. As a result, Southwall“s final net loss and net loss per share for the 3Q may be significantly higher than the preliminary results announced here. “In addition to the anticipated non-cash impairment charge, we expect our downsizing actions to result in restructuring charges for severance, facilities and additional impairment to be recorded in the 4Q of 2003,” said Michael E. Seifert, senior vice president and chief financial officer. “We currently believe that the combination of the impairment charge in the 3Q and the restructuring and additional impairment charges in the 4Q could exceed USD 20 million.” Southwall“s balance sheet at 28 September 2003 included cash and cash equivalents of USD 0.6 million, compared with USD 2.0 million at 31 December 2002 and with USD 2.4 million at 29 June 2003. “Given our present cash burn rate and available cash resources, we recognize the urgent need to immediately reduce spending and obtain additional cash. During the next few weeks, we intend to downsize our U.S. production facilities (Palo Alto and Tempe), lower overall employee headcount, and raise additional financing for Southwall,” said Thomas G. Hood, president and chief executive officer for Southwall. “We have been working very closely with the investment community to raise additional financing for Southwall in the form of debt and/or equity. With the support of investment advisors, we are also pursuing strategic investors as sources of capital to fund the pursuit of targeted new business opportunities,” added Mr. Hood. Southwall“s 3Q sales of automotive products were USD 5.8 million, compared with USD 7.0 million for the 3Q of 2002 and with USD 6.6 million for the 2Q of 2003. The sequential decline was due mainly to seasonality in Europe. Sales of electronic display products were USD 3.3 million, compared with USD 5.0 million for the same quarter of 2002 and with USD 6.1 million for the 2Q of 2003. This trend resulted mainly from a continued decrease in shipments of anti-reflective films used in cathode ray tube (CRT) monitors. The fall was partially offset by increased sales of electronic and infrared shielding films for the plasma display panel (PDP) and liquid crystal display (LCD) segments. Sales of architectural products were USD 2.8 million, compared with USD 4.3 million for the 3Q of 2002 and with USD 2.6 million for the 2Q of 2003. “While we met our expectations for the 3Q, the outlook for the 4Q and the near-term has changed significantly from our previously stated expectations,” Hood said. “We now anticipate revenue levels at or below USD 11-12 million for each of the next two to three quarters, with 4Q 2003 net revenues being relatively flat on a sequential basis. As a result, our current estimates for full-year 2003 net revenues range from USD 52 million to USD 54 million, lower than our previously stated estimates. We are reassessing our business model and taking the necessary actions in an attempt to achieve cash break-even by no later than the end of the 1Q of 2004.” “In addition to actively servicing the existing automotive and architectural markets, we are sharpening the company“s focus on the development of new products for the dramatically expanding LCD and PDP display markets, which are forecasted to grow 70% annually by industrysources,” Hood added. “We have recently been successful in capturing initial orders for a new generation of products for LCD applications. Southwall also continues to work closely with Mitsui Chemicals toward a low-cost product solution for consumer PDP televisions, which would complement our existing products that serve the commercial PDP market. Together, these two markets fit well with our technology portfolio and represent our most important future growth opportunities.”