Suppliers Say ACT Manufacturing Falling Behind on Bills

Act Manufacturing (ACTM Quote - Cramer on ACTM - Stock Picks) has fallen well behind on payments to a number of suppliers, which could indicate that the Hudson, Mass.-based electronic components maker is struggling to conserve cash amid a sharp dropoff in sales.

This column has learned that ACT is more than 60 days past due on bills totaling $3 million from more than a dozen creditors and isn't responding to calls from many of these suppliers. A column earlier this month looked at allegations that ACT is reporting doctored profits by parking expenses on its balance sheet.

The grinding slowdown in tech spending has shellacked electronics firms like ACT, which sells to companies like EMC (EMC Quote - Cramer on EMC - Stock Picks) and Lucent (LU Quote - Cramer on LU - Stock Picks), both of which have seen sales drop off sharply. A failure to pay its bills on time would suggest that ACT's business isn't providing sufficient cash to pay for the basic parts it uses to make its products, even though depressed demand has probably lowered prices for that gear.

The company reported free cash flow (operating cash flow minus capital expenditures) of $921,000 in the first quarter. Meanwhile, cash on hand dropped by two-thirds from the end of the fourth quarter, to $16 million.

Asked to comment on its past-due bills, CEO John Pino pointed to the company's days payable outstanding, an indicator of how long a company is taking to pay its trade creditors. At 61 days in the first quarter, days payable outstanding were below the 63 days in the fourth quarter. "Our days payable is at 61 -- that's all you need to know," Pino said in an interview after giving a presentation at a New York investor conference Wednesday. The company's target is to have days payable around 60 days.

Lagging Behind?

However, several firms that sell to ACT haven't been paid for more than 60 days, according to the Plymouth, Mass.-based Electronic Resellers Association International, which describes itself as an "affiliation of electronics distributors networking together to safeguard each other against fraud, lost revenue, and unscrupulous business practices in the hi-tech electronics industry." Kristal Snider, president of the ERAI, says a dozen members have filed complaints on unpaid bills totaling $722,514. In her ACT file, the oldest unpaid supplier invoice sent to ACT dates back to October, according to Snider.

The ERAI requires documentary evidence from its members when they file a complaint against a company and it then contacts the alleged nonpayer to verify the complaint, Snider says. However, "ACT isn't responding to ERAI's inquiries," she says, adding: "Some vendors have called to work out payment schedules but have been ignored."

When asked about the ERAI and its past-due bill number, ACT's Pino replied: "Never heard of them."

Other vendors are getting frustrated. A high-ranking executive of a large supplier to ACT who requested anonymity says ACT is over 60 days late paying over $2 million in bills. ACT isn't responding to his calls, either. "I don't see what they gain by this stonewalling tactic," he says.

The Gs

A top executive at a semiconductor supplier who also requested anonymity says ACT is over 60 days late in paying $300,000 to his company. "I don't think I'll ever see my 300 Gs again," says the executive.

ACT may be holding off on paying smaller vendors while making sure to service debts to larger ones, like Arrow (ARW Quote - Cramer on ARW - Stock Picks) and Avnet (AVT Quote - Cramer on AVT - Stock Picks). According to this theory, ACT may be temporarily juggling its cash and the smaller outfits will end up getting paid -- at some point. Such a tactic, if it is indeed being used, is surely damaging for the smaller outfits, but it doesn't necessarily mean ACT is headed for bankruptcy. And a $56 million drop in ACT's accounts payable suggests that some firms are getting paid.

However, three people at separate ACT suppliers say the company is significantly past-due on debts owed to Arrow and Avnet. None of these three work at Arrow or Avnet and neither of those two companies returned calls seeking comment on bills outstanding with ACT. One person says ACT is well past due on $30 million of trade debts to Arrow and $10 million to Avnet. Asked to comment on those numbers, Pino said: "Not true." He then broke off the conversation.