Three-Five Systems Announces Higher Earnings and Record Revenues; Company Posts Second Consecutive Quarter of Record Net Revenues - Company Financial Information

Edge: Work-Group Computing Report, Oct 18, 1999

Three-Five Systems, Inc. (NYSE: TFS) Thursday announced its financial results for the third quarter ended September 30, 1999.

Sales of $42.7 million for the third quarter were 73.6% higher than the $24.6 million reported in the same quarter of 1998. The company reported net income of $2.0 million, or $0.28 per share (diluted), as compared to a net loss of $403,000, or $0.05 per share (diluted), for the same quarter of 1998.

For the first nine months of 1999, sales were $97.3 million, an increase of 48.1% over sales of $65.7 million for the same period of 1998. The company had net income for the first nine months of $2.4 million, or $0.34 per share (diluted), which is a 41.2% increase over net income of $1.7 million, or $0.21 per share (diluted), for the same period of 1998.

Commenting on Three-Five's strong quarter, Jack L. Saltich, Chief Executive Officer and President, said, "Our accomplishments this quarter exceeded even the aggressive goals we had set for ourselves at the beginning of the year. We benefited strongly from the growth in market share achieved by our major cellular telephone customer. In addition, our ability to ramp up production quickly and efficiently at our new China production facility allowed us to better meet customer demand overall. Based on the current environment, we expect to see a strong rate of quarter-over-quarter revenue growth for the next several quarters."

The company had positive cash flow of $3.3 million during the quarter. Due to careful inventory management, inventories remained level despite the large increase in sales.

As expected, Three-Five's selling, general and administrative expense decreased to 6.4% of sales during the quarter because the company's SG&A expense has been spread over a larger sales base. This is substantially lower than the 7% to 9% that SG&A has been running in the last several years. Despite an increase in SG&A relating to microdisplays, SG&A is expected to remain lower overall as the company begins to leverage its existing infrastructure.

Three-Five's increased investment in research and technology continued as expenses rose to $2.4 million during the quarter, nearly doubling the $1.3 million spent in the third quarter of 1998. This increase is entirely related to microdisplays as the company focused on moving its proprietary Liquid Crystal on Silicon (LCoS) technology closer to volume production. In addition, the company purchased the assets, licensed the technology, and hired key employees of the Light Valve Business Unit of National Semiconductor Corporation during July. That purchase, combined with the acquisition of the microdisplay intellectual property from S-Vision in August of this year, increased research and technology expenses, but has allowed Three-Five to expand its portfolio of microdisplay technologies and secure efficient, direct silicon foundry relationships that are expected to produce new manufacturing efficiencies in the future.

Without the SG&A and research and technology expenditures relating to LCoS microdisplays, Three-Five Systems' core passive display business would have had net income of approximately $3.1 million, or $0.42 per share (diluted) for the third quarter of 1999.

The company sold approximately two million shares of its common stock in a secondary offering that closed on September 29, 1999. Proceeds from that offering were received on October 1, 1999, and are referred to on the balance sheet as "Receivable from Equity Offering." The net proceeds from the offering, which were $36.6 million, were used to repay on October 1, 1999 approximately $17.1 million in outstanding balances on the company's credit facilities, and the remaining funds will provide working capital for the company's new microdisplay business and will be available for potential technology acquisitions. After paying down its outstanding balances, Three-Five has no long-term debt outstanding and retains $15 million in unused credit facilities.

Also completed during the quarter were the construction and start-up of the company's new permanent manufacturing facility in Beijing, China. Dr. Carl Derrington, Chief Manufacturing Officer, commented, "As of September 1, one hundred percent of the product that we shipped from China was shipped from our new, permanent China facility - four weeks ahead of schedule. As we did with the temporary Beijing plant, the permanent facility was built and brought on-line in an extremely short period of time. This major achievement has materially contributed to Three-Five's ability to compete globally."

To support its continued ability to serve a larger and more diverse customer base, Three-Five recently announced that it has formed a global sourcing alliance with Tecdis S.p.A., a privately held Italian LCD display company. The alliance will make available to multinational OEMs the combined manufacturing resources of Three-Five and Tecdis in Europe, North America and Asia. In addition, the alliance will establish a silicon design center in Chatillon, Italy to develop new Application-Specific Integrated Circuits (ASICs) for customer applications. "This new alliance will provide us with additional flexibility and resources in meeting the needs of new and existing customers," remarked Saltich. "In addition, we will be able to design ASICs that are specifically tailored for the type of OEM customers served by both of our companies, and possibly be less affected by ASIC supply shortages, such as those we have recently seen in the industry."