Syntax-Brillian Shows Why It Delayed Earnings (BRLC)

Syntax-Brillian Corporation (NASDAQ:BRLC) is seeing its shares punished in after-hours trading.  Just yesterday morning it delayed its earnings report by a day and it gave no reason, so this drop after-hours is going to be viewed with even more skepticism after the problems of guidance and its CFO leaving.  The current report might have been fine, but Wall Street isn’t giving this company the benefit of the doubt.  Not at all.

Wayne Pratt, its chief financial officer, will resign effective September 30, 2007 to take a position working with a longstanding colleague at a start-up company located in Tempe, Ariz.

The company posted the following: GAAP EPS $0.11 after basic earnings of $0.12; Revenues $205.3 million; estimates were $0.12 and $198.1 Million. That $205.3 million is up 243% from revenue of $59.8 million in the year-ago quarter. Full year revenue was $697.6 million, up 261% from revenue of $193.0 million for the year ended June 30, 2006.

GAAP net income for the quarter was $8.4 million, compared with a net loss of $5.5 million for the fourth quarter of fiscal 2006. GAAP net income for the year ended June 30, 2007 was $29.8 million compared with a net loss of $18.9 million for the previous year.  Consolidated gross margins of 20.2% for the quarter ended June 30, 2007 represented an 800 basis point improvement from the fourth quarter of fiscal 2006.

You can read on to see the company’s exceptions, but shares closed down 2.5% in regular trading at $6.13 today; and that after a $0.51 drop yesterday from delaying its numbers.  Shares are down roughly 25% after-hours at $4.55.  Its 52-week trading range is $4.45 to $11.70.  Its CEO, Vince Sollitto, has been criticized for stock offerings right after great news, and he is probably getting ready for some criticism again.  We noted the doubt about it before.

Here are the main issues or details in the release:

In conjunction with its year-end closing and it section 404 review ofthe Sarbanes-Oxley Act. TWO ITEMS were identified and revised on ayear-to-date basis during the fourth quarter because their impact onnet income for each of the quarters during 2007 was not material intotal.  Here is what they said:

We determined that our methodology to estimate warranty accruals didnot adequately reflect information that had recently become availableto better estimate the possible future exposure for warranty costsrelated to units which had already been sold.

Using this newly available information resulted in the reversal ofapproximately $7.4 million of warranty expense which had been recordedin cost of sales through the third quarter of fiscal 2007. Thisaccounted for approximately 360 basis points of improvement in ourfourth quarter margins that may not be expected to recur in the future.This reduction in our warranty accrual was the result oflower-than-anticipated warranty claims, particularly in our nationalretail channels, where lower returns and warranty claims reflect, webelieve, the ongoing improvement in the quality of our products.

In addition, we also determined that the tax impact of dividends andaccretion of discount on redeemable, convertible preferred stock, whichare reported as interest expense under GAAP, cannot be treated asdeductible in our income tax provision which resulted in approximately$5.9 million of income tax that should have been recorded through thethird quarter of 2007 being recorded in the fourth quarter.

Syntax-Brillian ended the quarter with cash, cash equivalents, andshort-term investments of $28.7 million; working capital of $238.6million; and stockholders’ equity of $315.5 million. At June 30, 2007,Syntax-Brillian had $78.1 million outstanding under its revolvingcredit lines.  At June 30, 2007, accounts receivable and due fromfactor totaled $210.1 million for total days sales outstanding (“DSOs”)of 93.2. This compares with 77.3 DSOs at June 30, 2006 and 124.8 DSOsat March 31, 2007.

OUTLOOK: The current business outlook is reflective of a severetightening of credit in Asia that has significantly impacted the bankand other credit facilities of supply chain partners. As a result ofthe tighter credit environment in Asia, it believes that the combinedcredit availability of supply chain partners has been reduced by over$200 million.  For the quarter ending September 30, 2007,Syntax-Brillian anticipates revenue in the range of $170 million to$180 million, predominately from sales of LCD TVs on shipments ofapproximately 270,000 to 290,000 units. Gross margins for the quarterare anticipated to be in the range of 15% to 17%.  For the calendaryear ending December 31, 2007, Syntax-Brillian anticipates revenue inthe range of $1.0 billion to $1.1 billion, and gross margins in therange of 16% to 18%.

Jon C. Ogg
September 12, 2007