In a triple barrel announcement on Monday, computer products distributor CHS Electronics Inc posted far worse-than-expected results for its fourth quarter, said it would have restate earnings for the past several quarters due to accounting discrepancies and would be restructuring operations and cutting 10% of its staff. The company’s shares fell more than 34% as a result of the news.
The Miami-based company reported fourth-quarter net income down 45.6% at $13.0m on revenue up 55.8% at $2.86bn. That amounts to $0.23 per share, well below the $0.47 the company had predicted in its preliminary announcement on February 24. For the full- year, net income fell 5.6% to $45.7m on revenue up 79.7% at $8.55bn. Earnings per share fell 37.8% to $0.82 for the year.
It seems the trouble stems from vastly overstated European vendor rebates over the past several quarters, which were discovered in the year-end audit. Some of the fourth-quarter rebates were supported with invalid documentation, the company said, and all of the overstated rebates have been reversed. As a result, Pasquale Giordano, executive vice president of European operations, has been forced to resign. After the reversals, second-quarter EPS have been restated to $0.10 from $0.36 and third-quarter earnings have been reduced to $0.12 from $0.41.
Now that CHS has seen what its finances really look like, it has decided to cut costs through a worldwide restructuring that will streamline global operations centers to six from the current 10, review the possible closure of 25 to 30 redundant local warehouses and freeze hiring worldwide and reduce total employee headcount by 600, or roughly 10%. It will also reduce capital expenditures in 1999 by $15m, consider consolidating, closing, or restructuring all local operations with unsatisfactory levels of profitability within six months and initiate a cost cutting program that will immediately reduce selling, general, and administrative expenses.
The plan is designed to cut overall costs by $40m this year, while increasing operating cash flow by $50m. It will likely lead to an unspecified restructuring charge in the second quarter, as well. CHS is projecting that, based on current business conditions, it expects net sales in the first quarter of 1999 to be in the range of $2.35bn to $2.45bn. Wall Street was generally shocked by the news, with CHS shares falling $2.0625 to close at $3.9375.
