XRite Sees Net Loss

November 10, 2006
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GRANDVILLE — X-Rite Corp. posted net sales of $54.2 million for the third quarter ended Sept. 30, the first quarter in which the recently acquired Amazys Holding AG was figured into the financial mix. Comparatively, X-Rite reported pre-acquisition sales of $28.4 for the third quarter of last year.

Third quarter operating losses totaled $29.5 million and included $33.6 million of restructuring and acquisition charges related to the purchase of Swiss public company Amazys in a $295 million cash-for-stock deal finalized in July. As a result, X-Rite experienced a net loss of $28.3 million, or 99 cents per basic share, in the quarter.

CFO Mary Chowning pointed out that excluding acquisition and restructuring expenses, operating income as a percent of sales more than doubled, to 7.7 percent for third quarter 2006 versus 3.7 percent in the prior year’s third quarter. That’s reflective of the impact of the cost synergies X-Rite is implementing, she said.

X-Rite executed its succession plan during the third quarter and welcomed Tom Vacchiano as CEO on Oct. 1. The company also completed the sale of its Grandville headquarters near RiverTown Crossing to Target Corp. as part of its plan to relocate its headquarters and manufacturing facility to Kentwood, a move expected to take place early in the first quarter of 2007.

The first quarter of combined X-Rite and Amazys operations went as planned and revenues met expectations, Vacchiano said.

The quality of the integration planning before the closing on the acquisition provided a “strong foundation” for X-Rite’s first quarter as a combined company, he added.

“The management team feels that given all the balls we are juggling, including reducing our work force, closing offices, realigning responsibilities and rationalizing the product line, the overall results are pretty good,” he remarked.

“We do not, however, think that the performance in Q3 2006 reflects the longer-term growth and profit opportunities that exist for our business going forward.”

American operations brought in 43 percent of revenue in the third quarter, European operations 35 percent, and Asian operations 22 percent. That distribution, Vacchiano said, reasonably approximates what X-Rite expects over the course of the next two to three years.

The short-term challenge of merging two companies is a difficult challenge, but it’s “clearly overshadowed” by the immense opportunity X-Rite sees ahead, he added.

“One of the advantages of our business is diversity, both in vertical markets that we serve, as well as in the geographic distribution model we have,” Vacchiano noted.

“While this diversity does not insulate us from economic downturn, it does provide a very nice portfolio cushion, which we do value.”

He said X-Rite’s traditional vertical market generally appears stable and will provide the company with opportunities for core organic growth going forward, particularly if X-Rite can continue to provide innovative new solutions that make its customers more competitive.

On the geographic front, the company doesn’t see any significant changes or trends that would lead it to believe there has been any fundamental negative change.

X-Rite continues to monitor the competitive landscape for both existing and potential new competitive threats, which could take the form of new technology, new business models, a new competitor entering a market space, as well as other factors, but Vacchiano said that X-Rite doesn’t see any unusual threat to its business in the immediate and short term.

The company has been fully engaged in the integration of Amazys into X-Rite since July 5 and faces higher workload demands due to the acquisition, said the CEO.

“There were some distractions as employees grappled with the question, ‘What does the Amazys deal mean for me and my job?,’” Vacchiano recalled. “We have moved as quickly as possible to answer these questions, and with each passing day the distraction levels are decreasing as our employees acclimate to the new X-Rite company.”

The impact of the Amazys deal on customers is difficult to assess, he said. X-Rite knows that the ambiguity around the combined product line has been an issue and is part of the reason the company expected flat revenues in the quarter and the short term.

Vacchiano said that since the January announcement of the acquisition, X-Rite has spent a great deal of time communicating with customers in an effort to understand their views. The company’s OEM and strategic partners have been generally very positive about the deal, he reported.

The key issue for some of X-Rite’s channel partners revolves around the product integration process and the product line.

“They want to know which products will be sold and supported by the combined company and which products will not. We’ve announced these product decisions and migration plans in the past few weeks in all of our major markets, and the early market response has been quite favorable.”

As previously announced, X-Rite expects revenue growth on a proforma basis to be flat for the near term. Preliminary estimates for full year 2007 revenue growth is in the 4 percent to 6 percent range.     

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