Cash Crunch Staggers ACT Manufacturing

A dire cash shortage at ACT Manufacturing (ACTM - Cramer's Take - Stockpickr) has caused the electronics firm to lose an important deal with Alcatel (ALA - Cramer's Take - Stockpickr), fall behind on payments to key suppliers and impose wide-ranging wage reductions, according to a person familiar with the Hudson, Mass.-based outfit.

ACT Down Shares' power not yet unleashed

This person, who requested anonymity, has also supplied TheStreet.com with internal documents that detail ACT's recent efforts to reschedule payments on more than $25 million in overdue debts owed to key suppliers, including Arrow (ARW - Cramer's Take - Stockpickr) and Avnet (AVT - Cramer's Take - Stockpickr).

ACT CEO John Pino didn't respond to a call seeking comment. Detox has recently examined ACT's problems with suppliers as well as criticisms of the company's accounting.

ACT Manufacturing stock has fallen nearly 45% over two months. Wednesday the stock dropped 55 cents, or 6%, to $8.50.

Spending Slowdown

As the tech-spending boom has turned to bust, ACT has been caught in a vise grip. Its customers, which include hard-hit EMC (EMC - Cramer's Take - Stockpickr) and Nortel (NT - Cramer's Take - Stockpickr), no longer desire anywhere near the amount of electronic components they once did. At the same time, many of ACT's suppliers are demanding that the company pay for shipments they allegedly made months earlier. A good portion of those goods are now worth a fraction of what ACT may have paid for them, increasing the likelihood of a large inventory writedown in the coming months.

The person close to the company says the cash crunch has had a material and damaging impact on ACT's business. In particular, the refusal of suppliers to ship goods has made it difficult for ACT to meet some customer orders.

He says a big deal with Alcatel was lost in late April. This person alleges that, due to the cash shortage, ACT couldn't open a plant in Plano, Texas, that was being set up mainly to fulfill an Alcatel contract. "It's not just the economy that's hurting ACT; we've also lost a lot business ourselves," he says. Alcatel ended up giving the business to ACT rival Flextronics (FLEX - Cramer's Take - Stockpickr), he adds. Alcatel and Flextronics didn't comment.

Spread Thin?

Internal documents supplied by this person shed light on some of the measures ACT has been taking to pay off debts to some suppliers. A spreadsheet sent to ACT executives by Bob Clemente, vice president for worldwide materials management, shows that in early May, ACT owed $45.6 million to six large suppliers, with $26.5 million of these debts being more than 60 days old. (Clemente didn't return a call seeking comment.)

(The spreadsheet can be viewed by clicking here; the memo from Clemente that accompanied the spreadsheet can be viewed here.)

Over a period of three weeks, ACT aimed to pay back $16 million of the $26.5 million in debts older than 60 days, according to the spreadsheet. In the memo, Clemente said that "based on our continued efforts to provide them [the suppliers] weekly funding they have agreed to keep our lines running."

However, the person close to the company said that ACT didn't manage to honor the payment schedule set out in the May spreadsheet. He added that ACT funnels what spare cash it has to its most important suppliers while holding back payments to firms that have shipped sporadically to the company.

This person also claims that revenue has slumped at ACT in the second quarter. He says that in the regions he's acquainted with, second-quarter revenues were a third to a fourth of what they were in the second and third quarters of 2000.

Belt-Tightening

ACT has taken other measures to conserve cash, according to this person. In May, he said that all salaried employees at ACT had to take a 25% pay cut for a month, while workers paid hourly couldn't work more than 35 hours a week. Employees were also told to take 40 hours of vacation, regardless of how much they'd already taken, he claims. And nearly all of ACT's U.S. and Mexican facilities were scheduled to shut down from July 4 to July 13, according to this person.

Meanwhile, another supplier is suing ACT. Babylon, N.Y.-based Stack Electronics alleges that ACT owes it $164,000 for shipments dating back to Dec. 20, 2000. It filed the suit with the U.S. District Court in the Eastern District of New York on July 6. A Stack executive declined to comment. Raymond Giusto, Stack's East Islip, N.Y.-based attorney, says: "We're very frustrated with ACT." He adds that ACT hasn't attempted to work out a payment schedule, something Stack has offered. "They have backed us into a corner where we have to sue them," says Giusto.