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Weak Sales Hurt Novellus

The semiconductor-equipment maker misses analysts' estimates by 4 cents.

Updated from 4:57 p.m. EDT

Third-quarter profit at



plunged nearly 64% from the year-ago period amid restructuring charges and falling sales.

Meanwhile, the semiconductor-equipment maker offered a worse-than-expected outlook for its current fourth quarter.

Investors took the news badly, sending the company's stock downward in after-hours markets. In recent exchanges, shares were off $1.90, or nearly 8%, to $22.99.

In the quarter ended October 1, the semiconductor-equipment maker said Monday that it earned $23.4 million, or 17 cents a share.

That represented a decline both from the year-ago period, when the company earned $64.6 million, or 45 cents a share, and the previous quarter sequentially, when it earned $33.2 million, or 24 cents a share.

Sales came in at $338.9 million, a drop of 18.5% from the year-earlier quarter, but a rise of nearly 3% from the second quarter of this year.

Analysts had predicted that the company would earn 21 cents a share on $321 million in sales, according to a poll conducted by Thomson Financial. In August, Novellus narrowed its earnings forecast to a profit of 20 cents to 21 cents a share on revenue of $320 million, excluding the restructuring charges.

Novellus is having trouble maintaining its prices, said CEO Richard Hill on a conference call. Additionally, the company suffered from a high rate of cancelled orders in the quarter, said Hill, blaming the cancellations on cautious customers who are reluctant to expand capacity at the risk of affecting cash flow.

The company's bottom line in the third quarter included $8.6 million worth of pretax charges related to the closure of its operations in Chandler, Ariz., which Novellus announced in August. Novellus had not forecast how large those charges would be. The charges included a writedown of inventory, severance and other costs.

The company is continuing to try to firm up operations, which could entail further operational or management changes, Hill said. In the last two months, the company has announced the resignation of its executive vice president of sales and marketing and replaced its chief financial and chief technical offers.

The company is not announcing any new restructuring initiatives or executive departures, Hill said. But "if we don't get results, there have to be departures," he added.

Excluding restructuring charges, the company predicted earnings of 15 cents to 17 cents a share on revenue ranging from flat to up 10% for the fourth quarter. Wall Street forecast that the company would earn 24 cents a share on $330.7 million in sales for the quarter.

At the close of regular trading, the company's shares rose 5 cents or less than 1%, to $24.89.

In the third quarter, Novellus shipped $316.4 million worth of products. That was down 9% from the second quarter, when the company's shipments totaled $347.6 million. The company's bookings came in at $287 million, down 7% from the previous quarter sequentially.

That profit declined from the second quarter despite a rise in revenue was largely due to falling gross margins, which fell to 43.4% of sales from 47.8% in the second quarter.

Part of the decline had to do with the restructuring-related inventory write-down. But even setting that aside, gross margin still would have come in at 45%, still off nearly 3 percentage points from the previous quarter.

Much of that drop had to do with increased warranty costs on its newer equipment, said William Kurtz, the company's CFO, on the call. The company expects the heightened warranty costs to continue in the fourth quarter before tailing off, he said.