Iomega Corp announced a restructuring plan designed to cut costs by $50m in the second half of the year. The Roy, Utah storage products company will be cutting its work force by about 600 to 700 employees, about 12%-14% of its 5,000 total staff. It will also make efforts to shorten its supply chain and reduce inventory, as well as look into its manufacturing processes to identify ways to reduce those costs. As a result of the plan, Iomega said it will record pre-tax charges, totaling between $5m and $10m, for the second quarter, which ends June 27. Based on preliminary results, the company expects revenue for the quarter to be roughly in line with first-quarter revenue of $408m. It projects a net loss for the quarter, excluding the charges, in the range of $25m to $35m, or $0.10 to $0.13 per share – when First Call was expecting a loss of about $0.02. The expected loss, which is being blamed on weaker than expected after-market sales combined with the shift toward lower margin OEM sales, is greater than Iomega had previously anticipated. Weak after-market sales are a continuing trend for the company, as it also blamed its poor first-quarter numbers on that problem. Iomega expects cash flow to be negative in the second quarter to the tune of $60m to $70m. Zip drive shipments to the OEM market will represent approximately 50% of total shipments for the second consecutive quarter – a result of the rollout of the Zip Built-In program for hardware vendors. Due to this shift in sales, the company needs to cut costs to bring its business model in line with higher volume, lower margin OEM business. The company said that the $50m in cost savings that it is hoping to achieve, will allow it to return to profitability for the fourth quarter, although it cautions that it will not be profitable for the full year. The company said it regretted the job losses but they were necessary to become profitable as an OEM supplier of Zip drives and to capitalize on the sale of its higher-margin Zip disks. Iomega also cautioned that the second-quarter loss could cause the company a problem with non-compliance under its existing $200m senior credit facility. It is currently in discussions with its lenders to address the issue and said its ability to borrow further under the credit facility will depend on successful re- negotiation of the terms. Iomega will report final second-quarter results after the close of market on July 16.
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