Wednesday, May 28, 1997
"Galileo's head was on the block.
HOW DID IT FIND TROUBLE?
While the 17th century Italian genius Galileo's hide was spared, the 20th century company that bears his name was not so fortunate. After an abysmal quarterly report and the loss of its largest customer, the stock's freefall brought back images of its namesake's falling body experiments from atop the Tower of Pisa.
The Inquisition came for Galileo Corp. on January 16 when the company stunned investors by reporting lower sales of $9.7 million (vs. $10 million the year before) and net income before charges of $1.1 million (vs. $1.5 million). The stock promptly fell from $23 to $16 7/8 the following day, but the worst was yet to come.
Shareholders got a photocopy of the January carnage a month later when the company lost its account with Xerox, which had accounted for 48% of Galileo's 1996 sales. On February 13, with more than 3 million shares trading hands, the stock fell $11 3/4 to $6 7/8.
Massachusetts-based Galileo develops, manufactures, and markets products based on its core fiberoptics and electro-optics technologies for applications in office equipment, analytical instruments, process analysis, telecommunications, and medical instruments.
Its Dicorotron assemblies were used by Xerox in its copying machines. It was the only Galileo product purchased by the copy giant, and when Xerox decided to manufacture the assemblies in-house, it was the end of what had been a very profitable relationship for Galileo.
12-month sales: $40.5 million 12-month income: $4 million* 12-month EPS: $0.56* Profit Margin: 9.8% Market Cap: $49.3 million (*Excludes non-recurring charges) Balance Sheet Cash: $12.9 million Current Assets: $23.6 million Current Liabilities: $4 million Long-term Debt: N/A Ratios Price-to-earnings: 12.9 Price-to-sales: 1.2
HOW COULD YOU HAVE SEEN IT COMING?
For Galileo Corp., the world revolved around Xerox. With the sluggish sales of the December quarter, one may have sensed that the copy center of its universe was also struggling. However, Xerox was humming along nicely with a solid 7% gain in sales over the same three months.
While Galileo would eventually concede that sales to Xerox had shrunk from nearly half of total sales to just 39% over the last two quarters, those who sensed that the soft sales were a prelude to a disaster avoided the bulk of the tumble.
WHERE TO FROM HERE?
Galileo died blind and under house arrest. Galileo Corp. does not want to meet a similar fate. The company announced a wide-eyed restructuring plan back in March, setting its sights on diversification into the fields of medical instruments and telecommunications. More than just lip service, the company's medical products division announced a multi-million dollar deal with Sofamor Danek the same day the Xerox news came out.
Even with staff cuts and other expense trimmings, the company is still expecting to lose money through September when its fiscal year ends. Its cash-rich, debt-free balance sheet is still a heavenly body sporting a healthy current ratio of 5.9. It should not deteriorate much over the next two probably sluggish quarters. From that point on, this will be a brand new company. The one lingering question is whether Galileo, after coming down from the winding staircase at the Tower of Pisa, thought of taking the fallen objects and tossing them back into the sky.
"I offer thanks to those before me.
-Rick Aristotle Munarriz (firstname.lastname@example.org)