Hypercom Corporation announced that it has restructured the operations of its POS Terminals and Network Systems Group to improve operating efficiencies, reduce its exposure in Latin America and discontinue activities that are unprofitable and tangential to its core products and services.
The implemented changes have the potential to increase annual operating profit by approximately $6 million. The company further projects that its cash flow will be enhanced by the subsequent reduction in working capital and an annualized increase in EBITDA of $4 to $5 million. “We continuously review our operations for opportunities to better serve our customers and improve the profitability of our business,” stated Chris Alexander, Chairman and Chief Executive Officer of Hypercom. “This past quarter we identified and acted on a number of such initiatives within our international operations, primarily Latin America, where political and economic uncertainties have limited our opportunities for growth and raised the cost of doing business. Specifically:
— The company terminated its direct manufacturing operations in Brazil in favor of the economies of scale and expertise available on a contracted basis with a leading electronics manufacturing services provider. Management expects that beyond an improvement in the cost of goods sold, this decision will provide added capacity during peak periods of demand, and will also improve our cash position in Brazil.
— The company modified its sales and marketing approach in Latin America, Canada and Germany, where the level of activity is indicative of a local distributor network versus a dedicated direct sales organization.
— The company reduced general, administrative and other overhead expenses in the Latin American region.
— The company has started negotiations on the sale of several standalone operations, the products and services of which no longer align with the company’s core business and growth objectives. Individually and collectively these operations have been unprofitable, accounting for a combined operating loss over the last twelve months of $5.2 million on revenues of $26.6 million.”
Alexander added, “The management team has taken an aggressive approach to mitigate the financial and operating risks relating to our Latin American operations and enhance the longer term performance of our company. We expect the impact of these changes to have an immediate impact on our results commencing with the current 4th quarter. Further, we will continuously seek improvements in our business model as warranted by the marketplace and dictated by best practices.”
As a result of the actions taken, the company announced that for the 3rd quarter ending September 30, 2002, it will report special charges to pre-tax earnings of $16.1 million. Of the total pre-tax charge, $4.4 million associated with fixed asset write downs, severance and other restructuring costs, will be reported separately as restructuring expenses, $2.7 million relating to write-downs and other costs associated with discontinued product inventories will be included in costs of goods sold, and $0.7 million relating to write downs of other non-productive assets will be included in selling expense. The pre-tax charge also includes $8.3 million attributable to the write down of net assets of entities held for sale. This will be reported as a component of discontinued operations as will the results of operations for those entities. The company noted that its cash position will be nominally affected as all but $0.8 million of the pre-tax charge (principally related to severance payments to terminated employees) is non-cash.
The company announced that it is also lowering its previous forecast of 3rd quarter revenue and operating profit as a result of the delayed release of its new T7Plus POS terminal. The company projects a $10.4 million shortfall to the previous consolidated revenue forecast of $80 to 82 million notwithstanding an increase in the backlog during the quarter to $88 million from $50 million at the end of the 2nd quarter. The resulting reduction in operating profit is projected at $5.1 million yielding a revised forecast of 3rd quarter operating profit of $2.0 million before charges relating to restructuring and discontinued operations. Including the aforementioned charges, the revised 3rd quarter forecast reflects an operating loss of $5.0 million.
The company also established a valuation allowance of $20 million against its deferred tax asset that equaled $29 million as of the end of the 3rd quarter. The remaining $9 million represents the refundable income taxes available on the company’s projected net operating loss carry-back for U.S. income tax purposes and will be reflected as a tax receivable. The company anticipates collecting the receivable in 2003. The $20 million valuation allowance is subject to reversal in future years at such time that the operating profit in the U.S. becomes sustainable at a level to meet the recoverability criteria under income tax accounting standards. This accounting treatment reflects the efficient tax structure established by the company and does not affect the future cash value of the actual tax benefit available to the company. The company will record the charge as a $20 million non-cash income tax expense in the 3rd quarter. Giving effect to the special charges, valuation allowance and revenue shortfall, the company projects a 3rd quarter net loss of $36.9 million (-$0.77 per share).
Commented Alexander, “While our core business continues to compare favorably to the same period a year ago, we have been adversely affected by the impact the weakened global economy and soft back-to-school retail season has had on capital spending. Additionally, we are in the process of completing requirements for the release of our new T7Plus POS terminal and as a result we were unable to fulfill several orders scheduled for delivery at quarter’s end. We are working closely with our channel partners to reaffirm the company’s 4th quarter revenues that we now project to be in the range of $65 to $67 million. These figures exclude $7.8 million of revenue that will be reported in discontinued operations. Notwithstanding the current strength of our balance sheet, we are undertaking further actions to maximize period cash flow and ensure continued compliance with the terms of our loan covenants.”
About Hypercom ([www.hypercom.com][1])
Hypercom Corporation (NYSE:HYC) is a leading global provider of electronic payment solutions that add value at the point-of-sale for consumers, merchants and acquirers, and yield increased profitability for its customers. Hypercom(R) products include secure web-enabled information and transaction platforms that work seamlessly with its networking equipment and software applications for e-commerce, m-commerce, smart cards and traditional payment applications. The company’s widely-accepted ePOS-infocommerce(R) (epic(TM)) framework of consumer-activated, EMV-certified, touch-screen ICE(TM) (Interactive Consumer Environment) information and transaction platforms enable acquirers and merchants to decrease costs, increase revenues and improve customer retention. Headquartered in Phoenix, Arizona, Hypercom maintains an installed base of more than 5 million terminals in over 100 countries, which conduct over 10 billion transactions annually.
[1]: http://www.hypercom.com
