"The numbers say everything," Investec General Bank analyst Kobby Finkelstein says about the profit warning released by Lumenis (Nasdaq: LUME), maker of laser-based systems for the medical and cosmetics markets. The analyst doubts the company can create positive cash flow in the foreseeable future.
Lumenis released yesterday a serious profit warning, just six days ahead of the publication of its first-quarter financials. While the revenue drop isn't so severe, $4 million, earnings per share have been slashed from 21 cents to 4 cents net loss.
Investec reiterated its Hold rating, on the assumption Lumenis won't meet cash-flow targets.
In its previous outlook the company said it expects to achieve positive cash flow in the next quarter, and expects $40 million positive cash flow in the last quarter this year.
Finkelstein believes Lumenis will report marked negative cash flow in the first quarter, after in the fourth quarter of 2001 the company posted $9.8 million negative cash flow from operations.
Should these pessimistic projections be realized, Bank Hapoalim is expected to be hurt the most by Lumenis¿ inability to produce positive cash flow.
Ahead of releasing the results of the fourth quarter last year, Lumenis announced that Bank Hapoalim has agreed to convert $100 million short-term loans, and another $71 million credit line into long-term loans. Lumenis presented this financing agreement as a mark of the bank's faith in the company. The bank had also increased its current credit frameworks as of April 30 this year, from $20 million to $35 million.
In return for the primary credit agreement of $20 million, Bank Hapoalim received 20 million options, of which the bank exercised 1.4 million, which generated it $9.5 million. The remaining options comprise 3% of Lumenis's shares. Exercise price is $20.25 per share, compared with $13 in February, when the agreement was signed. Lumenis today trades at just $3 per share, and the exercise price seems further than ever.
Should Investec's estimates be realized, it isn't at all certain Lumenis will be able to repay the loans or the interest on the loans, but there might be certain terms that restrict the financing agreement. For instance, a term that says that should Lumenis fail to meet the loan criteria, the agreement will be cancelled.
According to an earlier credit agreement, Lumenis' annual earnings before interest, taxes, depreciation and amortization had to come to a third of its debt to the bank, that is $15 million to $20 million per quarter. Lumenis reported that in the first quarter EBITDA dropped to $7 million to $8 million, which is no backing for the financing agreement. But it's possible that the new credit agreement involves changed criteria.
CEO Yacha Sutton related the decreased revenue primarily to weakened sales in Europe, which account for 20% of total revenue. Investec believes that the main reason from revenue dropping is weak sales of new products the company presented in the course of the first quarter. Investec also related decreased revenue to delays in approvals by the U.S. Food and Drug Administration for two new products, one for treating acne and the other for intensive bleeding.
Lumenis will be releasing updated estimates in a conference call on May 14, a day after it is due to release its financials. As of now, Investec leaves unchanged its estimates and price target. It did say, however, "The question now is not the company's valuation, but its ability to survive."