INFS -- “Da Bears” Part II

The second major bearish case for INFS is that this company may never again earn a sufficient rate of return for shareholders. The company has been in a perpetual state of restructuring for the last five years with no sustained improvement achieved. For example, in the last 16 quarters the company has recorded 13 negative “one time charges” and this does not include inventory write-offs which are dumped into cost of goods—needless to say that at this point these are no longer one time in nature.

Here is a brief history of restructuring expenses:
2003
$15.7M inventory write-down (COGS)
$6.7M “restructuring charge” -- lease breakage, severance costs, etc.
$26.4M long lived asset impairment charge

2004
Negligible

2005
$27M inventory write-down (COGS)
$11.1M “restructuring charge”
$9.8M long lived asset impairment charge
$5.1M in SMT related losses

2006
$8.4M inventory write-down (COGS)
$5.4M “restructuring charge”
$9.4M regulatory assessment charge due to China customs case
$7M in SMT write-downs and TUN write-off

INFS also took a $7.4M charge in 2006 to write-down value for investments in technology companies that did not work out.

Looking at this restructuring history leads me to think about the following maxim: “turnarounds seldom ever turn.”

Over the last few years management has made other notable mistakes, specifically the failed and unnecessary JV to incubate a 3rd party manufacturer and the export problems with China. I am not going to spend any more time on these as 1) you can read about them in the latest 10K and I can’t add much more insight than that, 2) the management team that was responsible for these mistakes is no longer with INFS, 3) while these missteps have cost shareholders real money, I don’t think these missteps provide any indication about INFS’s core problems and really are one time in nature.

As I see it, the two main reasons not to own shares of INFS is that the company may never earn above average rate of return for an extended period of time due to
1) consumer and business electronics is a cut-throat industry with very little room for any managerial mistakes, and
2) the fact that INFS has been constantly restructuring without any consistent positive results maybe a sign that there is something inherently wrong with the business model that no amount of investment or managerial talent can fix


* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.