"Fiscal 2005 was a stellar year for our Company. Chief among ADE's many noteworthy financial accomplishments was our record profitability. This was achieved through a combination of strong revenue and stringent cost management. For the full year, ADE generated operating margins in excess of 20 percent, which ranks among the best in our industry. In addition, our balance sheet strengthened throughout the year."
Thus spake Brian James, CFO of semiconductor inspection company and Motley Fool Hidden Gems watch-list stock ADE
From this Fool's perspective, it looks like a combination of two things. First, the company warned that a bottleneck in the company's supply of high-quality optical glass will delay its recognition of some revenues, expected to affect fiscal Q1 2006 (that's the one we're in now), into Q2 2006 (the quarter ending in October). Lacking the raw materials it needs, ADE will have to postpone shipping an equipment order, with the result that ADE won't hit analysts' hoped-for $30 million in Q1 revenues. Strike one.
Strike two appears to arise from a misunderstanding of just how much this delay will affect earnings. The company advised that in fiscal Q4 2005 (the quarter just-ended), it recorded a $17 million tax benefit. As a result of taking that benefit all at once, next quarter the company will be assessed at a more normal 33% tax rate. Thus, when the company warned that its GAAP profits next quarter will fall below consensus estimates of $0.36 per share and hit closer to $0.14 to $0.17, it isn't entirely due to profits being postponed by the delayed sale. Sure, part of the profits shortfall comes from not being able to record the $2 million to $5 million order as profit-generating revenue. But a significant piece of the shortfall arises from the higher tax rate.
Interestingly, none of the media reports I've seen so far make this distinction. By and large, they read along the lines of "lower revenues will knock earnings down 50%" -- blowing that part of the problem out of proportion.
And in case you're wondering, there was no strike three -- or at least, none that I saw in the earnings report. It really was a good year for ADE, with revenues, income from operations, and net profits all up strongly over fiscal 2004 and $31 million added to the company's coffers. Although there was a small rise in accounts receivable (keep an eye on that one), inventories and debt did decline.
I think this patient will live.
Fool contributor Rich Smith does not own shares of ADE Corporation.